THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
FISCAL 2007
ANNUAL REPORT TO STOCKHOLDERS
[A&P LOGO]
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TABLE OF CONTENTS
Executive Chairman Letter to Stockholders........................................................ 3
President and Chief Executive Officer Letter to Stockholders..................................... 5
Management's Discussion and Analysis............................................................. 8
Consolidated Statements of Operations............................................................ 47
Consolidated Statements of Stockholders' Equity and Comprehensive (Loss) Income.................. 48
Consolidated Balance Sheets...................................................................... 50
Consolidated Statements of Cash Flows............................................................ 51
Notes to Consolidated Financial Statements....................................................... 52
Management's Annual Report on Internal Control over Financial Reporting.......................... 119
Report of Independent Registered Public Accounting Firm.......................................... 120
Five Year Summary of Selected Financial Data..................................................... 122
Executive Officers............................................................................... 124
Board of Directors............................................................................... 124
Stockholder Information.......................................................................... 125
COMPANY PROFILE
The Great Atlantic & Pacific Tea Company, Inc. ("We," "Our," "Us," "A&P," or
"our Company"), based in Montvale, New Jersey, operates conventional
supermarkets, combination food and drug stores, and limited assortment food
stores in 8 U.S. states and the District of Columbia under the A&P(R),
Waldbaum's(TM), Pathmark(R), Best Cellars(R), The Food Emporium(R), Super
Foodmart, Super Fresh(R), and Food Basics(R) trade names.
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EXECUTIVE CHAIRMAN LETTER TO STOCKHOLDERS
Dear Fellow Stockholders:
2007 has been a momentous year for A&P, not only did we deliver improved results
from our operations but also completed the strategic transformation in creating
a focused Northeast concentration of stores envisioned and planned over three
years ago. Back in 2004 the Company realized it had to transform itself in order
to grow stockholder value and sustain a successful business for the long term.
We embarked on a path to achieve the leading position in our core Northeast
markets by driving consolidation, consequently divesting our non-core markets,
while at the same time implementing a format driven strategy and eliminating
redundant overhead by creating a centralized organization focused on driving top
line sales growth and achieving improved profitability.
I am pleased to report to you that we have accomplished many of the goals we had
set for ourselves and the completion of the Pathmark acquisition has certainly
been the capstone of our strategic transformation. With this transaction we have
now achieved the number one position in the Northeast region based on market
share. The results in our retail operations have steadily improved during the
last three years. This past year has seen the strongest top line sales trend in
many years. Our overall improved performance is directly attributable to the
skills of our proven leadership team and the new mindset in our organization
which has driven the operating progress in our business by implementing a
multiple format strategy built on proven and successful concepts that have
generated positive sales and earnings; outsourcing distribution and gaining
significant cost advantages and supply chain efficiencies; centralizing
administration and reducing overhead costs dramatically.
The completion of the Pathmark transaction has certainly been the highlight of a
very busy year. I am very pleased with the overall outcome of the process. This
merger could not have come at a better time for the Company. The addition of
Pathmark's skilled talent, expansive store portfolio, formidable brand strength
and fervent consumer reputation completes our consumer-centric, go-to-market
strategy. The acquisition is significant not only in the fact that it creates a
highly competitive Company which positions us to achieve sustainable
profitability but also in the immeasurable value derived from bringing together
two iconic American grocery chains. The integration provides us the lead
position in the largest consumer market - the New York metropolitan area, while
also significantly increasing the combined Company's share in the greater
Philadelphia market. In addition, the merger will transform A&P's financial
performance, efficiency and competitiveness - we expect to realize integration
synergies of at least $150 million within the next 18 to 24 months - creating
substantial value for stockholders, and providing opportunities for growth and
development for our associates.
In 2008, our focus will be on the successful integration of Pathmark while at
the same time weathering the challenges of a changing economic environment. We
have moved quickly and effectively to integrate the businesses based on a
comprehensive plan developed by our integration team. To date the Company is on
track with significant benefits already being realized from the acquisition. We
are well positioned to deal with the effects of a slower economy. I am confident
that our management team is fully capable of delivering on the full potential of
the Pathmark acquisition and the on-going roll-out of our format strategy.
The last several years have seen a tremendous amount of change at A&P. We have
truly transformed our great Company and realized significant stockholder value
during this time. Throughout this process our board of directors worked
tirelessly to support our transformation and
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I couldn't be more thankful for their guidance, advice and counsel during this
very challenging but at the same time exciting period in A&P's history. My most
sincere thanks also goes out to our valued associates, who with their diligent
efforts have supported their Company through all these changes. Finally, I want
to thank our outstanding management team for their commitment, hard work and
enthusiasm. Under the leadership of our CEO, Eric Claus, they have accomplished
a remarkable turn-around and transformation and although a lot of work still
remains to be done this team deserves a tremendous amount of credit and praise
for their achievements.
I'm looking forward to continued progress in 2008 and beyond as we integrate
Pathmark, implement our format driven strategy and look for additional ways to
grow our business and create value for our stockholders.
Sincerely,
/s/CHRISTIAN HAUB
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CHRISTIAN HAUB,
Executive Chairman
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PRESIDENT AND CHIEF EXECUTIVE OFFICER LETTER TO STOCKHOLDERS
Dear Fellow Stockholders:
I am very pleased with our progress this past year, as the Company has realized
numerous accomplishments that were diligently planned and efficiently executed.
These achievements represent our continuous progression toward sustainable
profitability.
Highlights of the year include:
- The acquisition of Pathmark
- Strategic market divestitures for realignment of the business in the
Northeast core
- Consistent progress on fundamental retail key performance indicators
- Successful renovations in our FRESH, DISCOUNT, and GOURMET stores
- Aggressive private label penetration growth rate
- The strongest comparable store sales increases for one year, in over
8 years
Thanks to the hard work and dedication of our associates and management, we
successfully completed the close of the Pathmark transaction. The integration is
progressing smoothly with each milestone set thus far achieved, without any
major obstacles. To ensure a seamless business transition, numerous meetings
were immediately held to bring together all major Pathmark and A&P teams
including Pathmark store managers. The collective energy garnered from this
coming together has quickly made us Better Together and further fueled the drive
to build our business. Our teams are now more than ever deeply focused on
attaining the projected synergies anticipated. The intense preparation and
concentration on targets, provides support to our belief that the $150 million
of synergies is well within our grasp. Early assessments of potential synergies
are already presenting results consistent with projections.
I am especially pleased to announce the successful completion and signing of our
logistics contract with C&S Wholesale Grocers in March 2008. This innovative
ten-year agreement combines our previously separate A&P and Pathmark supply
contracts. It is especially significant in that it fully aligns our distribution
operations, procurement practices and warehousing facility goals. It is also
expected to create increased efficiencies across our distribution network
improving service levels to all stores, and enabling both the Company and C&S to
achieve substantial cost savings.
The key aspects of this agreement are:
- An innovative new business model
- A dedicated network of distribution centers
- Coordination and collaboration of resources
- Reduction of on-hand inventory
- Improved in-stock levels
- Best-in-class service levels with improved speed-to-market delivery
- Cost reductions which will result in savings for customers
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FORMAT DRIVEN OPERATIONS
As the only retailer in the Northeast to execute across four differentiated
formats, we are focused on effectively serving all of our customers. With clear
market segmentation across various regions in the Northeast operating under
multiple banners, as well as a target consumer base, we continue to invest
capital in our store base, which now includes Pathmark.
Due to our new effective price strategy in Fresh, we are better positioned
against our competition and winning new customers week after week. The FRESH
renovations continue to play an integral role in our strategic transformation.
The positive financial results of increased sales and margins clearly illustrate
that we are on target with our mindset to deliver a superior FRESH store
offering. In September, we premiered our "walking street" style environment
proto-type in Park Ridge, New Jersey to overwhelming customer response.
The Pathmark integration provided the basis for our latest format innovation,
PRICE IMPACT. Instituting quick "merchandising hits" in our new PRICE IMPACT
banner have already shown promising results with early returns. Designs are
already in place for a store refresh concept for select Pathmark locations that
will cost effectively modernize the stores while enhancing both our price image
and the FRESH experience. In early February, we premiered our first Pathmark
refresh in Jersey City, New Jersey with much success. The 2008 programs and
updates planned for this customer base will leverage the format's growth
potential.
The Food Basics stores which represent our DISCOUNT format are also experiencing
very strong, year-over-year sales growth as evidenced over the last four
consecutive quarters. This top line growth has greatly enhanced bottom line
improvement. Plans are currently being executed to expand this base of stores in
2008.
Solid growth is also clearly evident in the Manhattan market, where The Food
Emporium has exceeded expectations. The latest two renovations have been met
with positive results. The "food2go FRESH" product line recently launched is
providing customers a large variety of convenient and tasty prepared gourmet
selections. This program has had overwhelming success in meeting our customers'
needs for delicious, fresh cuisines that fit effortlessly into their busy
lifestyle. This format continues to meet customer's needs for premium foods with
expansion plans for the next two years.
INNOVATIONS
The success of these formats is primarily due to our new mindset which fosters
the development of innovations internally, as well as exploring new
opportunities through strategic partnerships and acquisitions. This is clearly
evident in our substantially enhanced private label program. In 2007, we
commenced the complete revamp of the America's Choice brand with a new logo and
packaging. Further we began introducing America's Choice products in Pathmark
with resounding positive feedback. Additionally plans are underway to transform
Pathmark's "Savings Plus" private label brand and leverage the new product line
across most of our formats. This has fueled excitement for aggressive
development of dynamic products for launch next year.
In October, we acquired Best Cellars, a New York City-based retailer renowned
for uniquely merchandising "Great Wines for Everyday" by flavor profile rather
than by origin. Best Cellars pioneered a simple concept of offering great wines
for everyday enjoyment with food, sold at reasonable prices in an engaging and
customer-friendly environment. Best Cellars' marketing strategy enables
customers to shop for beer, wine and spirits intuitively, based on taste.
Acquiring Best Cellars played an important role in marrying our FRESH food
programs with beer, wine & spirits operations to the next level, creating one
more innovative reason to choose A&P. Early in the coming year we will open the
first stand alone A&P Best Cellars store.
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As we continue to dynamically innovate product offerings across all formats, our
FRESH programs began introducing Starbucks cafes in select locations. The stores
offer a full beverage menu, as well as Starbucks cookies, pastries and other
baked selections. Four in-store cafes were launched this year and are doing very
well, with more planned for 2008.
This has been a year of substantial progress which has positioned the Company
well to continue capturing leadership share as the market is primed and ready.
We remain intent on our targeted plans and strategic mission, with increased
momentum from Pathmark's integration. Reflecting on this busy year, I am
especially proud to see many long planned programs and goals come to fruition.
And I look forward to reporting back to you the success of achieving our
projected synergy savings in 2008.
I want to take this opportunity to personally thank the executive management
team for their effective leadership, our associates and management for the
passion they bring to their jobs and their tireless efforts and to Christian
Haub, our Executive Chairman and the Board of Directors whose support has
enabled us to reach the next level.
Sincerely,
/s/ ERIC CLAUS
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ERIC CLAUS
President and Chief Executive Officer
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
The following Management's Discussion and Analysis is intended to help the
reader understand the financial position, operating results, and cash flows of
The Great Atlantic and Pacific Tea Company, Inc. It should be read in
conjunction with our financial statements and the accompanying notes ("Notes").
It discusses matters that Management considers relevant to understanding the
business environment, financial position, results of operations and our
Company's liquidity and capital resources. These items are presented as follows:
- - Basis of Presentation -- a discussion of our Company's fiscal year-end.
- - Overview -- a general description of our business; the value drivers of
our business; measurements; opportunities; challenges and risks; and
initiatives.
- - Recent Announcements -- a discussion of certain major announcements during
fiscal 2007 and subsequent events.
- - Operating Results -- a summary discussion of operating results during
fiscal 2007.
- - 2008 Outlook -- a discussion of certain trends or business initiatives for
the upcoming year that Management wishes to share with the reader to
assist in understanding the business.
- - Review of Continuing Operations and Liquidity and Capital Resources - a
discussion of results for fiscal 2007 and 2006, significant business
initiatives, current and expected future liquidity and the impact of
various market risks on our Company.
- - Market Risk -- a discussion of the impact of market changes on our
consolidated financial statements.
- - Critical Accounting Estimates -- a discussion of significant estimates
made by Management.
BASIS OF PRESENTATION
Our fiscal year ends on the last Saturday in February. Fiscal 2007, 2006
and 2005 were each comprised of 13 four week periods. Except where noted, all
amounts are presented in millions, and all net income (loss) per share data
presented is both basic and diluted.
OVERVIEW
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., based in Montvale, New
Jersey, operates conventional supermarkets, combination food and drug stores and
discount food stores in 8 U.S. states and the District of Columbia. Our
Company's business consists strictly of our retail operations, which totaled 447
stores as of February 23, 2008.
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
RECENT ANNOUNCEMENTS
On November 27, 2007, our Company announced that the Federal Trade
Commission ("FTC") had accepted a proposed consent agreement relating to our
acquisition of Pathmark Stores, Inc. ("Pathmark"). On December 3, 2007, our
Company completed our acquisition of 100% of Pathmark for $1.4 billion in cash,
stock, assumed or retired debt, warrants and options. Pathmark is a regional
supermarket chain with supermarkets in the New York, New Jersey and Philadelphia
metropolitan areas. The terms of the consent agreement, as discussed in Note 2 -
Acquisition of Pathmark Stores, Inc. required us to divest six stores located in
the state of New York, which have subsequently been sold in fiscal 2007.
Under the merger agreement, each share of Pathmark common stock
outstanding was converted into 0.12963 shares of A&P common stock (together with
cash in lieu of fractional shares) and $9.00 in cash. In determining the
purchase price, the common stock outstanding was valued using a Black-Scholes
valuation model using the price of A&P common stock of $32.08 per common share,
the average quoted market price of A&P common stock for two trading days before
and two trading days after the merger was announced. We issued 6,781,067 shares
of A&P common stock and paid $470.8 million to Pathmark common stockholders
based on the number of shares of Pathmark common stock outstanding, less shares
of restricted stock and shares held in treasury on November 30, 2007, of
52,310,959.
We issued 1,107,156 roll-over stock options in exchange for Pathmark
options granted prior to June 9, 2005 (i.) where consents are not obtained or
(ii.) that have exercise prices greater than or equal to $12.90, the quoted
market price of Pathmark common stock on November 30, 2007, the last trading day
before the closing date of the merger on December 3, 2007. The underlying stock
price at the closing date of the merger was calculated using a ratio of the
quoted closing market price for the Pathmark common stock on the merger closing
date. In determining the purchase price, the options are valued using a
Black-Scholes valuation model and a market price of $12.92, the average quoted
closing market price of Pathmark common stock for the two trading days prior to
the closing date and the closing date.
We also assumed 5,294,118 of outstanding Pathmark 2000 warrants. Upon
exercise at the price of $22.31, each warrant will entitle the holder to receive
0.12963 shares of A&P common stock and $9.00 in cash. In determining the
purchase price, the 2000 warrants are valued using a Black-Scholes valuation
model using the price of A&P common stock of $32.08 per common share, the
average quoted market price of A&P common stock for two trading days before and
two trading days after the merger was announced. A&P's stock price would need to
exceed $102.70 before the Pathmark 2000 warrants would be considered
"in-the-money". As part of the acquisition of Pathmark on December 3, 2007, we
issued 4,657,378 and 6,965,858 roll-over stock warrants in exchange for
Pathmark's 2005 Series A and Series B warrants, respectively. The number of
warrants issued was computed based on the conversion factor of 0.46296. The
Series A warrants are exercisable at $18.36 and the Series B warrants are
exercisable at $32.40. These warrants were valued using the price of A&P common
stock of $30.05 per common share, the quoted market price of A&P common stock on
November 30, 2007, the last trading day before the transaction closing date. The
Tengelmann stockholders have the right to approve any issuance of common stock
under these warrants upon exercise (assuming Tengelmann's outstanding interest
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
is at least 25% and subject to liquidity impairments defined within the
Tengelmann Stockholder Agreement). In addition, Tengelmann has the ability to
exercise a "Put Right" whereby it has the ability to require A&P to purchase A&P
stock held by Tengelmann to settle these warrants. Based on the rights provided
to Tengelmann, A&P does not have sole discretion to determine whether the
payment upon exercise of these warrants will be settled in cash or through
issuance of an equivalent portion of A&P shares. Therefore, these warrants are
recorded as liabilities and marked-to-market each reporting period based on
A&P's current stock price. During fiscal 2007, we recorded a gain on the market
value adjustment to these liabilities of $11.5 million and $14.8 million for
Series A and Series B warrants, respectively which is included in "Non Operating
Income" on our Consolidated Statements of Operations. The value of the Series A
and Series B warrants were $44.5 million and $106.1 million, respectively as of
February 23, 2008 and is included in "Current portion of other financial
liabilities" and "Other financial liabilities", respectively, on our
Consolidated Balance Sheets.
