`
March 13, 2008
VIA EDGAR
Mr. H. Christopher Owings
Assistant Director
Mail Stop 3561
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-3561
Re: The Great Atlantic & Pacific Tea Company, Inc.
Preliminary Proxy Statement on Schedule 14A
Filed January 18, 2008
Form 10-Q for the Quarter Ended December 1, 2007
Filed January 7, 2008
Form 10-K for Fiscal Year Ended February 24, 2007
Filed April 25, 2007
Definitive Proxy Statement on Schedule 14A
Filed May 25, 2007
File No. 1-4141
Dear Mr. Owings:
On behalf of The Great Atlantic & Pacific Tea Company, Inc.
(the "Company" or "A&P"), we hereby submit responses to the comments of the
Staff regarding the Company's preliminary proxy statement on Schedule 14A filed
January 18, 2008 as set forth in your letter dated February 15, 2007 (the
"Comment Letter"). Additionally, the Company files herewith, via EDGAR,
Amendment No. 1 to its preliminary proxy statement on Schedule 14A (the "Proxy
Statement"), filed with the Commission on January 18, 2008. This amendment
reflects the Company's responses to the comments of the Staff as set forth in
the Comment Letter.
With regards to the Staff's comments on Form 10-K for Fiscal
Year Ended February 24, 2007 and Form 10-Q for the quarter ended December 1,
2007 in comments 14 through 24, 27, and 28, we respectfully request that we be
permitted to address the Staff's requests for expanded disclosures in future
filings. Our responses to the comments included herein indicate the revised or
expanded disclosures we would propose to include. Our Form 10-K for fiscal year
ended February 23, 2008 is due no later than May 8, 2008 and we anticipate
filing this report in a timely manner. In addressing the Staff's comments, we
note that the proposed revisions enhance previous disclosures and do not believe
that these changes warrant revisions to previously filed documents when
considering the impending fiscal 2007 Form 10-K filing.
Set forth below are the Staff's comments contained in your
letter and immediately following each comment is the Company's response:
Preliminary Proxy Statement on Schedule 14A
Acquisition of Pathmark and Related Transactions, page 4
1. Please revise this discussion to explain to stockholders why the
Bridge Facility utilized to finance the Company's acquisition of Pathmark
Stores, Inc. was refinanced, with a view to explaining why stockholder approval
is being sought now for the authorization of additional shares as opposed to at
the time the merger was approved. In this regard, please also discuss how you
determined to offer the Notes that are convertible into common stock, as opposed
to the senior secured notes discussed in, inter alia, your Registration
Statement on Form S-4 and referred to in your Form 8-K filed on December 4,
2007.
Response: The Company has revised the disclosure beginning on page 4
in response to the Staff's comment and in response to comment 29, below.
2. Please include a brief discussion of the terms of the Notes,
including a discussion of the dilution that stockholders will experience upon
the exercise of the notes into common stock. Please also discuss the effect that
the issuances of common stock upon conversion will have on your stock price; we
note your indication in the next section that "the market price of the Company's
Common Stock may be adversely affected," however, please expand upon this
discussion.
Response: The Company has revised the Proxy Statement at page 6 to
provide an expanded discussion of the terms of the Notes and potential
dilution.
Amendment of the Company's Charter to Increase the Number of Authorized Shares
of Common Stock (Proposal 1), page 5
3. We note your indication that the board of directors deems it
advisable to increase the number of authorized shares of common stock "to ensure
that that there is a sufficient number of authorized shares available. . ."
Please disclose whether you presently have any plans, proposals or arrangements
to issue any of the newly authorized shares of common stock for any purpose,
including future acquisitions and/or financings. If so, please disclose by
including materially complete descriptions of the future acquisitions and
financing transactions, aside from the additional shares underlying the warrants
that may need to be issued. If not, please state that you have no such plans,
proposals, or arrangements at this time, written or otherwise, to issue any of
the additional authorized shares of common stock.
Response: The Company has revised the Proxy Statement at page 7 to
disclose that it has no plans, proposals, or arrangements at this time, written
or otherwise, to issue any of the additional authorized shares of common stock
other than as disclosed in the Proxy Statement.
4. Please refer to SEC Release 34-15230 and discuss the possible
anti-takeover effects of the increase in authorized shares. In doing so, please
discuss any other provisions of your articles, bylaws, or other governing
documents have material anti-takeover consequences. Disclose whether there any
plans or proposals to adopt other provisions or enter into other arrangements
that may have material anti-takeover consequences. Please inform stockholders
that management might use the additional shares to resist or frustrate a
third-party transaction providing an above-market premium that is favored by a
majority of the independent stockholders.
Response: The Company has reviewed SEC Release No. 34-15230 (October
13, 1978), "Anti-takeover or Similar Proposals." The Company has also revised
the Proxy Statement at page 7 to disclose that additional authorized shares of
common stock could be used in connection with an arrangement, such as a
stockholder rights plan, that could have the effect of hindering or delaying a
third party offer to acquire the Company or its common stock at a premium to
market prices. The Company has also revised the Proxy Statement at page 7 to
disclose that it has no plans or proposals to adopt provisions or enter into
arrangements that may have material anti-takeover consequences. Discussion of
any anti-takeover effects is also covered by the discussion called for by Item
202(a)(5) of Regulation S-K, which has been provided at page 20 of the Proxy
Statement in connection with the discussion of any preemptive rights called for
by Item 11(b) of Schedule 14A.
5. Please revise the penultimate paragraph of this discussion to
quantify the increase in the number of shares of common stock subject to the
warrant that will occur if stockholders do not approve this proposal.
Response: The Company has revised the Proxy Statement on page 8 in
response to the Staff's comment.
6. Please advise us how you concluded that financial statements were
not material for the matters to be acted upon in this proxy. Reference is made
to Item 11 and Item 13 of Schedule 14A.