The purchase price paid for the acquisition of Pathmark is as follows:
Equity issued to Pathmark common stock holders $ 217.5
Issuance to Pathmark option holders 8.9
Issuance to Pathmark 2005 warrant holders 177.0
Issuance to Pathmark 2000 warrant holders 1.1
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Total equity consideration $ 404.5
Cash paid to redeem Pathmark debt 474.2
Cash paid to Pathmark common stockholders
at $9 per share 470.8
Cash paid to Pathmark option, restricted stock
and restricted stock unit holders 22.0
Cash paid for transaction fees,
excluding financing fees 41.0
------------
Total cash consideration $ 1,008.0
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Total consideration $ 1,412.5
============
The acquisition of Pathmark was funded by restricted cash on hand,
temporary bridge financing arrangements and the issuance of equity securities.
On April 24, 2007, based upon unsatisfactory operating trends and the need
to devote resources to our expanding Northeast core business, our Company
announced negotiations for the sale of our non-core stores within our Midwest
operations, including inventory related to these stores. Our Company ceased
sales operations in all stores as of July 7, 2007. Planned sale transactions for
these stores have been completed resulting in a loss on disposal of $34.3
million. In connection with the shutdown of these operations, we recorded net
occupancy costs of $62.7 million during the fiscal year ended February 23, 2008,
for closed stores and warehouses not sold. As we continue to negotiate lease
terminations as well as sublease some of these locations, these estimates may
require adjustment in future periods.
On May 30, 2007, our Company announced advanced negotiations for the sale
of our non-core stores located within the Greater New Orleans area, including
inventory related to these stores. Our Company ceased sales operations in all
stores as of November 1, 2007. Planned sale transactions for these stores have
been completed resulting in a loss on disposal of $16.5 million. In connection
with the shutdown of these operations, we recorded net occupancy costs of $3.8
million during the fiscal year ended February 23, 2008. As we continue to
negotiate lease
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
terminations as well as sublease some of these locations, these estimates may
require adjustment in future periods.
On March 7, 2008 the Company entered into a definitive agreement with C&S
Wholesale Grocers, Inc. ("C&S") whereby C&S will provide warehousing, logistics,
procurement and purchasing services (the "Services") in support of the Company's
entire supply chain. This agreement replaces and supersedes three (3) separate
wholesale supply agreements under which the parties have been operating. The
term of the agreement is ten and one-half (10-1/2) years, which includes a
six-month "ramp-up" period during which the parties will transition to the new
contractual terms and conditions. The agreement provides that the actual costs
of performing the services shall be reimbursed to C&S on an "open-book" or
"cost-plus" basis, whereby the parties will negotiate annual budgets that will
be reconciled against actual costs on a periodic basis. The parties will also
annually negotiate services specifications and performance standards that will
govern warehouse operations. The agreement defines the parties' respective
responsibilities for the procurement and purchase of merchandise intended for
use or resale at the Company's stores, as well as the parties' respective
remuneration for warehousing and procurement/purchasing activities. In
consideration for the services it provides under the agreement, C&S will be paid
an annual fee and will have incentive income opportunities based upon A&P's cost
savings and increases in retail sales volume.
OPERATING RESULTS
A&P's transformation and operating improvement moved forward in the fourth
quarter of fiscal 2007, behind ongoing strategic, operating, merchandising,
store development and cost control initiatives.
Our Company completed its strategic divestiture of non-core operations,
which resulted in the concentration of operations and future development plans
in our Northeast markets. Having closed and/or sold all Midwest operations in
the second quarter and completed the divestiture of stores in the Greater New
Orleans area early in the third quarter, the fourth quarter concentrated on
effectively moving forward on the comprehensive Pathmark integration plan.
The resolution of the divestiture initiatives and the completion of our
acquisition of Pathmark Stores Inc. early in the fourth quarter effectively
completed our Company's strategic transformation initiative, which began in 2005
with the sale of A&P Canada and subsequent executive management changes. With
the addition of the Pathmark operations, A&P is positioned to achieve
sustainable profitability when the integration of Pathmark's business is
completed.
With divestiture of non-core operations and acquisition of Pathmark
completed, A&P now has:
- - Decisive market share leadership in metropolitan New York and New Jersey,
and greater share in our Philadelphia markets.
- - A comprehensive plan in place to achieve all identified synergy savings
through consolidation of the Pathmark business.
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
- - An improved cost model and solid financial and investment platform.
- - Experienced management team, enhanced by the addition of approximately 125
key personnel from the Pathmark organization.
Alongside the conclusion of the strategic transformation, we maintained
the ongoing improvement of operating and merchandising execution, which combined
with the growing impact of our new Fresh stores and remodels to drive continued,
strong year-over-year sales improvement in our Company's Northeast operations.
Accordingly, ongoing improvement from core operations was driven by the
continued sales improvement in those markets, more consistent operating
discipline and cost controls; margin improvement associated with our ongoing
fresh store development and positive results in our discount Food Basics
operations.
During fiscal 2007, we completed the conversion of 13 stores to our fresh
format and began remodeling additional stores, including the remodel of one
Pathmark location in the fourth quarter. In addition to increased volume and
customer traffic, the emphasis on fresh category distribution in our remodels
continues to improve margins, underlining its top and bottom line growth
potential.
The discount Food Basics operations again returned sound results, as they
provided customers in certain markets with an excellent value alternative. In
combination with the mainstream Fresh stores and gourmet Fine Food concept that
continued to evolve in New York, this development stream continues to advance
the multi-tier marketing strategy initiated in 2005.
The innovation of A&P's marketing profile moved forward with the
completion of the Best Cellars acquisition, a New York-based wine
retailer with six locations, whose unique wine-selling concepts will be used to
enhance A&P's freestanding and in-store wine, beer and liquor business.
In summary, strategic accomplishments for the full year included the
following:
- - Completed strategic restructuring, with divestiture of non-core businesses
and acquisition of Pathmark Stores.
- - Continued strong sales trends in core Northeast operating markets.
- - Earnings momentum in Northeast operations.
- - Improved Pathmark sales trends
- - Improved contribution from discount Food Basics and Food Emporium
operations.
- - Initiation of comprehensive Pathmark integration strategy.
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
2008 OUTLOOK
Management's objectives for fiscal 2008 are to progress further toward
operating profitability in the existing core Northeast business by: continuing
operating and merchandising improvements behind established strategies;
maintaining cost control and reduction disciplines throughout the business; and
ensuring the continuity of Pathmark store operations, with emphasis on customer
communication and retention, as the overall integration of that business
proceeds.
Chief among the pre-existing corporate and retail strategies in place are
the ongoing improvement of merchandising and operating performance, the
execution of capital improvement projects for maximum return, and general
adherence to cost control disciplines.
Key elements are:
- - Continued development of merchandising, promotion and pricing strategies
to drive profitable sales growth.
- - Execute core market capital plan for conversion of conventional locations
to fresh or discount formats, fine-tune and monitor gourmet format
development.
- - Ongoing disposition of closed store leaseholds.
The comprehensive plan for the integration of Pathmark operations is
designed to achieve:
- - Continuity of all retail operations during integration process.
- - Efficient consolidation of headquarters personnel and support functions at
pre-existing A&P headquarters in Montvale.
- - Timely achievement of significant synergies identified as result of
merging the two businesses.
- - Consumer communication regarding the continuation of both the A&P-operated
and Pathmark banners and store formats, and related marketing and
promotional efforts.
Overall, we will continue to reflect both continuity and change, as
management focuses on sustaining the improvement of our operations - and
executing a seamless transition of Pathmark operations into the Company, to
maintain retail continuity and ensure the capture of all identified financial
synergies as scheduled within the first 18 to 24 months of the acquisition.
Various risk factors could cause us to fail to achieve these goals. These
include, among others, the following:
- - Our retail food business and the grocery retailing industry continues to
experience fierce competition from mass merchandisers, warehouse clubs,
drug stores, convenience stores, discount merchandisers, dollar stores,
restaurants, other retail chains, nontraditional competitors and emerging
alternative formats in the markets where we have retail operations.
Competition with these outlets is based on price, store location,
advertising and promotion, product mix,
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
quality and service. Some of these competitors may have greater financial
resources, lower merchandise acquisition costs and lower operating
expenses than we do, and we may be unable to compete successfully in the
future. Price-based competition has also, from time to time, adversely
affected our operating margins. Competitors' greater financial strengths
enable them to participate in aggressive pricing strategies selling
inventory below costs to drive overall increased sales. Our continued
success is dependent upon our ability to effectively compete in this
industry and to reduce operating expenses, including managing health care
and pension costs contained in our collective bargaining agreements. The
competitive practices and pricing in the food industry generally and
particularly in our principal markets may cause us to reduce our prices in
order to gain or maintain our market share of sales, thus reducing
margins.
- - Our in-store pharmacy business is also subject to intense competition. In
particular, an adverse trend for drug retailing has been significant
growth in mail-order and internet-based prescription processors.
Pharmacies are exposed to risks inherent in the packaging and distribution
of pharmaceuticals and other healthcare products. In addition, the
conversion of various prescription drugs to over-the-counter medications,
the withdrawal of certain drugs from the market and changes in third party
reimbursement levels for prescription drugs, including changes in Medicare
Part D or state Medicaid programs, may have a material adverse effect on
our business. Failure to properly adhere to Federal, State and local
government rules and regulations, applicable Medicare and Medicaid
regulations could result in the imposition of civil as well as criminal
penalties.
- - The retail food and food distribution industries, and the operation of our
businesses, specifically in the New York -- New Jersey and Philadelphia
regions, are sensitive to a number of economic conditions and other
factors such as (i.) food price deflation or inflation, (ii.) softness in
local and national economies, (iii.) increases in commodity prices, (iv.)
the availability of favorable credit and trade terms, (v.) changes in
business plans, operations, results and prospects, (vi.) potential delays
in the development, construction or start-up of planned projects, and
(vii.) other economic conditions that may affect consumer buying habits.
Any one or more of these economic conditions can affect our retail sales,
the demand for products we distribute to our retail customers, our
operating costs and other aspects of our business.
- - Acts of war, threats of terror, acts of terror or other criminal activity
directed at the grocery or drug store industry, the transportation
industry, or computer or communications systems, could increase security
costs, adversely affect our operations, or impact consumer behavior and
spending as well as customer orders. Other events that give rise to actual
or potential food contamination, drug contamination, or food-borne illness
could have an adverse effect on our operating results.
- - We could be adversely affected if consumers lose confidence in the safety
and quality of the food supply chain. Adverse publicity about these types
of concerns, whether or not valid, could discourage consumers from buying
products in our stores. The real or perceived sale of contaminated food
products by us could result in a loss of consumer confidence and product
liability claims, which could have a material adverse effect on our sales
and operations.
14
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
- - Our operations subject us to various laws and regulations relating to the
protection of the environment, including those governing the management
and disposal of hazardous materials and the cleanup of contaminated sites.
Under some environmental laws, such as the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, also known as CERCLA or
the Superfund law, and similar state statues, responsibility for the
entire cost of cleanup of a contaminated site can be imposed upon any
current or former site owners or operators, or upon any party who sent
waste to the site, regardless of the lawfulness of the original activities
that led to the contamination. From time to time we have been named as one
of many potentially responsible parties at Superfund sites, although our
share of liability has typically been de minimis. Although we believe that
we are currently in substantial compliance with applicable environmental
requirements, future developments such as more aggressive enforcement
policies, new laws or discoveries of unknown conditions may require
expenditures that may have a material adverse effect on our business and
financial condition.
- - Our capital expenditures could differ from our estimate if development and
remodel costs vary from those budgeted, or if performance varies
significantly from expectations or if we are unsuccessful in acquiring
suitable sites for new stores.
- - Our ability to achieve our profit goals will be affected by (i.) our
success in executing category management and purchasing programs that we
have underway, which are designed to improve our gross margins and reduce
product costs while making our product selection more attractive to
consumers, (ii.) our ability to achieve productivity improvements and
reduce shrink in our stores, (iii.) our success in generating efficiencies
in our supporting activities, and (iv.) our ability to eliminate or
maintain a minimum level of supply and/or quality control problems with
our vendors.
- - The majority of our employees are members of labor unions. While we
believe that our relationships with union leaderships and our employees
are satisfactory, we operate under collective bargaining agreements which
periodically must be renegotiated. In the coming year, we have several
contracts expiring and under negotiation. In each of these negotiations,
rising health care and pension costs will be an important issue, as will
the nature and structure of work rules. We are hopeful, but cannot be
certain, that we can reach satisfactory agreements without work stoppages
in these markets. However, the actual terms of the renegotiated collective
bargaining agreements, our future relationships with our employees and/or
a prolonged work stoppage affecting a substantial number of stores could
have a material effect on our results.
15
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
- - The amount of contributions made to our pension and multi-employer plans
will be affected by the performance of investments made by the plans and
the extent to which trustees of the plans reduce the costs of future
service benefits.
- - Our Company is currently required to acquire a majority of our saleable
inventory from one supplier, C&S Wholesale Grocers, Inc. Although there
are a limited number of distributors that can supply our stores, we
believe that other suppliers could provide similar product on reasonable
terms. However, a change in suppliers could cause a delay in distribution
and a possible loss of sales, which would affect operating results
adversely.
- - We have estimated our exposure to claims, administrative proceedings and
litigation and believe we have made adequate provisions for them, where
appropriate. Unexpected outcomes in both the costs and effects of these
matters could result in an adverse effect on our earnings.
- - The success of the merger with Pathmark will depend, in part, on the
combined company's ability to realize the anticipated benefits from
combining the businesses of A&P and Pathmark, including, anticipated
annual integration synergies within two years, through cost reductions in
overhead, greater efficiencies, increased utilization of support
facilities and the adoption of mutual best practices between the two
companies. These integration matters could have a material adverse effect
on our business.
- - Following the closing of the acquisition of Pathmark, Tengelmann, A&P's
former majority stockholder, owned beneficially and of record a
substantial percentage of our common stock on a fully diluted basis. As a
result of this equity ownership and our stockholder agreement with
Tengelmann, Tengelmann has the power to significantly influence the
results of stockholder votes and the election of our board of directors,
as well as transactions involving a potential change of control of our
Company. Tengelmann may support strategies and directions for our Company
which are in its best interests but which are opposed to other stockholder
interests.
- - Our substantial indebtedness could impair our financial condition and our
ability to fulfill our debt obligations. Our indebtedness could make it
more difficult for us to satisfy our obligations, which could in turn
result in an event of default on our obligations, require us to dedicate a
substantial portion of our cash flow from operations to debt service
payments, thereby reducing the availability of cash for working capital,
capital expenditures, acquisitions, general corporate purposes or other
purposes, impair our ability to obtain additional financing in the future
for working capital, capital expenditures, acquisitions, general corporate
purposes or other purposes, diminish our ability to withstand a downturn
in our business, the industry in which we operate or the economy
generally, limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate, and place us at a
competitive disadvantage compared to certain competitors that have
proportionately less debt. Our New Credit Agreement ("Credit Agreement")
contains restrictive covenants customary for facilities of that type which
limit our ability to incur additional debt, pay dividends, grant
additional liens, make investments and take other actions. These
restrictions may limit our flexibility to undertake future financings and
take other actions. If we are unable to meet our debt service obligations,
we could be forced to restructure or refinance our indebtedness, seek
additional equity capital or sell assets. We may be unable to obtain
financing or sell assets on
16
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
satisfactory terms, or at all. In addition, our Credit Agreement bears
interest at a variable rate. If market interest rates increase, such
variable-rate debt will have higher debt service requirements, which could
adversely affect our cash flow. While we may enter into agreements
limiting our exposure to higher interest rates, any such agreements may
not offer complete protection from this risk.
- - We are the primary obligor for a significant amount of closed stores and
warehouses under long-term leases, primarily located in the Midwest. Our
ability to sublet or assign these leases depends on the economic
conditions of the real estate markets in which these leases are located.
We have estimated our obligation under these leases, net of expected
subleases and we have reserved for them, where appropriate. Unexpected
changes in the marketplace or with individual sublessors could result in
an adverse effect on our earnings.
- - Fluctuating fuel costs may adversely affect our operating costs since we
incur the cost of fuel in connection with the transportation of goods from
our warehouse and distribution facilities to our stores. In addition,
operations at our stores are sensitive to rising utility fuel costs due to
the amount of electricity and gas required to operate our stores. We may
not be able to recover these rising utility and fuel costs through
increased prices charged to our customers. Our profitability is
particularly sensitive to the cost of oil. Oil prices directly affect our
product transportation costs and fuel costs due to the amount of
electricity and gas required to operate our stores as well as our utility
and petroleum-based supply costs; including plastic bags for example.
- - We are subject to federal, state and local laws and regulations relating
to zoning, land use, environmental protection, work place safety, public
health, community right-to-know, beer and wine sales, pharmaceutical sales
and gasoline station operations. A number of states and local
jurisdictions regulate the licensing of supermarkets, including beer and
wine license grants. In addition, under certain local regulations, we are
prohibited from selling beer and wine in certain of our stores. Employers
are also subject to laws governing their relationship with employees,
including minimum wage requirements, overtime, working conditions,
disabled access and work permit requirements. Compliance with these laws
could reduce the revenue and profitability of our supermarkets and could
otherwise adversely affect our business, financial condition or results of
operations. In addition, any changes in these laws or regulations could
significantly increase our compliance costs and adversely affect our
results of operations, financial condition and liquidity.
- - We have large, complex information technology systems that are important
to business operations. We could encounter difficulties developing new
systems and encounter difficulties maintaining, upgrading or securing our
existing systems. Such difficulties could lead to significant expenses or
losses due to disruption in our business operations.
- - Our articles of incorporation permit our board of directors to issue
preferred shares without first obtaining stockholder approval. If we
issued preferred shares, these additional securities may have dividend or
liquidation preferences senior to our common stock. If we issue
convertible preferred shares, a subsequent conversion may dilute the
current common stockholders' interest. Issuance of such preferred stock
could adversely affect the price of our common stock.
17
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. Accordingly, actual events and results may vary significantly from
those included in or contemplated or implied by forward-looking statements made
by us or our representatives.
REVIEW OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES
Our consolidated financial information presents the results related to our
operations of discontinued businesses separate from the results of our
continuing operations. Both the discussion and analysis that follows focus on
continuing operations.
FISCAL 2007 COMPARED WITH FISCAL 2006
Sales for fiscal 2007 were $6,401.1 million compared with $5,369.2 million
for fiscal 2006; comparable store sales, which includes stores that have been in
operation for two full fiscal years and replacement stores excluding Pathmark,
increased 2.4%. Income from continuing operations of $87.0 million in fiscal
2007 increased from $12.8 million for fiscal 2006 primarily due to the gain on
sale of our Metro, Inc. of $184.5 million. Net loss per share - basic and
diluted for fiscal 2007 was $3.69 and $4.22, respectively, compared to net
income per share - basic and diluted of $0.65 and $0.64, respectively, for
fiscal 2006.
Favorable
Fiscal 2007 Fiscal 2006 (unfavorable) % Change
------------- ------------- -------------- --------
Sales $ 6,401.1 $ 5,369.2 $ 1,031.9 19.2%
Increase in comparable store sales 2.4% 0.6% NA NA
Income from continuing operations 87.0 12.8 74.2 >100%
(Loss) income from discontinued
operations (247.7) 14.1 (261.8) >100%
Net (loss) income (160.7) 26.9 (187.6) >100%
Net (loss) income per share - basic (3.69) 0.65 (4.34) >100%
Net (loss) income per share - diluted (4.22) 0.64 (4.86) >100%
Average weekly sales per supermarket were approximately $371,400 for
fiscal 2007 versus $342,600 for the corresponding period of the prior year, an
increase of 8.4% primarily attributable to Pathmark stores.
18
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
SALES
Fiscal
-------------------------------
2007 2006
------------- -------------
Sales
North $ 1,891,967 $ 1,838,416
Central 1,403,852 1,397,910
South 1,656,641 1,620,666
Pathmark 921,267 --
Gourmet 289,775 282,350
Other 231,836 212,189
Investment in Metro, Inc. 5,792 17,672
------------- -------------
Total sales $ 6,401,130 $ 5,369,203
============= =============
Sales increased from $5,369.2 million in fiscal 2006 to $6,401.1 million
in fiscal 2007 primarily due to the acquisition of Pathmark in the fourth
quarter contributing $921.3 million in sales as well as an increase in
comparable stores sales of $130.5 million. The increases in sales in our North
and Gourmet segments of $53.6 million and $7.4 million, respectively, are
primarily due to comparable store sales increases. Central sales increased $5.9
million or 0.43% from comparable store sale increases, partially offset by store
closures. Sales in our South segment increased by $36.0 million or 2.22%, which
is primarily the result of purchasing five stores in the second half of 2006.
The sales increase of $19.6 million, or 9.26%, in our Other segment,
representing Discount and Liquor, is primarily due to an increase in comparable
store sales driven by our remodel program, offset partially by store closures.
The decrease in sales of $11.9 million, or 67.22%, in our Metro Segment is due
to the expiration of our information technology agreement with Metro, Inc.
during fiscal 2007. Refer to Note 15 - Operating Segments for further discussion
of our reportable operating segments.
GROSS MARGIN
The following table presents gross margin dollar results and gross margin
as a percentage of sales for fiscal 2007 as compared to fiscal 2006. Gross
margin as a percentage of sales decreased 26 basis points to 30.77% for fiscal
2007 from 31.03% for fiscal 2006 primarily caused by a decrease in sales
relating to the expiration of information technology agreement with Metro, Inc.
of approximately 24 basis points.
Fiscal 2007 Fiscal 2006
--------------------------------------- --------------------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
------------ ------------- ------------ --------------
Total Company $ 1,969.8 30.77% $ 1,666.3 31.03%
19
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
The following table details the dollar impact of several items affecting
the gross margin dollar increase (decrease) from fiscal 2006 to fiscal 2007:
Sales Volume Rate Total
------------ ------------- ------------
Total Company $ 320.3 $ (16.8) $ 303.5
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
The following table presents store operating, general and administrative
expense ("SG&A"), in dollars and as a percentage of sales for fiscal 2007
compared with fiscal 2006. SG&A expense was $2,009.1 million or 31.39% for
fiscal 2007 as compared $1,693.5 million or 31.54% for fiscal 2006. The increase
in SG&A was primarily related to the acquisition of Pathmark of $271.2 million.
Fiscal 2007 Fiscal 2006
---------------------------------------- ---------------------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
------------ -------------- ------------ ---------------
Total Company $ 2,009.1 31.39% $ 1,693.5 31.54%
Included in SG&A for fiscal 2007 were certain charges as follows:
- - net losses on restructuring activity of $4.4 million (7 basis points)
during fiscal 2007;
- - Pathmark acquisition related costs of $17.6 million (27 basis points);
- - a change in estimate of self-insurance settlement costs for prior year
claims related to Pathmark of $9.8 million (15 basis points); and
- - costs related to a mass withdrawal from a multi-employer union pension
plan for Local 174 of $5.9 million (9 basis points).
Partially offset by:
- - net gains on real estate activity of $14.1 million (22 basis points)
during fiscal 2007.
Included in SG&A for fiscal 2006 were certain charges as follows:
- - Net losses on restructuring activity of $10.5 million (20 basis points)
during fiscal 2006.
Partially offset by:
- - net gains on real estate activity of $11.2 million (21 basis points)
during fiscal 2006.
Excluding the items listed above, SG&A, as a percentage of sales,
decreased 61 basis points during fiscal 2007 as compared to fiscal 2006
primarily due to a decrease in store operating costs of 16 basis points and a
decrease in corporate and banner administrative expenses of 46 basis points
offset by an increase in advertising costs of 3 basis points.
20
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
During fiscal 2007 and fiscal 2006, we recorded impairment losses on
long-lived assets as follows:
Fiscal 2007 Fiscal 2006
----------- -----------
Impairments due to closure or conversion
in the normal course of business $ 11.7 $ 4.3
Impairments related to our asset
disposition initiatives (1) -- 1.0
----------- -----------
Total $ 11.7 $ 5.3
=========== ===========
- ----------
(1) Refer to Note 7 - Asset Disposition Initiatives
The effects of changes in estimates of useful lives were not material to
ongoing depreciation expense. If current operating levels do not improve, there
may be a need to take further actions which may result in additional future
impairments on long-lived assets, including the potential for impairment of
assets that are held and used.
SEGMENT INCOME (LOSS)
Fiscal
-------------------------------
2007 2006
------------- ---------------
Segment income (loss)
North $ 76,247 $ 70,891
Central 18,207 11,917
South (19,375) (1,946)
Pathmark 20,694 --
Gourmet 19,105 18,220
Other (2,639) (9,400)
------------- ---------------
Total segment income $ 112,239 $ 89,682
============= ===============
Segment Income increased $22.6 million from $89.7 million in fiscal 2006
to $112.2 million in fiscal 2007. Fiscal 2007 results include Segment Income of
$20.7 million from the recently acquired Pathmark business. Our North segment
experienced an increase in Segment Income of $5.4 million from a combination of
increased sales of $53.6 million and decreased costs, mainly in labor and
administration. Segment Income improved $6.3 million in our Central segment as a
result of an improvement in gross margin rate as well as lower store operating
costs. Our South segment results declined from a Segment Loss of $1.9 million in
fiscal 2006 to $19.4 million in fiscal 2007. This is primarily due to a decline
in gross margin rate due to a more competitive marketplace as well as losses
generated from five stores purchased in the second half of 2006. Segment Income
from our Gourmet business improved by $0.9 million primarily as a result of an
improved gross margin rate partially offset by additional operating and
administrative costs. The decrease in Segment Loss of $6.8 million in our Other
segment, representing Discount and Liquor, is primarily due to improving sales
and margin rates in both businesses. Refer to Note 15 - Operating Segments for
further discussion of our reportable operating segments.
GAIN ON SALE OF METRO, INC.
During fiscal 2007, we sold all of our holding in Metro, Inc. resulting in
a gain of $184.5 million. There were no such gains during fiscal 2006.
21
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
INTEREST EXPENSE
Interest expense of $111.8 million for fiscal 2007 increased from the
prior year amount of $65.9 million due primarily to (i.) the issuance of $165
million 5.125% convertible senior notes due 2011 and $255 million 6.75%
convertible senior notes due 2012 resulting in an increase in interest expense
of $7.8 million ($3.0 million of which was non-cash costs) (ii.) the $370
million temporary Senior Secured Bridge Credit Agreement (the "Bridge Loan
Facility") with Banc of America Securities LLC, Bank of America, N.A. and Bank
of America Bridge LLC, Lehman Brothers Commercial Bank, Lehman Brothers Inc. and
Lehman Commercial Paper Inc. resulting in an increase in interest expense of
$27.3 million primarily related to financing fees that were amortized over the
two week period it was outstanding in the fourth quarter and (iii.) an increase
in interest expense due to the acquisition of Pathmark of $5.9 million primarily
due to interest on capital leases.
NON OPERATING INCOME
During fiscal 2007, we recorded $37.4 million in marked to market
adjustments for (i.) our Series A and Series B warrants acquired in connection
with our purchase of Pathmark, (ii.) our conversion feature of the 5.125%
convertible senior notes and the 6.75% convertible senior notes, and (iii.) our
financing warrants recorded in connection with the issuance of our convertible
senior notes. There were no such gains during fiscal 2006.
EQUITY IN EARNINGS OF METRO, INC.
We used the equity method of accounting to account for our investment in
Metro, Inc. through March 13, 2007, because we exerted significant influence
over substantive operating decisions made by Metro, Inc. through our membership
on Metro, Inc.'s Board of Directors and its committees and through an
information technology services agreement with Metro, Inc. During fiscal 2007
and fiscal 2006, we recorded $7.9 million and $40.0 million, respectively, in
equity earnings relating to our equity investment in Metro, Inc.
Beginning March 13, 2007, as a result of the sale of 6,350,000 shares of
Metro, Inc., our Company recorded our investment in Metro, Inc. under SFAS 115
as an available for sale security for the fiscal year ended February 23, 2008
because we no longer exert significant influence over substantive operating
decisions made by Metro, Inc. In accordance with SFAS 115, we recorded dividend
income of $3.9 million based on Metro, Inc.'s dividend declaration on April 17,
2007, August 8, 2007 and September 25, 2007 and included this amount in
"Interest and dividend income" on our Consolidated Statements of Operations for
the fiscal year ended February 23, 2008. On November 26, 2007, in connection
with our agreement to acquire Pathmark Stores, Inc., our Company sold the
remaining 11,726,645 shares of our holdings in Metro, Inc. After these sales,
our Company no longer holds Class A subordinate shares of Metro, Inc. as of the
balance sheet date.
INCOME TAXES
The provision from income taxes from continuing operations for fiscal 2007
was $5.6 million compared to a benefit from income taxes from continuing
operations for fiscal 2006 of $58.1 million. Consistent with the prior year, we
continue to record a valuation allowance against our net
22
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
deferred tax assets.
For fiscal 2007, our effective income tax rate of 6.0% changed from the
effective income tax rate of 128.1% for fiscal 2006 as follows:
Fiscal 2007 Fiscal 2006
--------------------------------- ---------------------------------
Effective Effective
Tax Provision Tax Rate Tax Benefit Tax Rate
---------------- -------------- ------------- -----------------
Total Company $ 5.6 6.0% $ 58.1 (128.1%)
The effective tax rate on continuing operations of 6.0% for fiscal 2007
varied from the statutory rate of 35% primarily due to state and local income
taxes, the impact of the sale of our Canadian operations, the impact of the
Pathmark financing and the decrease to our valuation allowance as a result of
utilization of losses not previously benefited because of a lack of history of
earnings.
The effective tax rate on continuing operations of 128.1% for fiscal 2006,
varied from the statutory rate of 35% primarily due to state and local income
taxes, the impact of the sale of our Canadian operations and the decrease to
our valuation allowance as a result of losses not benefited because of a lack
of history of earnings.
DISCONTINUED OPERATIONS
Beginning in the fourth quarter of fiscal year 2002 and in the early part
of the first quarter of fiscal 2003, we decided to sell our operations located
in Northern New England and Wisconsin, as well as our Eight O'Clock Coffee
business. These asset sales are now complete. However, our Company continues to
pay occupancy costs for operating leases on closed locations.
On April 24, 2007, based upon unsatisfactory operating trends and the need
to devote resources to our expanding Northeast core business, our Company
announced negotiations for the sale of our non-core stores within our Midwest
operations, including inventory related to these stores. Our Company ceased
sales operations in all stores as of July 7, 2007. Planned sale transactions for
these stores have been completed resulting in a loss on disposal of $34.3
million. In connection with the shutdown of these operations, we recorded net
occupancy costs of $62.7 million during the fiscal year ended February 23, 2008
for closed stores and warehouses not sold. As we continue to negotiate lease
terminations as well as sublease some of these locations, these estimates may
require adjustment in future periods.