Response: Item 11 of Schedule 14A provides for disclosure in
connection with authorization or issuance of securities otherwise than for
exchange. Item 13 of Schedule 14A provides for disclosure of financial and other
information if action is to be taken with respect to matters specified in Item
11 of Schedule 14A. Instruction 1 to Item 13 provides:
Notwithstanding the provisions of this Item, any or all of the
information required by paragraph (a) of this Item, not material for
the exercise of prudent judgment in regard to the matter to be acted
upon may be omitted. In the usual case the information is deemed
material to the exercise of prudent judgment where the matter to be
acted upon is the authorization or issuance of a material amount of
senior securities, but the information is not deemed material where the
matter to be acted upon is the authorization or issuance of common
stock, otherwise than in an exchange, merger, consolidation,
acquisition or similar transaction, the authorization of preferred
stock without present intent to issue or the authorization of preferred
stock for issuance for cash in an amount constituting fair value.
The Company is seeking approval of (i) an amendment to the Company's
charter to increase the number of authorized shares of common stock (ii) a
proposal to approve the issuance of the Company's common stock pursuant to a net
share settlement of the warrants described in the Proxy Statement and (iii) a
proposal to approve the issuance of an additional 1,577,569 shares of the
Company's common stock pursuant to the share lending agreements described in the
Proxy Statement. Each of these proposals is a proposal "where the matter to be
acted upon is the authorization or issuance of common stock, otherwise than in
an exchange, merger, consolidation, acquisition or similar transaction." The
Company determined, in accordance with Instruction 1 to Item 13 of Schedule 14A,
that the financial information provided for under Item 13(a) is not deemed
material for purposes of determining the contents required to be included in a
proxy statement to be delivered for such proposals, which is a determination
made in the context of ongoing financial information disclosure pursuant to the
Company's general periodic and current reporting obligations under the
Securities Exchange Act of 1934.
Approval of the Company's Share Issuance Pursuant to a Net Share Settlement of
the Warrants (Proposal 2), page 5
7. Please revise the first full paragraph on page 6 to provide an
example of how the net share settlement feature works. In doing so, explain to
stockholders the potential risks and benefits of this feature.
Response: The Company has revised the Proxy Statement on page 8 in
response to the Staff's comment.
8. Tell us how you plan to account for the warrants as at the next
interim period given the default settlement method is cash settlement.
Response: The Company will account for the warrants as a liability in
accordance with EITF 00-19 and any changes in fair value will be reflected in
the income statement at the next reporting date.
Approval of the Issuance of an Additional 1,577,569 Shares of the Company's
Common Stock Pursuant to the Share Lending Agreements (Proposal 3), page 7
9. Please revise this discussion to explain the purpose for the Share
Lending Agreements and the risks and benefits of this arrangement.
Response: The Company has revised the disclosure on page 10 in
response to the Staff's comment.
Beneficial Owners of Securities, page 12
10. Please disclose the natural person or public company with
investment or voting power over the shares held by FMR LLC and Yucaipa Group.
Response: The Company has revised the beneficial ownership table and
disclosure on pages 16 through 18 in response to the Staff's comment. The
Company has removed the table entry for the Yucaipa Group because the Schedule
13G filed with the SEC on December 13, 2007, by Ronald W. Burkle and the other
filing parties thereto with respect to the Yucaipa Group indicates that the
number of shares beneficially owned by the Yucaipa Group is less than five
percent of the number of shares currently outstanding and is therefore less than
the threshold in Item 403(a) of Regulation S-K. The table entry for Goodwood,
Inc. has been similarly removed. The disclosure in the beneficial ownership
table and the notes thereto has been prepared using information obtained from
the Schedules 13D and 13G filed with the SEC as referenced in the notes to the
table, in accordance with Instruction 3 to Item 403 of Regulation S-K. The
Company does not have additional knowledge of the ultimate person or persons
with investment or voting power over the shares held by the persons listed in
the beneficial ownership table, beyond the information contained in the
Schedules 13D and 13G filed by them.
Executive and Director Compensation, page C-1
Compensation Discussion and Analysis, C-1
11. We note that you have listed the specific peer group companies for
fiscal 2006. Please identify the surveys and databases from which these
companies are derived, as applicable, and their components, pursuant to Item
402(b)(2)(xiv) of Regulation S-K. Please also provide additional detail about
how the company uses this information and how it helps achieve the compensation
committee's goals.
Response: The Company has revised the Proxy Statement on pages C-1 and
C-2 in response to the Staff's comment.
Base Salary, page C-3
12. Please disclose fully the role of the executive officers in
determining or recommending the amount or form of executive compensation and the
role of the compensation consultants, describing the nature and scope of the
consultant's assignment and the material elements of the instructions or
directions given to the consultant regarding the performance of its duties. See
Item 407(e)(3)(ii) and (iii) of Regulation S-K. Clarify whether your President
and Chief Executive Officer met with Towers Perrin regarding his compensation or
the compensation of other named executive officers.
Response: The Company has revised the Proxy Statement on pages C-2 and
C-3 in response to the Staff's comment.
Long-Term Incentive Award, page C-3
13. Please clarify your policies for allocating between long-term and
currently paid out compensation. In this regard, we note the percentage
allocation on page C-2, however, it is not clear how you have arrived at this
allocation. See Item 402(b)(1)(v) and 402(b)(2)(i) of Regulation S-K.
Response: The Company has revised the Proxy Statement on page C-3 in
response to the Staff's comment.
Form 10-K for Fiscal Year Ended February 24, 2007
- -------------------------------------------------
Exhibit 13 -- Fiscal 2006 Annual Report to Stockholders
- -------------------------------------------------------
Critical Accounting Estimates, page 35
- --------------------------------------
14. Please revise your disclosure of critical estimates and judgments
to supplement and not duplicate the summary of significant accounting policies
that are already disclosed in Note 1 to the financial statements. Please
carefully evaluate each policy and revise your discussion as appropriate to
clarify and quantify each critical estimate and clearly identify the assumptions
you used to calculate each estimate. Discuss and quantify how accurate your
estimates and assumptions have been in the past and whether they are likely to
change in the future. Refer to Refer to Release Nos. 33-8350 and 34-48960.
Response: The Company has reviewed its current Critical Accounting
Estimates and will revise disclosures in future filings for the above, as
applicable. Please see responses below as it relates to each specific Critical
Accounting Estimate.
Self Insurance Reserves
We will expand the disclosure, as indicated in the following paragraph.
(Such disclosure has previously been included in Note 1 to the Consolidated
Financial Statements.)
During fiscal 2005, an adjustment of $8.5 million was recorded for
expected future workers compensation state assessment charges relating to prior
year claims that will be related to the incurred workers compensation claims on
our Consolidated Balance Sheet at February 25, 2006. There have been no other
significant adjustments to our estimate and while we expect the estimates may
change in the future due to the reasons previously stated, we believe our
current liability is adequate.
Long-Lived Assets
We have reviewed our discussion and believe that it meets the required
disclosure requirements.
Closed Store and Closed Warehouse Reserves
We will expand our Critical Accounting Estimates to include the second
and third paragraphs from our response to Comment 15, also repeated below:
We adjust the charges originally accrued for these events for 1)
interest accretion, 2) settlements on leases or sold properties, and 3) changes
in estimates in future sublease rental assumptions. Net adjustments, all of
which have been disclosed in the Notes to the Consolidated Financial Statements,
for changes have been cumulatively approximately 6% from the date of inception,
with the most significant adjustments being made prior to 2000. Total
adjustments in fiscal 2007, 2006, and 2005 were $X.X, $1.3 million, and $3.4
million, respectively. Adjustments are predominantly due to fluctuations in the
real estate market from the time the original charges are incurred until the
properties were actually settled.
Due to the long-term nature of the lease commitments, it is possible
that current accruals, which are based on estimates of vacancy costs and
sublease income, will change in the future as economic conditions change in the
real estate market; however, we are unable to estimate the impact of such
changes at this time and the existing obligations are management's best estimate
of these obligations at this time.
Employee Benefit Plans
We will expand our Critical Accounting Estimates to include our
response to Comment 16.
Inventories
We will expand our Critical Accounting Estimates to include our
response to Comment 17, also repeated below:
Physical inventory counts are taken every period for fresh inventory,
approximately twice per fiscal year on a staggered basis for the remaining
merchandise inventory in stores, and annually for inventory in distribution
centers and supplies. The average shrinkage rate resulting from the physical
inventory counts is applied to the ending inventory balance in each store as of
the balance sheet date to provide for estimated shrinkage from the date of the
last physical inventory count for that location. Total inventory stock loss
reserves amounted to approximately $XX.X and $12.8 million, as of February 23,
2008 and February 24, 2007, respectively. Adjustments to the stock loss reserve
based on physical inventories have not been material.
Income Taxes
We have reviewed our disclosure and will expand in future filings,
primarily as a result of changes that have occurred during fiscal 2007, we will
revise our Critical Accounting Estimates to include the following disclosures:
As discussed in Note 12 of the Consolidated Financial Statements, our Company
recorded a valuation allowance for the entire U.S. net deferred tax asset since,
in accordance with SFAS 109, it was more likely than not that the net deferred
tax asset would not be utilized based on historical cumulative losses. Under
SFAS 109, this valuation allowance could be reversed in future periods if our
Company generates taxable income from improvement in our U.S. operations.
We adopted the provisions of Financial Accounting Standards Board ("FASB")
Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an
Interpretation of FASB Statement 109 ("FIN 48") as of February 25, 2007. The
cumulative effect of the adoption of the recognition and measurement provisions
of FIN 48 resulted in a $24.4 million increase to the February 25, 2007 balance
of retained earnings. Results of prior periods have not been restated. FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 requires that we determine whether the benefits of
our tax positions are more likely than not of being sustained upon audit based
on the technical merits of the tax position. For tax positions that are more
likely than not of being sustained upon audit, we recognize the largest amount
of the benefit that is more likely than not of being sustained in our
Consolidated Financial Statements.
For tax positions that are not more likely than not of being sustained upon
audit, we do not recognize any portion of the benefit in our Consolidated
Financial Statements. Our policy for interest and penalties under FIN 48 related
to income tax exposures was not impacted as a result of the adoption of the
recognition and measurement provisions of FIN 48. Therefore, we continue to
recognize interest and penalties as incurred within "Benefit from (provision
for) income taxes" in our Consolidated Statements of Operations. See Note 12 to
the Consolidated Financial Statements for further discussion.
As discussed in Note 12, our Company makes estimates of the potential liability
based on its assessment of all potential tax exposures. In addition, we use
factors such as applicable tax laws and regulations, current information and
past experience with similar issues to make these adjustments. The increase in
our liabilities for unrecognized tax benefits as of the date of adoption of
approximately $165 million was due to our assessment of potential exposure
concerning a deduction taken in the Company's fiscal 2005 federal income tax
return. Despite the Company's belief that its tax return position is
supportable, the Company believes that the position may not be fully sustained
upon review by tax authorities. Such amount was adjusted to approximately $154
million in the fourth quarter of fiscal 2007 in connection with the Company's
fiscal 2006 tax return to provision reconciliation. As we were in a full
valuation allowance position, the approximate $11 million adjustment had no
effect on the Company's earnings. Our balance sheet has been adjusted to
reflect the liabilities for uncertain tax positions and deferred tax assets for
net operating losses, since such losses are available to absorb the taxable
income attributable to the unrecognized tax benefits. Thus, there was no impact
on the Company's retained earnings resulting from the increase in the liability
for unrecognized tax benefits.
15. Disclose how accurate the total amounts expected to be incurred in
connection with your asset disposition initiatives have been in the past and how
much you have adjusted the original amounts. Indicate whether the current
accruals are reasonably likely to change in the future.
Response: All significant adjustments to the reserves have been
disclosed in detail in the Notes to the Consolidated Financial Statements. In
the future, we will also disclose any significant adjustments in the Critical
Accounting Estimates through disclosure similar to the following:
We adjust the charges originally accrued for these events for 1)
interest accretion, 2) settlements on leases or sold properties, and 3) changes
in estimates in future sublease rental assumptions. Net adjustments, all of
which have been disclosed in the Notes to the Consolidated Financial Statements,
for changes have been cumulatively approximately 6% from the date of inception,
with the most significant adjustments being made prior to 2000. Total
adjustments in fiscal 2007, 2006, and 2005 were $X.X, $1.3 million, and $3.4
million, respectively. Adjustments are predominantly due to fluctuations in the
real estate market from the time the original charge are incurred until the
properties were actually settled.