On May 30, 2007, our Company announced advanced negotiation for the sale
of our non-core stores located within the Greater New Orleans area, including
inventory related to these stores. Our Company ceased sales operations in all
stores not sold as of November 1, 2007. Planned sale transactions for these
stores have been completed resulting in a loss on disposal of $16.5 million. In
connection with the shutdown of these operations, we recorded net occupancy
costs of $3.8 during the fiscal year ended February 23, 2008. As we continue to
negotiate lease terminations as well as sublease some of these locations, these
estimates may require adjustment in future periods.
The criteria necessary to classify these operations as discontinued have
been satisfied and as such, have been reclassified in our Consolidated
Statements of Operations for the fiscal years ended 2007, 2006 and 2005. We
estimated the assets' fair market value based upon expected proceeds less costs
to sell and recorded impairment losses on property, plant and equipment for
fiscal 2007 of $54.0 million. This amount is included in "Loss on disposal of
discontinued businesses, net of tax" on our Consolidated Statements of
Operations.
The effective tax rate on continuing operations of 128.1% for fiscal
2006, varied from the statutory rate of 35% primarily due to state and local
income taxes, the impact of the sale of our Canadian operations and the
decrease to our valuation allowance as a result of losses not benefited
because of a lack of history of earnings.
23
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
The loss from operations of discontinued businesses, net of tax, for
fiscal 2007 of $196.8 million decreased from income from operations of
discontinued business, net of tax, of $7.1 million for fiscal 2006 primarily due
to (i.) a decrease in income from operations for the Greater New Orleans area
and the Midwest, and (ii.) additional vacancy costs that were recorded during
the fiscal year ended February 23, 2008 due to the closure of stores in the
Midwest and the Greater New Orleans area. The loss on disposal of discontinued
operations, net of tax of $50.8 million for fiscal 2007 decreased from a gain on
disposal of discontinued operations of $7.1 million for fiscal 2006 primarily
due to impairment losses recorded on the property, plant and equipment in the
Greater New Orleans area and Midwest as we recorded the assets' fair market
value based upon proceeds received less costs to sell.
Although the Canadian operations were sold during fiscal 2005, the
criteria necessary to classify the Canadian operations as discontinued were not
satisfied as our Company retained significant continuing involvement in the
operations of this business upon its sale.
FISCAL 2006 COMPARED WITH FISCAL 2005
Sales for fiscal 2006 were $5,369.2 million compared with $7,090.0 million
for fiscal 2005; comparable store sales, which includes stores that have been in
operation for two full fiscal years and replacement stores, increased 0.6%.
Income from continuing operations of $12.8 million in fiscal 2006 decreased from
$518.1 million for fiscal 2005 primarily due to the absence of the gain on sale
of our Canadian operations of $912.1 million. Net income per share - basic and
diluted for fiscal 2006 was $0.65 and $0.64, respectively, compared to net
income per share - basic and diluted of $9.74 and $9.64, respectively, for
fiscal 2005.
(Unfavorable)
Fiscal 2006 Fiscal 2005 favorable % Change
--------------- --------------- ------------------- ----------------
Sales $ 5,369.2 $ 7,090.0 $ (1,720.8) (24.3%)
Increase in comparable store sales 0.6% 0.2% NA NA
(Loss) gain on sale of
Canadian operations (1.3) 912.1 (913.4) (100.1%)
Income from continuing operations 12.8 518.1 (505.3) (97.5%)
Income (loss) from discontinued
operations 14.1 (125.4) 139.5 >100.0%
Net income 26.9 392.6 (365.7) (93.1%)
Net income per share - basic 0.65 9.74 (9.09) (93.3%)
Net income per share - diluted 0.64 9.64 (9.00) (93.4%)
Average weekly sales per supermarket for the U.S. were approximately
$342,600 for fiscal 2006 versus $340,900 for the corresponding period of the
prior year, an increase of 0.5% primarily due to the impact of closing smaller
stores and positive comparable store sales.
24
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
SALES
Fiscal
----------------------------------
2006 2005
-------------- ----------------
Sales
North $ 1,838,416 $ 1,830,389
Central 1,397,910 1,404,741
South 1,620,666 1,631,998
Gourmet 282,350 282,650
Other 212,189 207,180
Investment in Metro, Inc. 17,672 9,181
Canada -- 1,723,879
-------------- -------------
Total sales $ 5,369,203 $ 7,090,018
=============== =============
Sales decreased from $7,090.0 million in fiscal 2005 to $5,369.2 million
in fiscal 2006 or 24.27% primarily due to the sale of our Canadian business
decreasing sales by $1,723.9 million. Comparable store sales increased in fiscal
2006 by $8.1 million or 0.6% as compared to fiscal 2005. Sales in our Other
segment, representing Discount and Liquor, increased $5.0 million, or 2.42%,
mainly from comparable store sale increases. The increase in sales of $8.5
million or 92.48% for our Metro segment is due to our information technology
agreement with Metro, Inc. which began during the middle of fiscal 2005. The
rates of change in revenues in all other segments are not considered
significant. Refer to Note 15 - Operating Segments for further discussion of
our reportable operating segments.
GROSS MARGIN
The following table presents gross margin dollar results and gross margin
as a percentage of sales for fiscal 2006 as compared to fiscal 2005. Gross
margin as a percentage of sales increased 45 basis points for the U.S. 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.
Fiscal 2006 Fiscal 2005
--------------------------------------- ----------------------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
------------- --------------- --------------- ---------------
U.S. $ 1,666.3 31.03% $ 1,641.2 30.58%
Canada -- -- 420.7 24.40
------------- --------------- -------------- ---------------
Total $ 1,666.3 31.03% $ 2,061.9 29.08%
============= =============== ============== ===============
The following table details the dollar impact of several items affecting
the gross margin dollar increase (decrease) from fiscal 2005 to fiscal 2006:
Sales Volume Rate Other Total
---------------- ---------------- ----------------- -----------------
U.S. $ 0.9 $ 24.2 $ -- $ 25.1
Canada -- -- (420.7) (420.7)
--------------- --------------- ----------------- ----------------
Total $ 0.9 $ 24.2 $ (420.7) $ (395.6)
================ =============== ================= ================
25
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
The following table presents store operating, general and administrative
expense ("SG&A"), in dollars and as a percentage of sales for fiscal 2006
compared with fiscal 2005. SG&A expense was $1,693.5 million or 31.54% for
fiscal 2006 as compared $2,232.7 million or 31.49% for fiscal 2005.
Fiscal 2006 Fiscal 2005
---------------------------------------- -----------------------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
-------------- ---------------- ---------------- ------------------
U.S. $ 1,693.5 31.54% $ 1,869.2 34.83%
Canada - - 363.5 21.09
-------------- --------------- -------------- -----------------
Total $ 1,693.5 31.54% $ 2,232.7 31.49%
============== =============== =============== ==================
U.S.
Included in SG&A in the U.S. for fiscal 2006 were certain charges as follows:
- - Net losses on restructuring activity of $10.5 million (20 basis points)
during fiscal 2006.
Partially offset by:
- - net gains on real estate activity of $11.2 million (21 basis points)
during fiscal 2006.
SG&A in the U.S. for fiscal 2005 also included certain charges as follows:
- - costs relating to the closing of our owned warehouses in Edison, New
Jersey and Bronx, New York of $76.6 million (143 basis points) that were
not sold as part of the sale of our distribution operations and some
warehouse facilities and related assets to C&S Wholesale Grocers as
discussed in Note 7 - Asset Disposition Initiatives;
- - costs relating to the impairment of unrecoverable assets of $17.7 million
(33 basis points) as discussed in Note 5 - Valuation of Long-Lived Assets;
- - costs relating to an administrative reorganization during fiscal 2005 of
$17.6 million (33 basis points);
- - costs relating to the consolidation of our operating offices of $14.5
million (27 basis points);
- - costs relating to the cash tender offer completed during fiscal 2005 as
discussed in Note 8 - Indebtedness and Other Financial Liabilities of
$32.6 million (61 basis points);
- - costs relating to the settlement of our net investment hedge as discussed
in Note 18 - Hedge of Net Investment in Foreign Operations of $15.4
million (29 basis points); and
- - costs relating to workers compensation state assessment charges as
discussed in Note 1 - Summary of Significant Accounting Policies of $9.7
million (18 basis points).
Partially offset by:
- - recoveries from our VISA/Mastercard antitrust class action litigation as
discussed in Note 19 - Commitments and Contingencies of $1.5 million (3
basis points); and
- - net gains on real estate activity of $14.6 million (27 basis points)
during fiscal 2005.
26
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
Excluding the items listed above, SG&A within the U.S., as a percentage of
sales, decreased by 15 basis points during fiscal 2006 as compared to fiscal
2005 primarily due to the continued focus on discretionary spend, particularly
within the administrative departments of $12.5 million (23 basis points).
CANADA
The decrease in SG&A in Canada of $363.5 million was due to the sale of
our Canadian operations during the second quarter of fiscal 2005 which resulted
in the inclusion of zero weeks of costs in fiscal 2006 as compared to 24 weeks
in fiscal 2005.
During fiscal 2006 and fiscal 2005, we recorded impairment losses on
long-lived assets as follows:
Fiscal 2006 Fiscal 2005
------------ ----------------------------------
U.S. U.S. Canada Total
------------ --------- --------- ----------
Impairments due to closure or conversion
in the normal course of business $ 4.3 $ 9.9 $ 0.5 $ 10.4
Impairments due to unrecoverable assets -- 17.7 -- 17.7
Impairments related to the asset disposition
initiatives (1) 1.0 8.6 -- 8.6
---------- ---------- -------- ----------
Total $ 5.3 $36.2 $ 0.5 $ 36.7
========== ========== ======== ==========
(1) Refer to Note 7 - Asset Disposition Initiatives
The effects of changes in estimates of useful lives were not material to
ongoing depreciation expense.
If current operating levels do not improve, there may a need to take
further actions which may result in be additional future impairments on
long-lived assets, including the potential for impairment of assets that are
held and used.
SEGMENT INCOME (LOSS)
Fiscal
----------------------------------
2006 2005
--------------- ----------------
Segment income (loss)
North $ 70,891 $ 65,315
Central 11,917 8,607
South (1,946) 9,471
Gourmet 18,220 14,980
Other (9,400) (12,108)
Canada -- 57,224
------------- ----------------
Total segment income $ 89,682 $ 143,489
============= ================
Segment income decreased from $143.5 million in fiscal 2005 to $89.7
million in fiscal 2006. This decrease in income of $53.8 million is due to the
sale of the Canadian business during fiscal 2005, which contributed $57.2
million of income in fiscal 2005, partially offset by a decline in losses of
$3.4 million for the remaining U.S. business. Segment Income in our North,
Central and Gourmet segments improved by $5.6 million, $3.3 million and $3.2
million, respectively, primarily due to reduced supply and logistics and
administrative costs. The decreases in administrative costs are due to the
restructuring of the U.S. business, whereby many administrative activities
27
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
were eliminated or centralized at Corporate. The decline in results of $11.4
million in our South segment is primarily due to a decline in gross margin rate
due to a more competitive marketplace as well as losses generated from five
stores purchased in the second half of 2006. Segment loss for our Other segment,
which represents Discount and Liquor, declined by $2.7 million, due mainly to
closures of underperforming stores. Refer to Note 15 - Operating Segments for
further discussion of our reportable operating segments.
(LOSS) GAIN ON SALE OF CANADIAN OPERATIONS
We sold our Canadian operations to Metro, Inc. at the close of business on
August 13, 2005. As a result of this sale, we recorded a pretax gain of $912.1
million (gain of $805.3 million after tax) during fiscal 2005. In fiscal 2006,
we recorded a charge of $1.3 million as a result of a post-closing working
capital adjustment as provided in the Stock Purchase Agreement.
INTEREST EXPENSE
Interest expense of $65.9 million (U.S.) for fiscal 2006 decreased from
the prior year amount of $84.4 million ($76.0 for the U.S. and $8.4 million for
Canada) due primarily to (i.) the repurchase of the majority of our 7.75% Notes
due April 15, 2007 and our 9.125% Senior Notes due December 15, 2011 resulting
in a reduction in interest expense of $17.2 million in the U.S., and (ii.) the
absence of interest expense of $8.4 million relating to our Canadian operations
that was recorded during fiscal 2005 but not recorded during fiscal 2006 as a
result of its sale, partially offset by (iii.) an increase in interest expense
of $5.4 million due to our increased borrowings on our revolving line of credit
in the U.S.
EQUITY IN EARNINGS OF METRO, INC.
We used the equity method of accounting to account for our investment in
Metro, Inc. because we exerted significant influence over substantive operating
decisions made by Metro, Inc. through our membership on Metro, Inc.'s Board of
Directors and its committees and through an information technology services
agreement with Metro, Inc. During fiscal 2006 and fiscal 2005, we recorded $40.0
million and $7.8 million, respectively, in equity earnings relating to our
equity investment in Metro, Inc. in the U.S. Refer to Note 3 - Investment in
Metro, Inc. for further discussion regarding our equity investment in Metro,
Inc. subsequent to February 24, 2007.
INCOME TAXES
The benefit from income taxes from continuing operations for fiscal 2006
was $58.1 million compared to a provision for income taxes from continuing
operations for fiscal 2005 of $158.3 million (a $139.6 million provision for our
U.S. operations and a $18.7 million provision for our Canadian operations).
Consistent with the prior year, we continue to record a valuation allowance
against our U.S. net deferred tax assets.
28
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
For fiscal 2006, our effective income tax rate of 128.1% changed from the
effective income tax rate of 23.4% for fiscal 2005 as follows:
Fiscal 2006 Fiscal 2005
--------------------------------- ---------------------------------
Effective Tax (Provision) Effective
Tax Benefit Tax Rate Benefit Tax Rate
--------------- ---------------- --------------- ----------------
U.S. $ 58.1 (128.1%) $ (139.6) 20.6%
Canada -- -- (18.7) 2.8
--------------- ---------------- --------------- ----------------
$ 58.1 (128.1%) $ (158.3) 23.4%
=============== ================ =============== ================
The effective tax rate on continuing operations of 128.1% for fiscal 2006,
varied from the statutory rate of 35% primarily due to state and local income
taxes, the impact of the sale of our Canadian operations and the decrease to our
valuation allowance as a result of losses not benefited because of a lack of
history of earnings.
The effective tax rate on continuing operations of 23.4% for fiscal 2005,
varied from the statutory rate of 35% primarily due to state and local income
taxes, the impact of the sale of our Canadian operations and the decrease to
our valuation allowance as a result of utilization of losses not previously
benefited because of a lack of history of earnings.
DISCONTINUED OPERATIONS
Income from operations of discontinued businesses, net of tax, for fiscal
2006 was $7.1 million, which primarily related to a gain from proceeds of an
insurance settlement received during fiscal 2006 for a portion of our losses
caused by Hurricane Katrina as discussed in Note 16 - Hurricane Katrina and
Impact on Business, as compared to a loss from operations of discontinued
businesses, net of tax, of $115.1 million for fiscal 2005, which was primarily
due to future occupancy related costs for four stores closed in the Greater New
Orleans and the Midwest and our insurance deductible and other related hurricane
costs in connection with Hurricane Katrina as discussed in Note 16 - Hurricane
Katrina and Impact on Business.
The gain on disposal of discontinued operations, net of tax, was $7.1
million for fiscal 2006, which primarily related to net gains on real estate
activity of $5.6 million as compared to a loss on disposal of discontinued
businesses, net of tax, of $10.4 million for fiscal 2005, which was primarily
related to the write-off of an asset for a favorable lease that was recorded for
one of the stores that was closed due to Hurricane Katrina as discussed in Note
16 - Hurricane Katrina and Impact on Business and property write-offs related to
stores closed in the Midwest.