Due to the long-term nature of the lease commitments, it is possible
that current accruals, which are based on estimates of vacancy costs and
sublease income, will change in the future as economic conditions change in the
real estate market; however, we are unable to estimate the impact of such
changes at this time and the existing obligations are management's best estimate
of these obligations at this time.
16. Please revise your disclosure to clearly indicate the impact on the
financial statements of your assumptions in the current period of raising the
discount rate and raising the expected return on plan assets.
Response: Our disclosure will be revised in future filings as follows:
Employee Benefit Plans
The determination of our obligation and expense for pension and other
postretirement benefits is dependent, in part, on our selection of certain
assumptions used by our actuaries in calculating these amounts. These
assumptions include the weighted-average discount rate at which obligations can
be effectively settled, the anticipated rate of future increases in compensation
levels, the expected long-term rate of return on assets, increases or trends in
health care costs, and certain employee related factors, such as turnover,
retirement age and mortality.
The discount rate is determined by taking into account the
actual pattern of maturity of the benefit obligations. To generate the year-end
discount rate, a single rate is developed using a yield curve which is derived
from multiple high quality corporate bonds, discounting each future year's
projected cash flow, and determining the equivalent single discount rate. A
discount rate of 5.75% was selected for the February 23, 2008 disclosures. We
use independent actuaries to assist us in determining the discount rate
assumption and measuring our plans' obligations.
The rate of compensation increase is determined based upon a scale of
merit and promotional increases according to duration plus an economic increase
per year.
Our long-term rate of return is developed by taking into account the
target allocations contained in each plan's investment policy, as of the
beginning of the year, and reflecting long term historical data, with greater
weight given to recent years. Under this approach, separate analyses are
performed to determine the expected long-term rate of inflation, real rates of
return for each asset class, and the correlations among the returns for the
various asset classes. We use independent actuaries to assist us in determining
our long-term rate of return assumptions.
We believe that our current assumptions used to estimate plan
obligations and annual expense are appropriate in the current economic
environment. However, if economic conditions change, we may need to change some
of our assumptions, and the resulting changes may materially affect our pension
and other postretirement obligations on the balance sheet and our future expense
in the consolidated statements of operations. Actual results that differ from
our Company's assumptions are accumulated and amortized over future periods
into the income statement.
The weighted-average discount rate, the weighted average rate of
compensation increase and the expected long-term rate of return on plan assets
used in our determination of plan obligations and pension expense are as
follows:
2007 2006 2005
--------- --------- ------------
U.S. U.S. U.S.
--------- --------- ------------
Weighted average discount
rate 5.75% 5.75% 5.50%
Weighted average rate of
compensation increase x.xx% 2.75% 2.50%
Expected long-term rate of
return on plan assets 6.75% 6.75% 6.50%
The following illustrates the annual impact on pension expense of a 100
basis point increase or decrease from the assumptions used to determine the net
cost for the year ending February 23, 2008:
Combined (Decrease)
Weighted Average Expected Return Increase in Pension
Discount Rate on Plan Assets Expense
----------------------- ----------------------- -----------------------
100 basis point increase $x.xx $xx.x $x.xx
100 basis point decrease x.xx xx.x x.xx
The following illustrates the annual impact on the benefit obligation
of a 100 basis point increase or decrease from the assumptions used to determine
the benefit obligation at February 23, 2008:
Combined (Decrease)
Weighted Average Expected Return Increase in Benefit
Discount Rate on Plan Assets Obligation
----------------------- ----------------------- -----------------------
100 basis point increase $x.xx $xx.x $x.xx
100 basis point decrease x.xx xx.x x.xx
The following illustrates the annual impact on postretirement benefit
expense of a 100 basis point increase or decrease from the discount rate used to
determine the net cost for the year ending February 23, 2008:
Weighted Average
Discount Rate
----------------
100 basis point increase $x.xx
100 basis point decrease x.xx
The following illustrates the annual impact on the accumulated
postretirement benefit obligation of a 100 basis point increase or decrease from
the discount rate used to determine the accumulated benefit obligation at
February 23, 2008:
Weighted Average
Discount Rate
----------------
100 basis point increase $x.xx
100 basis point decrease x.xx
17. Your discussion of inventories is identical to disclosure contained
in Note 1. Please revise to state how often physical counts are made and
supplement your discussion by providing quantitative analysis. Disclose the
amount of reserves recorded each year as compared to the actual shrink
determined based on the physical counts.
Response: We will amend the disclosure in future filings with the
following:
Physical inventory counts are taken every period for perishable
inventory, approximately twice per fiscal year on a staggered basis for the
remaining merchandise inventory in stores, and annually for inventory in
distribution centers and supplies. The average shrinkage rate resulting from the
physical inventory counts is applied to the ending inventory balance in each
store as of the balance sheet date to provide for estimated shrinkage from the
date of the last physical inventory count for that location. Total inventory
stock loss reserves amounted to approximately $XX.X and $12.8 million, as of
February 23, 2008 and February 24, 2007, respectively. Adjustments to the stock
loss reserve based on physical inventories have not been significant.
Consolidated Financial Statements, page 39
Note 1 -- Summary of Significant Accounting Policies, page 43
Inventories, page 45
18. Please explain the factors you considered in concluding it was
appropriate to use the gross profit method in determining the cost of your
perishables and pharmacy inventories at your fiscal year end 2006 and 2005. In
your response please specifically address and support how the historical gross
profit margin still applies to each of the respective current periods. In this
regarding we note many changes have occurred such as the company addressing
pricing issues, the rollout of the fresh stores, launching of an improved Food
Basics discount format and the debut of the Food Emporium Foods concept. In a
separate discussion, please address and support how the historical gross profit
margin still applies in 2007 after the Pathmark acquisition.
Response: Perishable inventory is physically counted at all locations at the
end of each period and valued at cost with an adjustment to the perishable
inventory gross profit. (Our fiscal year has 13 periods of 4 weeks each.)
Pharmacy inventory is physically counted approximately two times per year and
valued at cost with an adjustment to the pharmacy inventory gross profit.
The procedures described above ensure that margins are updated on a current
basis for any significant Company events and represent margins based on current
costing information. The Company does not use historical gross profit margins to
calculate existing inventory balances and therefore, the rollout of new formats
is not a factor which would distort inventory costing.
The Company follows the same physical inventory count and costing policies
outlined above for its acquired Pathmark locations.
Note 4 -- Equity Investment in Metro, Inc., page 51
19. Please tell us how you accounted for the accumulated translation
adjustment at the time of the sale of your Canadian operations. Also address
your accounting for the cumulative translation adjustment at the time of your
March 2007 stock sale. See FIN 37.
Response: In August 2005, the Company considered the accumulated
translation adjustment as part of the net book value of the Canadian operations.
This net book value was used to calculate the gain on the disposal and the
related deferral of a portion of that gain (including CTA) in accordance with
EITF 01-2. The accumulated translation adjustments, related to the Canadian
operations, recorded as of the date of the sale of the Canadian operations
totaled $20 million. In accordance with FIN 37, approximately 15%, which
represents the retained economic interest in Metro, Inc., or $3 million of this
amount was not recognized upon the sale of the Canadian operations, and was
deferred as part of the remaining basis of the Investment in Metro.
In March 2007, the Company recognized a pro rata share of the
accumulated translation adjustment of approximately $7 million, in calculating
the gain recorded on the partial sale of its investment in Metro, Inc.
Note 8 -- Asset Disposition Initiatives, page 62
20. We note your disclosure of the total amount paid from the time of
the original charge through the current balance sheet date, however, please
revise to specifically disclose the total amount expected to be incurred in
connection with the Project Great Renewal, 2001 Asset Disposition, and Farmer
Jack Restructuring as required by paragraph 20.b.(1) of SFAS no. 146. To the
extent the original charge amounts disclosed for the Closure of Stores in the
Midwest and U.S. Distribution Operations and Warehouses in the tables presented
on page 69 and 71, respectfully, do not represent the total amount expected to
be incurred, please revise your disclosure accordingly.
Response: We will add disclosure similar to the following in future
filings:
U.S
Distribution
Project Operations
Great 2001 Asset and
Renewal Disposition Warehouses Total
-------- -------------- --------------- ----------
Total severance payments made to date $ 30.3 $ 28.2 $ 46.4 $ 104.9
Expected future severance payments
excluding interest accretion 1.2 0 .9 2.1
-------- -------------- --------------- -----------
Total severance payments expected
to be incurred 31.5 28.2 47.3 107.0
-------- -------------- --------------- -----------
Total occupancy payments made to date 108.8 56.3 12.4 177.5
Expected future occupancy payments,
excluding interest accretion 11.0 20.6 5.4 37.0
--------- -------------- --------------- -----------
Total occupancy payments expected
to be incurred, excluding interest
accretion 119.8 76.9 17.8 214.5
--------- -------------- --------------- -----------
Total severance and occupancy
payments made to date $ 139.1 $ 84.5 $ 58.8 282.4
Expected future severance and
occupancy payments, excluding
interest accretion 12.2 20.6 6.3 39.1
--------- -------------- -------------- ------------
Total severance and occupancy
payments expected to be incurred,
excluding interest accretion
$ 151.3 $ 105.1 $ 65.1 $ 321.5
========= ============== ============== ===========
21. Please expand your disclosure regarding the sale of your U.S.
distribution operations and warehouse facilities to C&S Wholesale Grocers, Inc.
to include the pertinent terms of the 15 year Supply Agreement. Also, please
disclose the percentage of your inventory supplied by C&S and discuss in MD&A
the financial impact of the changes as a result of this transaction in 2005.
Response: We will provide the following disclosure in our Commitments
and Contingencies footnote in future filings:
On June 27, 2005, our Company signed definitive agreements, including
an Asset Purchase Agreement and a 15 year Supply Agreement with C&S Wholesale
Grocers, Inc. The Asset Purchase Agreement included the assignment or sale of
the majority of all of our warehouse leases and owned property. Under the Supply
Agreement, C&S Wholesale Grocers, Inc. supplies our Company with all of our
requirements for groceries, perishables, frozen food and other merchandise in
the product categories carried by C&S Wholesale Grocers, Inc.
The contract provides that we will purchase virtually all warehoused inventory
from C&S for a 15 year period. When combined with our previous existing
agreement with C&S, this equates to C&S supplying our existing store base with
approximately two-thirds of our saleable inventory. Although there are a limited
number of distributors that can supply our stores, we believe that other
suppliers could provide similar product on comparable terms. However, a change
in suppliers could cause a delay in distribution and a possible loss of sales,
which would affect our results adversely.
We will modify our MD&A disclosure in future filings as follows:
Fiscal 2006 Compared with Fiscal 2005
Gross Margin
Gross margin as a percentage of sales increased 45 basis points for the
Northeast to 31.03% for fiscal 2006 from 30.58% for fiscal 2005 primarily caused
by an increase in sales relating to an information technology agreement with
Metro, Inc. of approximately 16 basis points and a decrease in warehouse and
trucking costs due to our C&S agreement of approximately 51 basis points, offset
by an increase in net product cost of approximately 25 basis points.
Note 14 -- Stock Based Compensation, page 91
22. Please explain and illustrate how the Company modified the number
and/or price of all of its unexercised stock options and non-vested performance
restricted stock units with no impact on stock compensation expense. Revise your
disclosure to clarify as appropriate.