29
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The following table presents excerpts from our Consolidated Statements
of Cash Flows:
Fiscal 2007 Fiscal 2006 Fiscal 2005
--------------- --------------- ---------------
Net cash (used in) provided by operating activities $ (35,345) $ 36,722 $ (76,007)
--------------- --------------- ---------------
Net cash (used in) provided by investing activities $ (356,577) $ 48,755 $ 459,297
--------------- --------------- ---------------
Net cash provided by (used in) financing activities $ 406,447 $ (228,937) $ (411,566)
--------------- --------------- ---------------
Net cash flow used in operating activities of $35.3 million for fiscal
2007 primarily reflected our net loss of $160.7 million, adjusted for non-cash
charges for (i.) gains on the disposal of owned property of $13.7 million, (ii.)
gain on disposal of Metro, Inc. of $184.5 million, (iii.) non operating income
related to marked to market adjustments for financial instruments of $37.4
million (iv.) our equity in earnings of Metro, Inc of $7.9 million partially
offset by (v.) depreciation and amortization of $186.8 million, (vi.) asset
disposition initiatives of $124.0 million, (vii.) financing fees related to our
bridge loan of $25.4 million, (viii.) other share based awards of $9.0 million
and (ix.) loss on disposal of discontinued operations of $50.8 million. Further,
cash was used in operating activities by a decrease in other non-current
liabilities of $61.4 million, a decrease in account payable of $72.7 million
primarily due to timing, a decrease in accrued salaries, wages and benefits, and
taxes of $47.7 million, offset by a decrease in receivables of $37.1 million and
a decrease in inventories of $116.0 million. Refer to Working Capital below for
discussion of changes in working capital items. Net cash flow provided by
operating activities of $36.7 million for fiscal 2006 primarily reflected our
net income of $26.9 million, adjusted for non-cash charges for (i.) depreciation
and amortization of $177.8 million, (ii.) asset disposition initiatives of $2.1
million, (iii.) cash proceeds from dividends from Metro, Inc. of $6.9 million
partially offset by (iv.) gains on the disposal of owned property of $22.5
million, (v.) income tax benefit of $66.4 million, and (vi.) our equity in
earnings of Metro, Inc of $40.0 million. Further, cash was provided by a
decrease in receivables of $62.7 million partially offset by a decrease in other
accruals of $61.4 million primarily due to timing and a decrease in non-current
liabilities of $37.6 million due mainly to the utilization of closed store
accruals. Net cash flow used in operating activities of $76.0 million for fiscal
2005 primarily reflected our net income of $392.6 million, adjusted for non-cash
charges for (i.) depreciation and amortization of $207.3 million, (ii.) asset
disposition initiatives of $175.4 million, (iii.) income tax provision of $98.1
million, (iv.) other property impairments of $28.1 million, (v) loss on
derivatives of $15.4 million and (vi) loss on early extinguishment of debt of
$28.6 million offset by the gain on sale of Canadian operations of $912.1
million. Further, cash was used in operating activities by an increase in
receivables of $56.1 million, a decrease in accounts payable of $101.3 million
and a decrease in other non-current liabilities of $76.3 million primarily due
to the sale of our Canadian operations partially offset by a decrease in
inventories of $109.5 million and an increase in other accruals of $48.9
million.
Net cash flow used in investing activities of $356.6 million for fiscal
2007 primarily reflected the cash component of the purchase of Pathmark stores
and Best Cellars liquor stores of $985.5 million, and property expenditures of
$122.9 million, which included 2 new supermarkets, 2 new liquor stores, 9 major
remodels and 2 minor remodels partially offset by proceeds received from the
sale of certain of our assets of $153.6 million, a decrease in restricted cash
of $47.5 million, net
30
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
proceeds from the sale of shares of Metro, Inc. of $548.8 million and net
proceeds from maturities of marketable securities of $0.5 million. Net cash flow
provided by investing activities of $48.8 million for fiscal 2006 primarily
reflected proceeds received from the sale of certain of our assets of $41.9
million, a decrease in restricted cash of $95.1 million and net proceeds from
maturities of marketable securities of $145.8 million partially offset by the
purchase of 6 Clemens Markets stores from C&S Wholesale Grocers, Inc. of $24.6
million and property expenditures of $208.2 million, which included 4 new
supermarkets and 30 major remodels and 35 minor remodels. Net cash flow provided
by investing activities of $459.3 million for fiscal 2005 primarily reflected
proceeds from the sale of our Canadian operations of $960.7 million, proceeds
received from the sale of certain of our assets of $72.3 million partially
offset by property expenditures of $191.1 million, which included 3 new
supermarkets and 41 major remodels, disposal related expenditures for sale of
the Canadian operations of $53.9 million, payments for derivatives of $15.4
million, the increase in restricted cash of $146.3 million, and the net
purchases of marketable securities of $167.0 million.
Our planned capital expenditures for fiscal 2008 are approximately $200
million, which relate primarily to enlarging or remodeling supermarkets,
and converting supermarkets to more optimal formats.
Net cash flow provided by financing activities of $406.5 million for
fiscal 2007 primarily reflected by proceeds under revolving lines of credit of
$1,027.3 million, proceeds from long-term borrowings of $1,018.3 million,
proceeds from financing warrants of $36.8 million, net proceeds from long term
real estate liabilities of $6.2 million partially offset by principal payments
on revolving lines of credit of $1,060.3 million, principal payments on
long-term borrowings of $485.8 million, payments for call options of $73.5
million, and deferred financing fees of $61.8 million. Net cash flow used in
financing activities of $228.9 million for fiscal 2006 primarily reflected
principal payments on revolving lines of credit of $1,687.1 million, principal
payments on capital leases of $5.3 million, and dividends paid of $299.1 million
partially offset by proceeds under revolving lines of credit of $1,757.1 million
and proceeds from the exercise of stock options of $6.0 million. Net cash flow
used in financing activities of $411.6 million for fiscal 2005 primarily
reflected principal payments on long term borrowings of $414.0 million and
principal payments on capital leases of $11.0 million partially offset by
proceeds from the exercise of stock options of $26.1 million.
We operate under an annual operating plan which is reviewed and approved
by our Board of Directors and incorporates the specific operating initiatives we
expect to pursue and the anticipated financial results of our Company. Our plan
for fiscal 2008 at this time has been approved and we believe that our present
cash resources, including invested cash on hand, available borrowings from our
Credit Agreement and other sources, are sufficient to meet our needs.
Profitability, cash flow, asset sale proceeds and timing can be impacted
by certain external factors such as unfavorable economic conditions,
competition, labor relations and fuel and utility costs which could have a
significant impact on cash generation. If our profitability and cash flow do not
improve in line with our plans or if the taxing authorities do not affirm the
adequacy of our Company's Domestic Reinvestment Plan, we anticipate that we
would be able to modify the operating plan in order to ensure that we have
appropriate resources.
31
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
On April 25, 2006, our Company paid a special one-time dividend to our
stockholders of record on April 17, 2006 equal to $7.25 per share. This dividend
payout totaling $299.1 million was recorded as a reduction of "Additional paid
in capital" in our Consolidated Balance Sheets at February 24, 2007. The
transaction was funded primarily by cash available on the balance sheet
resulting from the strategic restructuring of the Company during fiscal 2005.
WORKING CAPITAL
We had working capital of $117.1 million at February 23, 2008 compared to
working capital of $190.5 million at February 24, 2007. We had cash and cash
equivalents aggregating $100.7 million at February 23, 2008 compared to $86.2
million at February 24, 2007. The decrease in working capital was attributable
primarily to the following:
- - A decrease in restricted cash due primarily to the use of the cash for the
acquisition of Pathmark;
- - An increase in current portion of other financial liabilities due to the
issuance of Series A warrants in connection with the acquisition of
Pathmark;
- - An increase in accrued salaries, wages and benefits, and taxes due
primarily to the acquisition of Pathmark offset by the disposition of our
Greater New Orleans and Midwest operations; and
- - An increase in other accruals due primarily to the acquisition of Pathmark
offset by the disposition of our Greater New Orleans and Midwest
operations.
Partially offset by the following:
- - An increase in cash and cash equivalents as detailed in the Consolidated
Statements of Cash Flows;
- - An increase in accounts receivable due primarily to the acquisition of
Pathmark offset by the disposition of our Greater New Orleans and Midwest
operations;
- - An increase in inventory due primarily to the acquisition of
Pathmark offset by the disposition of our Greater New Orleans and Midwest
operations;
- - A decrease in the current portion of our long-term debt primarily due to
maturity of 7.75% debt which matured and was paid in full partially offset
by our new line of credit with Blue Ridge Investments L.L.C.
LINE OF CREDIT
On January 16, 2008, we entered into a secured line of credit agreement
with Blue Ridge Investments, L.L.C. This agreement enables us to borrow funds on
a revolving basis of up to $32.7 million. Each borrowing bears interest at a
rate per annum equal to the BBA Libor Daily Floating Rate plus 0.10%. At
February 23, 2008 we had borrowings outstanding under this line of credit
agreement of $11.6 million. This agreement expires December 31, 2008. These
loans are collateralized by a first priority perfected security interest in our
ownership interest in the Columbia Fund. See Note 4 - Cash, Cash Equivalents,
Restricted Cash and Restricted Marketable Securities, for further discussion on
the Columbia Fund.
CREDIT AGREEMENT
On December 3, 2007, the 2005 Revolving Credit Agreement and Letter of
Credit Agreement were refinanced pursuant to a new $675 million Credit Agreement
("Credit
32
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
Agreement"), with Banc of America Securities LLC, Bank of America, N.A. Subject
to borrowing base requirements, the Credit Agreement provides for a five-year
term loan of $82.9 million and a five-year revolving credit facility of $592.1
million enabling us to borrow funds and issue letters of credit on a revolving
basis. The Credit Agreement includes a $100 million accordion feature which
gives us the ability to increase commitments from $675 million to $775 million.
The Credit Agreement is collateralized by all assets of the company, including,
but not limited to, inventory, certain accounts receivable, pharmacy scripts,
owned real estate and certain Pathmark leaseholds. Borrowings under the Credit
Agreement bear interest based on LIBOR or Prime interest rate pricing. Subject
to certain conditions, we are permitted to pay cumulative cash dividends on
common shares as well as make bond repurchases. At February 23, 2008, there were
$169.9 million of loans and $234.5 million in letters of credit outstanding
under this agreement. As of February 23, 2008, after reducing availability for
borrowing base requirements, we had $259.1 million available under the Credit
Agreement.
On December 27, 2007, in order to facilitate the syndication of the Credit
Agreement under current market conditions, we entered into an Amended and
Restated Credit Agreement, whereby a portion of the revolving commitment was
converted into a $50 million term loan tranche which was collateralized by
certain real estate assets at an increased margin rate. This agreement expires
in December 2012. Fees paid and capitalized in connection with the Credit
Agreement were $22.5 million and are included in "Other Assets" on our
Consolidated Balance Sheet at February 23, 2008.
BRIDGE LOAN FACILITY
On December 3, 2007, we entered into a one year, $370 million Senior
Secured Bridge Credit Agreement (the "Bridge Loan Facility") with Banc of
America Securities LLC, Bank of America, N.A. and Bank of America Bridge LLC,
Lehman Brothers Commercial Bank, Lehman Brothers Inc. and Lehman Commercial
Paper Inc. which, at maturity, and subject to the satisfaction of certain
conditions, the loans then outstanding would either remain outstanding or be
exchanged for exchange notes, in each case having a maturity of December 3, 2015
prior to the completion of the fiscal year, the Bridge Loan Facility was
refinanced. During fiscal 2007, fees and interest paid in connection with the
Bridge Loan Facility was $27.3 million and are included in "Interest Expense" on
our Consolidated Statement of Operations.
We used our restricted cash on hand and borrowings under the Credit
Agreement and the Bridge Loan Facility to fund the acquisition of Pathmark,
terminate our existing Revolver which had outstanding borrowings of $11.3
million, terminate Pathmark's obligation under their revolver and term loan of
$114.0 million and to place $375.5 million into an irrevocable trust for the
defeasance of Pathmark's Senior Subordinated Notes with a face value of $350
million due 2012.
LETTER OF CREDIT AGREEMENT
During fiscal 2005, we entered into a cash collateralized, Letter of
Credit Agreement that enabled us to issue letters of credit up to $200 million.
This agreement was terminated as of December 3, 2007 and letters of credit are
issued under the Credit Facility with Bank of America N.A described in the
Credit Agreement above. In March 2007, our Letter of Credit Agreement and
Revolver were amended to allow for the sale of Metro, Inc. shares provided that
the net proceeds from such sales are deposited in a restricted cash account.
Refer to Note 3 - Investment in Metro, Inc. for further discussion regarding the
sale of these Metro, Inc. shares.
33
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
At February 23, 2008 and February 24, 2007, there were nil and $138.3
million, respectively, in letters of credit outstanding under this agreement.
REVOLVING CREDIT AGREEMENT
Our Company had a $250 million Revolving Credit Agreement ("Revolver")
with four lenders enabling us to borrow funds on a revolving basis for working
capital loans and letters of credit. This Revolver was terminated as of December
3, 2007 and replaced by the Credit Facility with Bank of America N.A. described
in the Credit Agreement above. The Revolver was collateralized by inventory,
certain accounts receivable and pharmacy scripts. Borrowings under the Revolver
bear interest based on LIBOR or Prime interest rate pricing. At February 23,
2008 and February 24, 2007, there were no letters of credit outstanding under
this agreement and there were nil and $70.0 million, respectively, in
outstanding borrowings under the Revolver.
SERIES A AND SERIES B WARRANTS
As part of the acquisition of Pathmark on December 3, 2007, we issued
4,657,378 and 6,965,858 roll-over stock warrants in exchange for Pathmark's 2005
Series A and Series B warrants, respectively. The number of warrants issued was
computed based on the conversion factor of 0.46296. The Series A warrants are
exercisable at $18.36 and the Series B warrants are exercisable at $32.40. These
warrants were valued using the price of A&P common stock of $30.05 per common
share, the quoted market price of A&P common stock on November 30, 2007, the
last trading day before the transaction closing date. The Tengelmann
stockholders have the right to approve any issuance of common stock under these
warrants upon exercise (assuming Tengelmann's outstanding interest is at least
25% and subject to liquidity impairments defined within the Tengelmann
Stockholder Agreement). In addition, Tengelmann has the ability to exercise a
"Put Right" whereby it has the ability to require A&P to purchase A&P stock held
by Tengelmann to settle these warrants. Based on the rights provided to
Tengelmann, A&P does not have sole discretion to determine whether the payment
upon exercise of these warrants will be settled in cash or through issuance of
an equivalent portion of A&P shares. Therefore, these warrants are recorded as
liabilities and marked-to-market each reporting period based on A&P's current
stock price. During fiscal 2007, we recorded a gain on the market value
adjustment to these liabilities of $11.5 million and $14.8 million for Series A
and Series B warrants, respectively which is included in "Non Operating Income"
on our Consolidated Statements of Operations. The value of the Series A and
Series B warrants were $44.5 million and $106.1 million, respectively as of
February 23, 2008 and are included in "Current portion of other financial
liabilities" and "Other financial liabilities", respectively, on our
Consolidated Balance Sheets. The following assumptions and estimates were used
in the Black-Scholes model:
Series A Series B
----------------- ---------------
Expected life 0.29 years 7.29 years
Volatility 29.4% 53.3%
Dividend yield range 0% 0%
Risk-free interest rate range 2.20% 3.26%
PUBLIC DEBT OBLIGATIONS
Outstanding notes totaling $586.7 million at February 23, 2008 consisted
of $12.8 million of 9.125% Senior Notes due December 15, 2011, $140.1 million of
5.125% Convertible Senior Notes due June 15, 2011, $233.8 million of 6.75%
Convertible Senior Notes
34
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
due December 15, 2012 and $200.0 million of 9.375% Notes due August 1, 2039.
Interest is payable quarterly on the 9.375% Notes and semi-annually on the
9.125%, 5.125% and 6.75% Notes. The 9.375% Notes are now callable at par ($25
per bond) and the 9.125% Notes are now callable at a premium to par (103.042%).
The 9.375% Notes are unsecured obligations and were issued under the terms of
our senior debt securities indenture, which contains among other provisions,
covenants restricting the incurrence of secured debt. The 9.375% Notes are
effectively subordinate to the Credit Agreement and do not contain cross default
provisions. All covenants and restrictions for the 9.125% Senior Notes have been
eliminated in connection with the cash tender offer in fiscal 2005. Our notes
are not guaranteed by any of our subsidiaries.
During the first quarter of fiscal 2007, the outstanding principal amount
of our 7.75% Notes of $31.9 million due April 15, 2007 matured and was paid in
full.
To pay down our Bridge Loan Facility as discussed above, on December 18,
2007, we completed a public offering and issued $165 million 5.125% convertible
senior notes due 2011 and $255 million 6.75% convertible senior notes due 2012.
The 2011 notes are not redeemable at our option at any time. The 2012 notes are
redeemable at our option on or after December 15, 2010, at a redemption price of
102.70% and on or after December 15, 2011, at a redemption price of 101.35%. The
initial conversion price of the 2011 notes is $36.40 representing a 30.0%
premium to the offering price of $28.00 and the initial conversion price of the
2012 notes is $37.80 representing a 35.0% premium to the offering price of
$28.00 at maturity, and at our option, the notes are convertible into shares of
our stock, cash, or a combination of stock and cash. Concurrent with this
offering, we entered into call options and financing warrant transactions with
financial institutions that are affiliates of the underwriters of the notes to
effectively increase the conversion price of these notes and to reduce the
potential dilution upon future conversion. Conversion prices were effectively
increased to $46.20 or 65% and $49.00 or 75% for the 2011 and 2012 notes,
respectively.
35
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
As of the date of the transaction, our Company did not have sufficient
authorized shares to provide for all potential issuances of common stock.
Therefore, in accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", our Company accounted for the conversion
features as freestanding instruments. The notes were recorded at a discounted
amount equal to the value of the conversion features at the transaction date and
will be accreted to the par value of the notes over the life of the notes. The
value of the conversion features were determined utilizing the Black-Scholes
option pricing model, recorded as a long term liability and marked to market on
February 23, 2008. In fiscal 2007, the gain that was recorded in "Non Operating
Income" on our Consolidated Statements of Operations for the conversion features
of the 5.125% and 6.75% convertible senior notes was $3.2 million and $2.3
million, respectively. The fair value of the conversion features as of February
23, 2008 were $23.2 million and $19.8 million for the 5.125% and 6.75%
convertible notes, respectively. The following assumptions and estimates were
used in the Black-Scholes model:
Fiscal 2007
---------------------------
Expected life 3.3 years - 4.8 years
Volatility 33.0% - 35.4%
Dividend yield range 0%
Risk-free interest rate range 2.24% - 2.81%
SHARE LENDING AGREEMENTS
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. If an
event of default should occur under the stock lending agreement and a legal
obstacle exists that prevents the Borrower from returning the shares, the
Borrower shall, upon written request of our Company, pay our Company, using
available funds, in lieu of the delivery of loaned shares, to settle its
obligation.
These financial institutions will sell the "borrowed shares" to investors
to facilitate hedging transactions relating to the issuance of our 5.125% and
6.75% Convertible Notes. Pursuant to these agreements, we loaned 8,134,002
shares of our stock of which 6,300,752 shares were sold to the public on
December 18, 2007 in a public offering. We did 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 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 return 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. On a net basis, this transaction will have no impact on earnings per
share.
CALL OPTION AND FINANCING WARRANT
Concurrent with our issuance of the convertible senior notes, we entered
into call option and financing warrant transactions with financial institutions
that are affiliates of the underwriters to reduce the potential dilution upon
future conversion of the notes and to effectively increase the
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
conversion price of the notes. The call options allow our Company to purchase
common shares at $36.40 with respect to the 5.125% notes and $37.80 with respect
to the 6.75% notes. These purchased shares would be used to satisfy the
conversion of the convertible senior notes. The call options are accounted for
as free standing derivatives and $73.5 million is recorded as equity in the
Consolidated Balance Sheet. The financing warrants allow holders to purchase
common shares at $46.20 with respect to the 5.125% notes and $49.00 with respect
to the 6.75% notes. The financing warrants were valued at $36.8 million at the
issuance date. At the issuance date our Company did not have sufficient
authorized shares to provide for all potential issuances of common stock.
Therefore, the financing warrants are accounted for as freestanding derivatives,
required to be settled in cash until sufficient shares are available and are
recorded as a long-term liability in the Consolidated Balance Sheet. The
financing warrants are marked to market each reporting period utilizing the
Black-Scholes option pricing model and are valued at $31.2 million as of
February 23, 2008. In fiscal 2007, we recorded a gain of $5.6 million included
in "Non operating income" on our Consolidated Statements of Operations. The
following assumptions and estimates were used in the Black-Scholes model:
Fiscal 2007
---------------------
Expected life 3.6 years - 5.1 years
Volatility 27.2% - 29.6%
Dividend yield range 0%
Risk-free interest rate range 2.24% - 2.81%
OTHER
During fiscal 2007, we acquired four sale lease back locations in
connection with the acquisition of Pathmark. Due to Pathmark's continuing
involvement with these four properties, as all four leases contain renewal
options that extend beyond the economic useful life of the properties, these
sales did not qualify for sale-leaseback accounting in accordance with SFAS 98,
but rather as long-term real estate liabilities under the provisions of SFAS 66.
The fair market value of these properties as of the acquisition date was $64.1
million with associated long-term real estate liabilities of $64.1 million.
These liabilities with maturities between 14 and 17 years are recorded within
"Long-term real estate liabilities" on our Consolidated Balance Sheets at
February 23, 2008.
During fiscal 2006 and fiscal 2005, we sold one and five properties,
respectively, and simultaneously leased them back from the purchaser.
Due to our Company's continuing involvement with one of the properties
sold in fiscal 2005, as (i.) we receive sublease income that is more than 10% of
the fair market value of this property, (ii.) lease contains renewal options
that extend beyond the economic useful life of the property, and (iii.) we are
obligated to repurchase the property if certain circumstances occur, the sale
did not qualify for sale-leaseback accounting in accordance with SFAS 98, but
rather as a long-term real estate liability under the provisions of SFAS 66. In
accordance with SFAS 66, the carrying value of this property of approximately
$9.0 million remained on our Consolidated Balance Sheets at February 25, 2006,
and no sale was recognized. Instead the sales price of this property of $20.8
million was recorded as a long-term real estate liability with a maturity of 20
years within "Long-term real estate liabilities" on our Consolidated Balance
Sheets at February 25, 2006. In addition, the lease payments are being charged
to "Interest expense" in our Consolidated Statements of Operations. This
property was sold for a profit resulting in a gain, after deducting expenses,
which
37
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
has been deferred and will not be recognized until the end of the lease when our
continuing involvement ceases.
"Long-term real estate liabilities" on our Consolidated Balance Sheets
also include various leases in which we received landlord allowances to offset
the costs of structural improvements we made to the leased space. As we had
directly paid for a substantial portion of the structural improvement costs, we
were considered the owner of the building during the construction period. In all
situations upon completion of the construction, we were unable to meet the
requirements under SFAS 98, to qualify for sale-leaseback treatment; thus, the
landlord allowances have been recorded as long-term real estate liabilities on
our Consolidated Balance Sheets and are being amortized over the lease term
based on rent payments designated in the lease agreements. These leases have
terms ranging between 12 and 25 years and effective annual percentage rates
between 4.74% and 78.21%. The effective annual percentage rates were implicitly
calculated based upon technical accounting guidance.
The remaining one and four properties sold and simultaneously leased back
from the purchaser during fiscal 2006 and fiscal 2005, respectively, had a
carrying value of approximately $2.5 million and $16.1 million, respectively.
Net proceeds received related to these transactions amounted to approximately
$9.2 million and $32.6 million, respectively. These properties were sold for a
profit resulting in (i.) a gain that was immediately recognized of $1.3 million
and $5.1 million, respectively, as we are leasing back more than a minor part
but less than substantially all of the property sold in accordance with SFAS 28,
"Accounting for Sales with Leasebacks," and (ii.) a deferred gain after
deducting expenses of $5.4 million and $11.1 million, respectively, which will
be recognized as an offset to rent expense over the remaining life of the
leases.
During fiscal 2007, fiscal 2006, and fiscal 2005, we recognized gains
related to our sale-leaseback transactions of $27.6 million, of which $24.1
million related to the reversal of gains on terminated or assigned properties,
$5.3 million, of which $1.3 million related to recognition of a portion of the
gain on sale in the current year as we are leasing back more than a minor part
but less than substantially all of the property sold as discussed above, and
$8.8 million, of which $5.1 million related to recognition of a portion of the
gain on sale in the current year as we are leasing back more than a minor part
but less than substantially all of the property sold as discussed above,
respectively. The remaining deferred gain at February 23, 2008 and February 24,
2007 amounted to $37.2 million and $64.7 million, respectively.
Although our Company paid a special one-time dividend to our stockholders
of record on April 17, 2006 equal to $7.25 per share, our Company's policy is to
not pay dividends. As such, we have not made dividend payments in the previous
three years and do not intend to pay dividends in the normal course of business
in fiscal 2007. The terms of our Revolving Credit Agreement restrict our
Company's ability to pay cash dividends on common shares.
38
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
As of February 23, 2008, we have the following contractual obligations and
commitments:
Payments Due by Period (in millions)
----------------------------------------------------------------
Contractual Less than
Obligations Total 1 Year 1 - 3 Years 4 - 5 Years Thereafter
- ------------------------------- ------------ --------- ------------ ------------ -----------
Debt (1) $ 817.0 $ 11.9 $ 0.5 $ 603.2 $ 201.4
Capital Leases (2) 315.9 27.8 54.6 52.9 180.6
Operating Leases (2) 1,865.2 194.9 372.4 329.7 968.2
Long-term Real Estate
Liabilities (2) 600.4 36.4 73.3 73.9 416.8
Pension Obligations (3) 66.9 7.0 13.9 13.5 32.5
Postretirement
Obligations (4) 41.1 2.4 5.2 5.7 27.8
Occupancy Payments (5) 605.4 68.6 124.3 102.2 310.3
Severance Payments (6) 29.3 18.0 10.9 0.3 0.1
Pension Withdrawal
Payments (7) 69.4 6.5 13.1 13.1 36.7
Interest (8) 705.5 45.7 91.5 72.7 495.6
Environmental Liability (9) 1.7 0.4 0.4 0.7 0.2
Postemployment
Obligations (10) 12.5 2.5 4.0 3.1 2.9
Defined Contribution
Plans (11) 8.3 8.3 -- -- --
Multi-employer Pension
Plans (11) 34.4 34.4 -- -- --
Other Service Contracts (12) 91.6 -- 91.6 -- --
Purchase Commitments (13)
Equipment Purchases 12.5 12.5 -- -- --
Equipment Rentals 1.7 0.5 0.9 0.3 --
Suppliers 2,052.2 505.0 1,009.9 509.8 27.5
Manufacturers/Vendors 2.4 0.1 0.2 0.2 1.9
Service Contracts 39.4 20.6 18.8 -- --
Consulting 6.0 2.9 3.1 -- --
------------ --------- ------------ ------------ -----------
Total $ 7,378.8 $ 1,006.4 $ 1,888.6 $ 1,781.3 $ 2,702.5
============ ========= ============ ============ ===========
(1) Amounts represent contractual amounts due. Refer to Note 8 of our
Consolidated Financial Statements for information regarding long-term
debt. We expect to settle such long-term debt by several methods,
including cash flows from operations.
(2) Amounts represent contractual amounts due. Refer to Note 10 of our
Consolidated Financial Statements for information regarding capital
leases, operating leases and long-term real estate liabilities.
(3) Amounts represent future contributions to our defined benefit pension
plans. Refer to Note 12 of our Consolidated Financial Statements for
information regarding our defined benefit pension plans.
(4) Amounts represent future benefit payments that were actuarially determined
for our postretirement benefit obligation. Refer to Note 12 of our
Consolidated Financial Statements for information regarding our
postretirement benefits.
(5) Amounts represent our future occupancy payments primarily relating to our
asset disposition initiatives (refer to Note 7 of our Consolidated
Financial Statements), discontinued operations (refer to Note 6 of our
Consolidated Financial Statements) and store closures made during the
normal course of business.
(6) Amounts represent our future severance obligations primarily relating to
Pathmark.
(7) Amount represents our future pension withdrawal payments from
multiemployer plans. Payments due by period for certain of our withdrawal
payments have not yet been determined and are classified within the less
than one year category.
(8) Amounts represent contractual amounts due. Refer to Note 8 of our
Consolidated Financial Statements for information regarding our interest
payments. Note that amounts presented exclude estimates on current and
39
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
future variable interest rate payments as these amounts cannot be
estimated as of the balance sheet date due to the variability in our
expected borrowings.
(9) Amounts represent our future contractual amounts payable.
(10) Amounts represent our future benefit payments that were actuarially
determined for our short and long term disability programs. Refer to Note
12 of our Consolidated Financial Statements for information regarding our
postemployment obligations.
(11) Amounts represent our best estimate of our immediate funding requirements
of our defined contribution and multiemployer plans in which we
participate. Refer to Note 12 of our Consolidated Financial Statements for
information regarding these obligations.
(12) The amount represents our unfavorable service contracts with GHI and C&S
in connection with the purchase of Pathmark. Payments due by period for
certain payments have not yet been determined and are classified within
the one to three year category.
(13) The purchase commitments include agreements to purchase goods or services
that are enforceable and legally binding and that specify all significant
terms, including open purchase orders. We expect to fund these commitments
with cash flows from operations.
Expiration of Commitments (in millions)
Other Less than
Commitments Total 1 Year 1 - 3 Years 4 - 5 Years Thereafter
- ----------- -------- --------- ------------- ----------- ----------
Guarantees $ 1.3 $ 0.2 $ 0.6 $ 0.5 $ --
======== ========= ============= =========== ==========
We are the guarantor of a loan of $1.3 million related to a shopping
center, which will expire in 2011.
In the normal course of business, we have assigned to third parties
various leases related to former operating stores (the "Assigned Leases"). When
the Assigned Leases were assigned, we generally remained secondarily liable with
respect to these lease obligations. As such, if any of the assignees were to
become unable to continue making payments under the Assigned Leases, we could be
required to assume the lease obligation. As of February 23, 2008, 235 Assigned
Leases remain in place. Assuming that each respective assignee became unable to
continue to make payments under an Assigned Lease, an event we believe to be
remote, we estimate our maximum potential obligation with respect to the
Assigned Leases to be approximately $741.6 million, which could be partially or
totally offset by reassigning or subletting such leases.
Our existing senior debt rating was Caa1 with stable outlook with Moody's
Investors Service ("Moody's") as of February 23, 2008. Our existing senior debt
rating was B with positive outlook and was removed from CreditWatch with
Standard & Poor's Ratings Group ("S&P") as of February 23, 2008. Also S&P
assigned B- ratings to our $165 million 5.125% convertible senior notes due 2011
and our $255 million 6.75% convertible senior notes due 2012. Moody's assigned a
Caa1 rating to our $165 million 5.125% convertible senior notes due 2011 and our
$255 million 6.75% convertible senior notes due 2012.
Our liquidity rating was SGL3 with Moody's as of February 23, 2008. Our
recovery rating was 5 with S&P as of February 23, 2008 indicating a modest
expectation of 10%-30% recovery of our senior debt to our lenders. Future rating
changes could affect the availability and cost of financing to our Company.
40
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
MARKET RISK
Market risk represents the risk of loss from adverse market changes that
may impact our consolidated financial position, results of operations or cash
flows. Among other possible market risks, we are exposed to such risk in the
areas of interest rates and foreign currency exchange rates.
From time to time, we may enter hedging agreements in order to manage
risks incurred in the normal course of business including forward exchange
contracts to manage our exposure to fluctuations in foreign exchange rates.
INTEREST RATES
Our exposure to market risk for changes in interest rates relates
primarily to our debt obligations. We do not have cash flow exposure due to rate
changes on our $577.4 million of total indebtedness as of February 23, 2008
because they are at fixed interest rates. However, we do have cash flow exposure
on our committed bank lines of credit due to our variable floating rate pricing.
Accordingly, during fiscal 2007 and fiscal 2006, a presumed 1% change in the
variable floating rate would have impacted interest expense by $0.6 million and
$0.8 million, respectively. During fiscal 2005, a presumed 1% change in the
variable floating rate would not have impacted interest expense as there were
minimal or no borrowings under our committed bank lines of credit.