Response: The Company's stock award plan contains an anti-dilution provision
requiring such equitable adjustments as necessary in the event of an equity
restructuring so that the value of pre-existing awards is preserved after the
event. Pursuant to FAS 123R, the Company measured the fair value of the
outstanding awards immediately before the equity event (i.e., the large
dividend) and found it to be equal to the fair value of the awards subsequent to
the equity event. Supplementally, an illustration of the modification in the
number of options, option price, and other stock equivalents is as follows:
Option Holders
Qualifying Option Holders received an adjustment to the number and option price
of their Options in accordance with the following mathematical example:
Assume that there are 1,000 outstanding Options in the employee's favor with an
option price of $20.00. The number of new outstanding Options in the employee's
favor following the adjustment was:
1,000 x [$34.70/($34.70-7.25)] = 1,000 x [$34.70/$27.45] = 1,264
-----
The new option price following the adjustment was:
$20.00 x [($34.70-$7.25)/$34.70] = $20.00 x [$27.45/34.70] = $15.82
------
As a result of the adjustment, under this example the employee would continue to
have the right to purchase stock with an aggregate value of approximately
$34,700 (1,000 x $34.70 pre-adjustment and 1,264 x $27.45 following the
adjustment) at an aggregate option price of approximately $20,000 (1,000 x
$20.00 before the adjustment and 1,264 x $15.82 following the adjustment).
Holders of Other Stock Equivalents
Qualifying Holders of Other Stock Equivalent Units received an adjustment to the
number of their Stock Equivalent Units in accordance with the following
mathematical example:
Assume that there are 1,000 outstanding Stock Equivalent Units in the employee's
favor. The number of new outstanding Stock Equivalent Units in the employee's
favor following the adjustment was:
1,000 x [$34.70/($34.70-7.25)] = 1,264
-----
As a result of the adjustment, under this example the aggregate value of the
employee's Stock Equivalent Units would continue to be approximately $34,700
(1,000 x $34.70 pre-adjustment and 1,264 x $27.45 following the adjustment).
In future filings, we will amend the disclosure in the Note to read as follows:
* As discussed in Note 3 - Special One-Time Dividend, our Company adjusted the
number and/or price of all unexercised stock options and nonvested performance
restricted stock units as of April 12, 2006, to ensure that an individual's
right to purchase stock at an aggregate value remained the same both before and
after the special one-time dividend payment. These adjustments were required
pursuant to the Plan's anti-dilution provision and had no impact on stock
compensation expense for fiscal 2006.
Note 15 -- Operating Segments, page 97
23. It appears from your disclosures that management evaluates the
financial performance of your store formats separately and that the results of
the assessments are the basis for changes in the manner resources are being
allocated. We note your disclosure in the Overview section of MD&A beginning on
page 9 of your conversion of conventional stores to the Fresh Store format, the
reformatting and expansion of the discount Food Basics format and the
introduction of the Food Emporium Fine Foods stores. Further we note that with
the Pathmark acquisition the company added a fourth store format. Please explain
to us how your chief operating decision maker reviews the Company's financial
results for purposes of making financial decisions about allocating resources
and for purposes of assessing performance. Include in your response how you have
considered the criteria in paragraph 17 of SFAS 131, including economic
characteristics, which supports your basis for aggregation into two operating
segments: the United States and subsequently Northeast, and your investment in
Metro, Inc. Please also provide us with the reports provided to your CODM for
purposes of assessing financial performance and allocating resources for each of
the fourth quarters in fiscal years 2006 and 2005 as well as the third quarter
of fiscal 2007.
Response: We have evaluated our segment presentation and believe that reporting
the consolidated company results as two reportable segments, Northeast and the
Investment in Metro, Inc., is appropriate and in compliance with the
requirements of Statement of Financial Accounting Standards ("SFAS") 131. The
Company is a grocery retailer operating in the Northeast with an investment in
Metro, Inc., previously accounted for under the equity method and fully disposed
of in November 2007.
Our Chief Operating Decision Maker ("CODM") is our President and Chief Executive
Officer. Our CODM uses many different measurements and data points to evaluate
the results and to assess the Company's performance. At the end of each period,
our CODM is provided a significant amount of data in order to complete this
assessment and to make business decisions regarding the Company's capital
resources and performance. Performance is assessed at the consolidated Total
Company level and Region/Banner level. The Company will evaluate Pathmark
independently as an additional Region/Banner. As such the Region/Banner results
are consolidated to form the Total Company; however, this is not the primary
measure for the CODM to allocate resources. These Region/Banner groupings are
shown in CAPS below.
o TOTAL COMPANY
o A&P (NORTHERN NJ, CT, NY-EXCEPT LONG ISLAND, MANHATTAN)
o A&P in NY and Northern NJ
o The Food Emporium in Westchester County, NY
o A&P/Super Foodmart in Connecticut
o WALDBAUM'S (LONG ISLAND)
o THE FOOD EMPORIUM (MANHATTAN, NY)
o SUPERFRESH (SOUTHERN NJ, PA, MD)
o SuperFresh in Baltimore and Philadelphia
o A&P in central and south NJ
o FOOD BASICS (all locations)
o LIQUOR (all locations)
o PATHMARK (all locations)
In addition, information provided is also categorized in the following formats:
o Consolidated Results
o Fresh
o Discount
o Price Impact (Pathmark)
o Gourmet
o Large Store Locations
o Small Store Locations
o Shore Store Locations
o Discount Remodels
o New Discount Stores
o New Fresh Stores
o Acquired Stores
o Individual Store Locations
A&P is a grocery retailer which operates approximately 400 stores in the
Northeastern United States under various banners (A&P, Waldbaum's, SuperFresh,
SuperFoodmart, Food Emporium, Food Basics, and Pathmark). Each of the banners is
principally located within a smaller geographic region, as outlined above;
however, decisions as to the allocation of resources are based on a variety of
factors, which include, but are not limited to, the Company's long-term goals,
geographic location, store size, store appearance, store traffic, historical
results and store format.
The historical store formats (fresh, gourmet and discount) described in the MD&A
represent a marketing approach to distinguish the Company and its stores within
their given region. However, decisions to open or close a store or to convert a
store to a given format are based on the current market conditions and the
factors listed above specific to each store location. Our Company is
continuously converting and upgrading its stores and these decisions are not
based on any one factor. These changes in format do not impact the way our CODM
assesses and reviews the results of a given store or the Company as a whole.
Store banners are operated based on the Company's assessment of customer
loyalty. Based on the Company's continuous assessment of each stores'
performance, decisions have periodically been made to change a store from one
banner to another in order to promote profitability growth. Change in banners
also does not change the way in which the CODM assesses the business and reviews
the Company's results.
Regardless of the type of store format or banner, the Company currently operates
in one primary segment - the grocery business - with the other segment being its
investment in Metro, Inc.
As further evidence that the Company's primary grocery operating segment is the
Northeast, A&P currently sources the majority of its products through a long
term supply agreement with C&S regardless of region, banner or store format. In
addition, with the acquisition of Pathmark which had an existing supply
arrangement with C&S, A&P's consolidated sourcing from C&S for all stores is
expected to continue. Lastly, it should be noted that A&P negotiates vendor
agreements and programs on a Company wide basis without regard to region, banner
or store format in order to maximize cost savings.
Although we don't believe that it is necessary to address the aggregation
criteria in paragraph 17 of SFAS 131 based on our above assessment, we have
provided analysis below as additional information to further support our
position of reporting under two reportable segments.
Economic characteristics
The economic conditions, competitive and operating risks are substantially
similar for grocery retailers. Competitors include other grocery retailers
within a similar geographic area, regardless of the competitor format or banner.
Additionally, operating risks are similar (i.e. market share, labor supply,
fresh product supply, product availability, product cost, consumer preferences,
logistics, transportation and supply). Stores operate in essentially the same
manner and management reviews trends along with operating results to determine
how to allocate capital resources; however, overall management of the various
stores is essentially the same.
There is disparity in gross margin between individual store locations within
region/banners/format; oftentimes a broader range within a given
region/banners/format than between region/banners/format. This disparity is
predominantly based on product sales mix. It is also noted that ranges of store
margins between region/banners/format often overlap. Therefore, it was
determined that individual gross margins are not the best indication of economic
characteristics of our business, as evaluated by the CODM.
a) The nature of products and services
The products and services delivered by each of the locations do not vary
significantly from one format or banner to another. The stores all sell various
combinations of food and beverages.
b) The nature of the production processes
A&P is a grocery retailer; therefore, this item is not applicable to our
business.
c) The type or class of customer for their products and services.
The Company believes that its customers cross all socio-economic classes.
d) The methods used to distribute their products or provide their
services Distribution of products to customers occurs by in-store consumer
shopping.
e) If applicable, the nature of the regulatory environment, for
example, banking, insurance, or public utilities
The nature of the regulatory environment over the food retail environment is
substantially the same in all jurisdictions.
Summary
In FY 07, the Company plans to market its products through five separate
formats: Conventional, Gourmet, Fresh, Discount, and Price Impact. As previously
stated, the formats are a marketing approach to distinguish its products and
services for operations in one segment of the marketplace that is essentially
the same (i.e., grocery retailing). The Company considered the overall and
individual products sold in common among the different formats as well as the
competitive and operating risks of each format and noted that a majority of
specific individual products are sold in common at each format, including
Pathmark. Future expectations are that greater convergence of product offerings
will occur. In addition, the competitive risk for all formats is essentially the
same--other grocery retailers, with pressure against our dry goods merchandise
from the "big box" wholesalers. The operating risks at all formats are almost
identical, with primary emphasis placed on labor and goods, which are sourced
the same for all formats.
Hard copies of our CODM packages for the 4th quarters of fiscal 2005 and 2006
and the third quarter of fiscal 2007 have been mailed to the Commission. We
respectfully request that information be held confidential.
Exhibit 11
24. Please provide a statement reflecting the computation of
earnings per share. See Item 601 of Regulation S-K.
Response: The required information is contained in Note 1 to our
Consolidated Financial Statements and therefore, the exhibit is not necessary
pursuant to Item 601. In future filings, we will amend our exhibit listing as
follows -
11** Statement re computation of per share earnings
** Information required to be presented in Exhibit 11 is
included in Exhibit 13 under Note 1 - Summary of Significant
Accounting Policies, in accordance with Statement of
Accounting Standards No. 128, "Earnings Per Share."
Exhibits 31.1 and 31.2
25. In paragraph two, three and four you have replaced the word
"report" with "annual report." The wording in each certification should be in
the exact format provided by Item 601(b)(31) of Regulation S-K. In future
filings please make these corrections.
Response: In future filings, we will amend Exhibits 31.1 and 31.2 to
state "report."
Exhibit 99.2
26. Please provide a signed auditor's report. Refer to Rule 3-09
of Regulation S-X and Rule 302 of Regulation S-T.
Response: We will amend the Form 10-K to contain the typed name of
the auditor.
Form 10-Q for the quarter ended December 1, 2007
Note 11 -- Income Taxes, page 38
27. Please revise to provide the following additional disclosures as of
the date of adoption and any material changes in the interim periods post
adoption:
o The total amount of unrecognized tax benefits as of date of adoption;
o The total amount of unrecognized tax benefits that, if recognized,
would affect the effective tax rate
o The total amounts of accrued interest and penalties as of the
date of adoption and any material changes in the amounts
recognized subsequently in the interim periods;
o The amounts of unrecognized tax benefits as of the date of
adoption that it is reasonably possible that the amount will
significantly increase or decrease within 12 months of the
reporting date.
Response: We will revise disclosures in future filings to disclose the above,
as appropriate. Please see responses below as it relates to each specific
comment:
In response to the first bullet:
Upon adoption, the Company recorded approximately $165
million of unrecorded tax benefits which was disclosed in
the first quarter footnotes. There were no material
changes to this amount during the second and third
quarters. The Company has subsequently updated this amount
to approximately $154 million in conjunction with the
reconciliation of the fiscal 2006 tax return to its 2006
provision. The updated amount will be disclosed in our
Form 10-K for the fiscal year ended February 23. 2008. As
the Company was in a full valuation allowance position,
the approximately $11 million adjustment will have no
effect on earnings.
In response to the second bullet:
The Company is in a full valuation position; therefore, if
any amount of the Company's unrecognized tax benefits were
to be recognized, there would be an offset in the
valuation allowance, resulting in no impact on the
effective rate. Accordingly no disclosure is necessary.
In response to the third bullet:
As of the date of adoption, the Company has not included
any amount for accrued interest and penalties since it has
sufficient net operating loss carryforwards to absorb
income attributable to unrecognized tax benefits.
Accordingly no disclosure is necessary.