FOREIGN EXCHANGE RISK
We were exposed to foreign exchange risk to the extent of adverse
fluctuations in the Canadian dollar. A change in the Canadian currency of 10%
would have resulted in a fluctuation in our investment in Metro, Inc. of nil and
$30.2 million at February 23, 2008 and February 24, 2007, respectively.
On November 6, 2007, we entered into a currency exchange forward contract
to purchase $380 million United States dollars to hedge the value of our shares
in Metro, Inc. against adverse movements in exchange rates. Our Company measures
ineffectiveness based upon the change in forward exchange rates. In fiscal 2007
and upon completion of the sale of our shares of Metro, Inc., this forward
contract was settled.
As we have approximately $1.0 million in assets denominated in foreign
currency, we do not believe that a change in the Canadian currency of 10% will
have a material effect on our Consolidated Statements of Operations or Cash
Flows.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those accounting estimates that we
believe are important to the portrayal of our financial condition and results of
operations and require our most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("U.S. GAAP")
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent
41
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
SELF-INSURANCE RESERVES
Our Consolidated Balance Sheets include liabilities with respect to
self-insured workers' compensation and general liability claims. We estimate the
required liability of such claims on a discounted basis, utilizing an actuarial
method, which is based upon various assumptions, which include, but are not
limited to, our historical loss experience, projected loss development factors,
actual payroll, legal costs and other data. Legal expenses incurred in
connection with workers' compensation and general liability claims are charged
to the specific claim to which costs pertain. The total current and non-current
liability for self-insurance reserves recorded at February 23, 2008 was $221.9
million. The discount rate used at February 23, 2008 was 4.0% and was based on
the timing of the projected cash flows of future payments to be made for claims.
A 1% increase in the discount rate would decrease the required liability by $5.7
million. Conversely, a 1% decrease in the discount rate would increase the
required liability by $6.1 million. The required liability is also subject to
adjustment in the future based upon the changes in claims experience, including
changes in the number of incidents (frequency) and changes in the ultimate cost
per incident (severity).
During fiscal 2007, the increase in our workers' compensation and general
liability reserves was primarily related to the acquisition of Pathmark on
December 3, 2007, which increased the reserve $86.7 million from fiscal 2006.
Included in the change of $86.7 million was a $9.8 million charge for a change
in estimate of self-insurance settlement costs for prior year claims related to
Pathmark. During fiscal 2006, there were no significant adjustments to our
estimates. 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 review assets in stores planned for closure or conversion for
impairment upon determination that such assets will not be used for their
intended useful life. The value of the assets is determined based on estimates
of future cash flows. Any impairment amounts are included in SG&A in our
Consolidated Statements of Operations. The effects of changes in estimates of
useful lives were not material to ongoing depreciation expense. If current
operating levels do not improve, there may be a need to take further actions
which may result in future impairments on long-lived assets, including the
potential for impairment of assets that are held and used.
CLOSED STORE AND CLOSED WAREHOUSE RESERVES
For closed stores and warehouses that are under long-term leases, 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 5% from the date of inception, with
the most significant adjustments being made prior to 2000. Total adjustments for
settlements on leases or sold properties and changes in estimates in fiscal 2007
resulted in income of $4.9 million and fiscal 2006 and 2005 were additional
expenses of $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.
42
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
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.
CONVERSION FEATURE, FINANCIAL WARRANTS, AND WARRANT LIABILITY
We have issued several financial instruments which are recorded as
liabilities in our financial statements and marked to market each reporting
period using the Black-Scholes option pricing model. The value of these
liabilities may change as a result of changes in A&P's stock price, the
remaining time until maturity, and the current interest rate.
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 cost, 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 in the Consolidated Balance Sheets and our future
expense in the Consolidated Statement of Operations. Actual results that differ
from our Company's assumptions are accumulated and amortized over future periods
into the Consolidated Statement of Operations.
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:
43
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
2007 2006 2005
------ ------- -----
Weighted average discount rate 5.75% 5.75% 5.50%
Weighted average rate of compensation increase 2.75% 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 $ 0.1 $ (4.7) $ (4.6)
100 basis point decrease (0.4) 4.7 4.3
The following illustrates the annual impact on benefit obligation of a 100
basis point increase or decrease from the assumptions used to determine the
benefit obligation at February 23, 2008:
Weighted Average
Discount Rate
----------------
100 basis point increase $ (42.8)
100 basis point decrease 51.8
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 $ (0.4)
100 basis point decrease 0.4
The following illustrates the annual impact on the accumulated
postretirement benefit obligation of a 100 basis point increase or decrease from
the assumptions used to determine the accumulated benefit obligation at February
23, 2008:
Weighted Average
Discount Rate
----------------
100 basis point increase $ (4.2)
100 basis point decrease 3.6
INVENTORIES
We evaluate inventory shrinkage throughout the year based on actual
physical counts and record reserves based on the results of these counts to
provide for estimated shrinkage between the store's last inventory and the
balance sheet date. 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
44
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
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 $15.7 million 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
As discussed in Note 11 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 experiences 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 11 to
the Consolidated Financial Statements for further discussion.
As discussed in Note 11 to the Consolidated Financial Statements, 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 mostly 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. In addition, the acquisition of Pathmark Stores Inc. increased this
balance to the current $164 million. Our Consolidated Balance Sheet has been
adjusted to reflect the liabilities for uncertain tax positions and deferred tax
assets for net operating losses,
45
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
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.
CAUTIONARY NOTE
This presentation may contain forward-looking statements about the future
performance of our Company, and is based on our assumptions and beliefs in light
of information currently available. We assume no obligation to update this
information. These forward-looking statements are subject to uncertainties and
other factors that could cause actual results to differ materially from such
statements including but not limited to: competitive practices and pricing in
the food industry generally and particularly in our principal markets; our
relationships with our employees; the terms of future collective bargaining
agreements; the costs and other effects of lawsuits and administrative
proceedings; the nature and extent of continued consolidation in the food
industry; changes in the financial markets which may affect our cost of capital
or the ability to access capital; supply or quality control problems with our
vendors; and changes in economic conditions, which may affect the buying
patterns of our customers.
46
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
Fiscal 2007 Fiscal 2006 Fiscal 2005
-------------- -------------- ----------------
Sales $ 6,401,130 $ 5,369,203 $ 7,090,018
Cost of merchandise sold (4,431,299) (3,702,883) (5,028,141)
-------------- -------------- ---------------
Gross margin 1,969,831 1,666,320 2,061,877
Store operating, general and
administrative expense (2,009,071) (1,693,490) (2,232,737)
-------------- -------------- ---------------
Loss from operations (39,240) (27,170) (170,860)
(Loss) gain on sale of Canadian operations (436) (1,299) 912,129
Gain on sale of Metro, Inc. 184,451 -- --
Non operating income 37,394 -- --
Interest expense (111,816) (65,884) (84,404)
Interest and dividend income 14,350 9,020 12,855
Minority interest in earnings of consolidated
franchisees -- -- (1,131)
Equity in earnings of Metro, Inc. 7,869 40,003 7,801
-------------- -------------- ---------------
Income (loss) from continuing operations
before income taxes 92,572 (45,330) 676,390
(Provision for) benefit from income taxes (5,592) 58,081 (158,331)
--------------- -------------- ---------------
Income from continuing operations 86,980 12,751 518,059
Discontinued operations:
(Loss) income from operations of
discontinued businesses, net of tax
benefit of nil, $1,781 and $25,360
for the years ended February 23, 2008,
February 24, 2007 and February 25,
2006, respectively (196,848) 7,088 (115,072)
(Loss) gain on disposal of discontinued
operations, net of tax benefit of nil,
$1,952 and $2,445 for the years ended
February 23, 2008, February 24, 2007
and February 25, 2006, respectively (50,812) 7,054 (10,357)
-------------- -------------- ---------------
(Loss) income from discontinued
operations (247,660) 14,142 (125,429)
-------------- -------------- ---------------
Net (loss) income $ (160,680) $ 26,893 $ 392,630
============== ============== ===============
Net (loss) income per share - basic:
Continuing operations $ 2.00 $ 0.31 $ 12.85
Discontinued operations (5.69) 0.34 (3.11)
-------------- -------------- ---------------
Net (loss) income per share - basic $ (3.69) $ 0.65 $ 9.74
============== ============== ===============
Net (loss) income per share - diluted:
Continuing operations $ 1.37 $ 0.30 $ 12.72
Discontinued operations (5.59) 0.34 (3.08)
--------------- -------------- ---------------
Net (loss) income per share - diluted $ (4.22) $ 0.64 $ 9.64
============== ============== ===============
Weighted average common shares outstanding:
Basic 43,551,459 41 430 600 40,301,132
============== ============== ===============
Diluted 44,295,214 41,902,358 40,725,942
============== ============== ===============
See Notes to Consolidated Financial Statements.
47
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE (LOSS) INCOME
(Dollars in thousands, except share amounts)
Accumulated (Accumulated
Common Stock Additional Other Deficit) Total
----------------------- Paid-in Comprehensive Retained Call Stockholders'
Shares Amount Capital (Loss) Income Earnings Options Equity
----------- ----------- ----------- ------------- ------------ ----------- -------------
BALANCE AT 2/26/05 38,764,999 $ 38,765 $ 464,543 $ (3,308) $ (266,198) $ -- $ 233,802
Net income 392,630 392,630
Stock options exercised 2,378,685 2,379 23,677 26,056
Other share based awards 5,303 5 8,973 8,978
Other comprehensive income 10,261 10,261
----------- ----------- ----------- ------------- ------------ ----------- -------------
BALANCE AT 2/25/06 41,148,987 41,149 497,193 6,953 126,432 -- 671,727
Net income 26,893 26,893
Cash dividends on common
stock-$7.25 per share (299,089) (299,089)
Stock options exercised 414,104 414 5,580 5,994
Other share based awards 26,104 26 8,108 8,134
Tax benefit of stock options 1,076 1,076
Initial adoption of SFAS 158 19,196 19,196
Other comprehensive loss (3,261) (3,261)
----------- ----------- ----------- ------------- ------------ ----------- -------------
BALANCE AT 2/24/07
AS PREVIOUSLY REPORTED 41,589,195 41,589 212,868 22,888 153,325 -- 430,670
Impact of the adoption of
change in measurement
date under FAS 158 (643) (643)
Cumulative impact of
the adoption of FIN 48 24,421 24,421
----------- ----------- ----------- ------------- ------------ ----------- -------------
BALANCE AT 2/24/07,
AS ADJUSTED 41,589,195 41,589 212,868 22,888 177,103 -- 454,448
Net loss (160,680) (160,680)
Stock options exercised 585,094 585 9,992 10,577
Other share based awards 11,597 12 9,027 9,039
Tax benefit of stock options 2,640 2,640
Call options (73,509) (73,509)
Stock, options and warrants
issued in connection with
the acquisition of
Pathmark 14,915,069 14,915 212,576 227,491
Other comprehensive loss (51,863) (51,863)
----------- ----------- ----------- ------------- ------------ ----------- -------------
BALANCE AT 2/23/08 57,100,955 $ 57,101 $ 447,103 $ (28,975) $ 16,423 $ (73,509) $ 418,143
=========== =========== =========== ============= ============ =========== =============
See Notes to Consolidated Financial Statements.
48
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE (LOSS) INCOME
(Continued)
(Dollars in thousands, except share amounts)
COMPREHENSIVE (LOSS) INCOME
Fiscal 2007 Fiscal 2006 Fiscal 2005
--------------- -------------- --------------
Net (loss) income $ (160,680) $ 26,893 $ 392,630
--------------- -------------- --------------
Foreign currency translation adjustment (9,710) (3,164) 9,839
Net unrealized gain (loss) on marketable securities, net of tax 22 993 (1,015)
Net unrealized loss on derivatives, net of tax -- -- (57)
Pension and other postretirement benefits, net of tax (42,175) -- --
Minimum pension liability adjustment, prior to adoption of
SFAS 158, net of tax -- (1,090) 1,494
--------------- -------------- --------------
Other comprehensive (loss) income, net of tax (51,863) (3,261) 10,261
--------------- -------------- --------------
Total comprehensive (loss) income $ (212,543) $ 23,632 $ 402,891
=============== ============== ==============
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME BALANCES
Net Unrealized Pension Accumulated
Foreign (Loss) / Gain Net Unrealized & Other Post- Other
Currency on Marketable (Loss) / Gain retirement Comprehensive
Translation Securities on Derivatives Benefits (Loss) Income
----------- -------------- --------------- ------------- ---------------
Balance at
February 26, 2005 $ 3,035 $ -- $ 57 $ (6,400) $ (3,308)
Current period change 9,839 (1,015) (57) 1,494 10,261
----------- -------------- --------------- ------------- ---------------
Balance at
February 25, 2006 12,874 (1,015) -- (4,906) 6,953
Current period change (3,164) 993 -- (1,090) (3,261)
Initial adoption of SFAS 158 -- -- -- 19,196 19,196
----------- -------------- --------------- ------------- ---------------
Balance at
February 24, 2007 9,710 (22) -- 13,200 22,888
Current period change (9,710) 22 -- (42,175) (51,863)
----------- -------------- --------------- ------------- ---------------
Balance at
February 23, 2008 $ -- $ -- $ -- $ (28,975) $ (28,975)
=========== ============== =============== ============= ===============
See Notes to Consolidated Financial Statements.
49
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
February 23, 2008 February 24, 2007
----------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 100,733 $ 86,194
Restricted cash 3,713 51,176
Restricted marketable securities 6,796 20,335
Accounts receivable, net of allowance for doubtful
accounts of $5,864 and $4,514 at February 23, 2008
and February 24, 2007, respectively 173,203 117,082
Inventories 505,012 411,370
Prepaid expenses and other current assets 94,969 62,751
----------------- ------------------
Total current assets 884,426 748,908
----------------- ------------------
Non-current assets:
Property:
Land 120,966 44,878
Buildings 380,974 200,404
Equipment 1,254,827 1,299,468
Leasehold improvements 1,337,858 916,115
----------------- ------------------
Total - at cost 3,094,625 2,460,865
Less accumulated depreciation and amortization (1,343,185) (1,541,543)
----------------- ------------------
Property owned, net 1,751,440 919,322
Property under capital leases, net 149,363 20,676
----------------- ------------------
Property - net 1,900,803 939,998
Goodwill 387,546 5,810
Intangible assets 234,086 --
Equity investment in Metro, Inc. -- 368,871
Other assets 241,057 48,036
----------------- ------------------
Total assets $ 3,647,918 $ 2,111,623
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 11,875 $ 32,069
Current portion of obligations under capital leases 11,344 1,554
Current portion of other financial liabilities 44,539 --
Accounts payable 216,703 197,500
Book overdrafts 36,435 31,833
Accrued salaries, wages and benefits 169,552 115,719
Accrued taxes 46,156 34,452
Other accruals 230,733 145,264
----------------- ------------------
Total current liabilities 767,337 558,391
----------------- ------------------
Non-current liabilities
Long-term debt 758,886 284,214
Long-term obligations under capital leases 157,430 29,938
Long-term real estate liabilities 346,110 300,832
Deferred real estate income 24,389 --
Other financial liabilities 180,250 --
Other non-current liabilities 995,373 507,578
----------------- ------------------
Total liabilities 3,229,775 1,680,953
----------------- ------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - no par value; authorized - 3,000,000
shares; issued - none -- --
Common stock - $1 par value; authorized - 80,000,000
shares; issued and outstanding - 57,100,955 and
41,589,195 shares at February 23, 2008 and
February 24, 2007, respectively 57,101 41,589
Call options (73,509) --
Additional paid-in capital 447,103 212,868
Accumulated other comprehensive (loss) income (28,975) 22,888
Retained earnings 16,423 153,325
----------------- ------------------
Total stockholders' equity 418,143 430,670
----------------- ------------------
Total liabilities and stockholders' equity $ 3,647,918 $ 2,111,623
================= ==================
See Notes to Consolidated Financial Statements.