In response to the fourth bullet:
As of the date of adoption, the Company was not aware of
any amount of unrecognized tax benefits that would
significantly increase or decrease within 12 months of the
reporting date. As circumstances change in the future, we
will revise the disclosure accordingly.
Note 15 -- Subsequent Events, page 45
28. Please tell us and disclose how you plan to account for the
transaction in which you lent your shares for nominal value. Tell us in more
detail why you believe that these shares should not be considered outstanding
for purposes of earnings per share given that they may be ultimately sold to
third parties where it appears they will have voting privileges and be eligible
to receive dividends. If the stock price exceeds $28 at the end of the share
lending agreement, tell us whether the borrowers will be required to give back
shares or whether they may opt to pay you their initial proceeds from the sale
of the borrowed shares in exchange for the shares borrowed.
Response:
The share lending transaction can be economically viewed as a
combination of two separate features: (i) the issuance of a fixed number of
shares; and (ii) the execution of a prepaid forward purchase contract for the
same fixed number of shares. We are accounting for each feature of the share
lending arrangement separately (issuance of common stock and the execution of a
prepaid purchase contract) by analogizing to EITF 99-7, which also provides that
the economic terms of an agreement be split into separate accounting components.
The Company will account for the transaction in the financial statements by
debiting Additional Paid-in Capital and crediting Common Stock at par for the
shares loaned. The nominal amount received of $8,134.01 represents a share
lending fee that was recorded in Additional Paid In Capital.
The issuance of the shares under the share lending agreement will be reflected
in the basic and dilutive earnings per share. However, paragraph 25 of FAS 150
indicates that the shares underlying postpaid forward contracts should be
removed from the computation of basic and dilutive earnings per share. By
analogy, the shares underlying the prepaid forward purchase contract in this
transaction will be treated the same. Accordingly, on a net basis this
transaction will have no impact on earnings per share.
In addition, please note, under the terms of the agreement the borrower of the
shares is required to remit the issuer any dividends the issuer declares on the
borrowed stock.
Regardless of the stock price, at the end of the share lending agreement, the
borrowers are required to return the shares to the Company, unless the Company
consents to accept cash. The Company controls how the share lending transaction
will be settled. If the Company consents to accept cash, the borrower must pay
market value of the borrowed shares outstanding as of the repayment date.
In future filings, we will include the following disclosure in our Indebtedness
Note related to the share lending agreement:
Share Lending Agreement
We have entered into share lending agreements, dated December 12, 2007,
with certain financial institutions, under which we have agreed to loan up to
11,278,988 shares of our common stock (subject to certain adjustments set forth
in the share lending agreements). These borrowed shares must be returned to us
no later than December 15, 2012 or sooner if certain conditions are met, unless
otherwise agreed. In certain circumstances, upon our request, the financial
institutions may pay us the value of the shares in cash instead of returning the
borrowed shares.
These financial institutions will sell the "borrowed shares" to investors
to facilitate hedging transactions of their investments in Convertible Notes,
Convertible Note Hedges and Convertible Note Warrants. We will not receive any
proceeds from the sale of the borrowed shares. We received a nominal lending fee
from the financial institutions pursuant to the share lending agreements.
Any shares that we loan will be issued and outstanding. Investors that
purchase borrowed shares will be entitled to the same voting and dividend rights
as any other holders of our common stock; however, the financial institutions
will not have such rights pursuant to the share lending agreements. The
obligation of the financial institutions to repay the borrowed shares has been
accounted for as a prepaid forward contract and, accordingly, shares underlying
this contract are removed from the computation of basic and dilutive earnings
per share. Accordingly, on a net basis this transaction will have no impact on
earnings per share.
Form 8-K/A (Amendment No. 2) dated December 3, 2007
29. Please tell us how the "Commitment Waivers" dated November 5, 2007
changed your debt financing pursuant to the Commitment Letter dated March 4,
2007.
Response: The Company has revised the disclosure in the Proxy
Statement beginning on page 4 in response to the Staff's comment and in
response to comment 1, above. As disclosed in the Company's Form 8-K filed
November 6, 2007, the waivers facilitated decreasing the anticipated total
amount of indebtedness upon closing the Merger and decreasing A&P's anticipated
post-Merger interest expense. Specifically, rather than retaining shares of
Metro Inc. as contemplated by the March 4, 2007 commitment letter, A&P was
permitted to sell the shares and apply the proceeds, together with borrowings
under a reduced Bridge Credit Facility and a portion of its increased ABL Credit
Facility to finance the Merger.
Definitive Proxy Statement on Schedule 14A
Certain Relationships and Transactions, page 16
30. We note that you have adopted a "Policy and Procedure with Respect
to Related Party Transactions," however, it is not clear how transactions are
reviewed and approved. In future filings, please revise your disclosure to
describe your policies and procedures for review, approval, or ratification of
related party transactions. See Item 404(b) of Regulation S-K.
Response: The Company will comply in future filings.
31. In future filings, disclose whether the transactions and agreements
with related parties were comparable to terms you could have obtained from
unaffiliated third parties. Also, if written, please file all related party
contracts as exhibits or confirm to us that they all have been filed.
Response: The Company will comply in its disclosure in future filings.
The Company confirms that all such contracts required to be filed as exhibits
have been so filed.
* * * * *
The Company acknowledges that:
o the Company is responsible for the adequacy and accuracy
of the disclosure in the filing;
o Staff comments or changes to disclosure in response to
Staff comments do not foreclose the Securities and
Exchange Commission (the "Commission") from taking any
action with respect to the filing; and
o the Company may not assert Staff comments as a defense in
any proceeding initiated by the Commission or any person
under the federal securities laws of the United States.
Comments or questions regarding any matters with respect to the Proxy
Statement may be directed to Allan Richards at (201)571-4015 or Chris McGarry at
(201)571-8161. Comments or questions regarding any matters with respect to the
10K and 10Q may be directed to Brenda Galgano at (201)571-4363 or Melissa
Sungela at (201)571-4330.
Very truly yours,
Allan Richards
Senior Vice President
Human Resources, Labor Relations,
Legal Services and Secretary
cc: Brenda M. Galgano
Melissa E. Sungela
Chris McGarry
Kenneth W. Orce
John Schuster
Helene R. Banks