50
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Fiscal 2007 Fiscal 2006 Fiscal 2005
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (160,680) $ 26,893 $ 392,630
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Asset disposition initiatives 123,951 2,139 175,391
Depreciation and amortization 186,789 177,754 207,329
Income tax (benefit) provision -- (66,435) 98,079
Gains on disposal of owned property and write-down of property,
net (13,743) (22,502) (22,770)
Other property impairments 11,657 4,294 28,085
Loss (gain) on disposal of discontinued operations 50,812 (7,054) 10,357
Loss (gain) on sale of Canadian operations 436 1,299 (912,129)
Non operating income (37,394) -- --
Loss on derivatives -- -- 15,446
Loss on early extinguishment of debt -- -- 28,623
Non-cash impact of early extinguishment of debt -- -- 809
Other share based awards 9,039 8,134 8,978
Equity in earnings of Metro, Inc. (7,869) (40,003) (7,801)
Proceeds from dividends from Metro, Inc -- 6,858 4,708
Financing fees relating to bridge loan facility 25,421 -- --
Gain on disposition of Metro, Inc. (184,451) -- --
Other changes in assets and liabilities, net of acquisitions:
Decrease (increase) in receivables 37,098 62,741 (56,130)
Decrease (increase) in inventories 115,985 (1,264) 109,521
Decrease in prepaid expenses and other current assets 9,904 3,062 585
Decrease (increase) in other assets 12,887 3,044 (7,344)
Decrease in accounts payable (72,714) (19,199) (101,342)
Decrease in accrued salaries, wages and benefits, and taxes (47,730) (9,202) (31,414)
(Decrease) increase in other accruals (42,205) (61,395) 48,931
Increase in minority interest -- -- 1,806
Decrease in other non-current liabilities (61,364) (37,641) (76,309)
Other operating activities, net 8,826 5,199 7,954
------------ ------------ ------------
Net cash (used in) provided by operating activities (35,345) 36,722 (76,007)
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (122,850) (208,159) (191,050)
Proceeds from disposal of property 153,591 41,880 72,293
Purchase of businesses, net of cash acquired (985,521) (24,619) --
Proceeds from sale of Canadian operations, net of cash disposed -- -- 960,689
Disposal related expenditures for sale of Canadian operations (1,040) (1,299) (53,882)
Proceeds from (payments for) derivatives 2,442 -- (15,446)
Decrease (increase) in restricted cash 47,463 95,133 (146,309)
Net proceeds from the sale of shares of Metro, Inc. 548,796 -- --
Purchases of marketable securities (32,700) (148,700) (667,808)
Proceeds from maturities of marketable securities 33,242 294,519 500,810
------------ ------------ ------------
Net cash (used in) provided by investing activities (356,577) 48,755 459,297
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds under revolving lines of credit 1,027,335 1,757,100 --
Principal payments on revolving lines of credit (1,060,336) (1,687,100) --
Proceeds from long-term borrowings 1,018,300 -- --
Principal payments on long-term borrowings (485,830) (80) (413,961)
Long-term real estate liabilities 6,229 3,379 32,122
Principal payments on capital leases (9,386) (5,278) (11,033)
Proceeds from the financing warrants 36,771 -- --
Payments for the call options (73,509) -- --
Decrease in book overdrafts (4,562) (3,614) (42,957)
Financing fees (61,782) (249) (1,793)
Dividends paid -- (299,089) --
Tax benefit on stock options 2,640 -- --
Proceeds from exercises of stock options 10,577 5,994 26,056
------------ ------------ ------------
Net cash provided by (used in) financing activities 406,447 (228,937) (411,566)
------------ ------------ ------------
Effect of exchange rate changes on cash and
cash equivalents 14 65 117
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 14,539 (143,395) (28,159)
Cash and cash equivalents at beginning of year 86,194 229,589 257,748
------------ ------------ ------------
Cash and cash equivalents at end of year $ 100,733 $ 86,194 $ 229,589
============ ============ ============
See Notes to Consolidated Financial Statements.
51
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts, per share amounts, and where noted)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of The Great
Atlantic & Pacific Tea Company, Inc. ("We," "Our," "Us" or "our Company") and
all subsidiaries. Intercompany accounts and transactions have been eliminated.
As discussed in Note 3 - Investment in Metro, Inc. our Company used the
equity method of accounting for our investment in Metro, Inc. through March 13,
2007 as we exerted significant influence over substantive operating decisions
made by Metro, Inc. through our membership on Metro, Inc.'s Board of Directors
and its committees and through an information technology services agreement with
Metro, Inc. However, as a result of the sale of 6,350,000 shares of our holdings
in Metro, Inc., on March 13, 2007, our Company began recording our investment in
Metro, Inc. under Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115")
as an available for sale security. On November 26, 2007, our Company sold the
remaining 11,726,645 shares of our holdings in Metro, Inc. As a result of these
sales, our Company no longer holds Class A subordinate shares of Metro, Inc. as
our investment has been fully liquidated as of the balance sheet date.
At February 23, 2008, we operated retail supermarkets in the United
States. The operations are mainly in the Northeastern part of the U.S. Our
principal stockholder, Tengelmann Warenhandelsgesellschaft KG ("Tengelmann"),
owned 38.52% of our common stock as of February 23, 2008.
As discussed in Note 6 - Discontinued Operations, the criteria necessary
to classify the operations for the Midwest and the Greater New Orleans area as
discontinued have been satisfied and as such, have been reclassified in our
Consolidated Statements of Operations.
Fiscal Year
Our fiscal year ends on the last Saturday in February. Fiscal 2007, 2006
and 2005 were each comprised of 13 four week periods.
52
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results can differ from those estimates.
Revenue Recognition
Retail revenue is recognized at point-of-sale. Discounts and allowances
that we provide to our customers are accounted for as a reduction to sales and
are recorded at point-of-sale.
Cost of Merchandise Sold
Cost of merchandise sold includes cost of inventory sold during the
period, including purchasing and distribution costs. These costs include inbound
freight charges, purchasing and receiving costs, warehouse inspection costs,
warehousing costs, internal transfer costs and other distribution costs through
C&S Wholesale Grocers, Inc.
Vendor Allowances
Vendor allowances that relate to our Company's buying and merchandising
activities consist primarily of advertising, promotional and slotting
allowances. With the exception of allowances described below, all allowances are
recognized as a reduction of cost of goods sold when the related performance is
completed and the related inventory is sold. Lump-sum payments received for
multi-year contracts are generally amortized on a straight line basis over the
life of the contracts. Vendor rebates or refunds that are contingent upon our
Company completing a specified level of purchases or remaining a reseller for a
specified time period are recognized as a reduction of cost of goods sold based
on a systematic and rational allocation of the rebate or refund to each of the
underlying transactions that results in progress toward earning that rebate or
refund, assuming that we can reasonably estimate the rebate or refund and it is
probable that the specified target will be obtained. If we believe attaining the
milestone is not probable, the rebate or refund is recognized as the milestone
is achieved. Vendor reimbursement for coupons that can only be redeemed at a
Company retail store are recorded as a reduction of cost of sales.
Advertising Costs
Advertising costs incurred to communicate media advertising are expensed
in the period the advertisement is first shown. Other advertising costs,
primarily costs to produce circulars and pay advertising agency fees, are
expensed when incurred. We recorded advertising expense of $77.7 million for
fiscal 2007 ($73.3 million for continuing operations and $4.4 million for
discontinued operations), $76.2 million for fiscal 2006 ($59.5 million for
continuing operations and $16.7 million for discontinued operations) and $93.0
million for fiscal 2005 ($74.2 million for continuing operations and $18.8
million for discontinued operations).
Pre-opening Costs
Non-capital expenditures incurred in opening new stores or remodeling
existing stores are expensed as incurred. Rent incurred during the construction
period is expensed in accordance with FASB Staff Position FAS 13-1, which
requires companies to expense rental costs associated with ground or building
operating leases that are incurred during a construction period.
53
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Software Costs
We capitalize externally purchased software and amortize it over five
years. Amortization expense related to software costs for continuing operations
for fiscal 2007, 2006 and 2005 was $4.8 million, $7.6 million, and $8.4 million,
respectively.
In accordance with Statement of Position 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use", we capitalize
certain internally generated software costs after feasibility is reached which
is concurrent (i.) with the completion of the preliminary project stage, (ii.)
when management authorizes and commits to funding a software project, and (iii.)
when it is probable that the project will be completed and the software will be
used to perform the function intended. In fiscal 2007, 2006 and 2005, we
capitalized $3.6 million, $1.4 million and $2.7 million, respectively, of such
software costs. These costs are amortized over 5 years. For fiscal 2007, 2006
and 2005, we recorded related amortization expense for continuing operations of
$8.9 million, $14.6 million and $16.7 million, respectively.
Externally purchased and internally developed software are classified in
"Property - Equipment" on our Consolidated Balance Sheets.
Earnings Per Share
Basic earnings (loss) per share is computed by dividing net income (loss)
by the weighted average shares outstanding for the reporting period. Diluted
earnings (loss) per share reflects the potential dilution, using the treasury
stock method, and assumes that the convertible debt, stock options, restricted
stock, warrants, and other potentially dilutive financial instruments were
converted into common stock upon issuance, if dilutive.
Weighted average common shares of 486,375, 186,218, and 651,650 for fiscal
2007, fiscal 2006, and fiscal 2005, respectively, related to options outstanding
under our Company's stock award plan were excluded from the computation of
diluted earnings per share as the effect would be antidilutive.
Weighted average common shares of 30,183 for fiscal 2007 related to
restricted stock units outstanding under our Company's stock option plans were
excluded from the computation of diluted earnings per share as the effect would
be antidilutive.
Weighted average common shares of 156,486 for fiscal 2007 related to
warrants outstanding under our Company's stock award plan were excluded from the
computation of diluted earnings per share as the effect would be antidilutive.
Weighted average common shares of 2,107,064 for fiscal 2007 related to
convertible debt outstanding were excluded from the computation of diluted
earnings per share as the effect would be antidilutive.
Weighted average common shares of 1,519,539 for fiscal 2007 related to
the share lending agreement were excluded from the computation of earning
per share. See Note 14 - Capital Stock, for further discussion on the share
lending agreement.
54
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table sets forth the calculation of basic and diluted
earnings per share:
Fiscal 2007 Fiscal 2006 Fiscal 2005
------------- ------------- ------------
Income from continuing operations $ 86,980 $ 12,751 $ 518,059
Adjustments on Convertible Warrants (26,352) -- --
------------ ------------- ------------
Income from continuing operations - diluted $ 60,628 $ 12,751 $ 518,059
============ ============= ============
Weighted average common shares outstanding 45,007,214 41,430,600 40,301,132
Restricted stock options 63,784 -- --
Share lending agreement (1,519,539) -- --
------------ ------------- ------------
Common shares outstanding - basic 43,551,459 41,430,600 40,301,132
Effect of dilutive securities:
Options to purchase common stock 348,357 471,758 424,810
Convertible warrants 395,398 -- --
------------ ------------- ------------
Common shares outstanding - diluted 44,295,214 41,902,358 40,725,942
============ ============= ============
Translation of Canadian Currency
Assets and liabilities denominated in Canadian currency are translated at
year-end rates of exchange, and revenues and expenses are translated at average
rates of exchange during the year. Gains and losses resulting from translation
adjustments are accumulated as a separate component of accumulated other
comprehensive loss within Stockholders' Equity. At February 23, 2008, because we
sold all of our shares of Metro, Inc., assets and liabilities denominated in
Canadian currency are approximately $1.0 million.
Cash and Cash Equivalents
Short-term investments that are highly liquid with maturities of ninety
days or less when purchased are deemed to be cash equivalents. These balances as
well as credit card receivables of $46.0 million and $29.5 million at February
23, 2008 and February 24, 2007, respectively, are included in "Cash and cash
equivalents" on our Consolidated Balance Sheets.
Restricted Cash
In fiscal 2007, our restricted cash was held in escrow for services which
our Company is required to perform in connection with the sale of our real
estate properties. In fiscal 2006, our restricted cash was primarily held in a
money market fund and could only be used as collateral for our Letter of Credit
Agreement that we entered into during fiscal 2005. The remaining monies from
fiscal 2006 are held in escrow for services which our Company is required to
perform in connection with the sale of our real estate properties.
Restricted Marketable Securities and Marketable Securities
Investments with maturities greater than ninety days when purchased are
considered marketable securities. Our marketable securities are principally
comprised of commercial paper, corporate bonds, securities of the U.S.
government and its agencies, and auction rate securities. Our Company's
investments are considered to be available-for-sale and are reported at fair
value, with unrealized gains and losses, net of tax, reported as a separate
component of stockholder's equity. Our Company records other than temporary
declines in fair value to earnings as realized losses. In fiscal 2007, our
restricted marketable securities were held by Bank of America in the Columbia
Strategic Cash Portfolio ("Columbia Fund"). On December 6, 2007, Bank of America
froze the Columbia Fund as a result of the increased risk in subprime asset
backed securities. Refer to Note 4 - Cash, Restricted Cash and Restricted
Marketable Securities for further discussion of the Columbia Fund. In fiscal
2006, our restricted marketable securities were held by Bank of America and
could only be used as collateral for our Letter of Credit Agreement that we
entered
55
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
into during fiscal 2005. Refer to Note 8 - Indebtedness and Other Financial
Liabilities for further discussion of our Letter of Credit Agreement and
Revolving Credit Agreement.
Inventories
Store inventories are stated principally at the lower of cost or market
with cost determined under the retail method. Under the retail method, the
valuation of inventories at cost and resulting gross margins are determined by
applying a cost-to-retail ratio for various groupings of similar items to the
retail value of inventories. Inherent in the retail inventory method
calculations are certain management judgments and estimates, including
shrinkage, which could impact the ending inventory valuation at cost as well as
the resulting gross margins. Perishables and pharmacy inventories are stated at
cost. Distribution center and other inventories are stated primarily at the
lower of cost or market. As of February 23, 2008, the cost for 61.1% of our
inventories was determined using the first-in, first out ("FIFO") method and the
cost for 38.9% of our inventories was determined using the last-in, first-out
("LIFO") method. In fiscal 2006, the cost for 100% of inventories was determined
using the FIFO method. At February 23, 2008, the excess of estimated current
costs over LIFO carrying value, or LIFO reserve, was approximately $2.3 million.
We estimate inventory shrinkage throughout the year based on the results
of our periodic physical counts in our stores and distribution centers and
record reserves based on the results of these counts to provide for estimated
shrinkage as of the balance sheet date.
Long-Lived Assets
We review the carrying values of our long-lived assets for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. Such review is primarily based
upon groups of assets and the undiscounted estimated future cash flows from such
assets to determine if the carrying value of such assets is recoverable from
their respective cash flows. If such review indicates an impairment exists, we
measure such impairment on a discounted basis using a probability weighted
approach and a 7 year U.S. Treasury risk free rate.
Property
Depreciation and amortization are calculated on the straight-line basis
over the estimated useful lives of the assets. Buildings are depreciated based
on lives varying from twenty to forty years and equipment is depreciated based
on lives varying from three to twelve years. Leasehold improvements are
amortized over the lesser of their estimated useful lives or the remaining
available lease terms. Property leased under capital leases is amortized over
the lives of the respective leases or over their economic useful lives,
whichever is less. During fiscal 2007, 2006 and 2005, in addition to the
impairment losses discussed at Note 5 - Valuation of Long-lived Assets, we
disposed of certain assets, which resulted in pretax net gains from continuing
operations of $13.7 million, $22.5 million and $22.8 million, respectively.
Goodwill and Other Intangible Assets
In accordance with SFAS 142 "Goodwill and Other Intangible Assets,"
goodwill is no longer required to be amortized, but tested for impairment at
least annually. Our Company tests for impairment in the fourth quarter of each
fiscal year by reassessing the appropriateness of the goodwill balance based on
a comparison of the fair value of a reporting unit (determined through forecasts
of cash flows from operating results on a discounted basis in comparison) to the
carrying value of such operations. If the results of such comparison indicate
that an impairment may exist, that is the carrying value exceeds fair market
56
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
value, we determine the implied fair market value of the goodwill using a
purchase price allocation approach and compare this value to the carrying value.
If such comparison indicates that an impairment exists, we will recognize a
charge to operations at that time based upon the difference between the implied
fair market value of the goodwill and the balance sheet amount. In fiscal 2007,
no impairment was deemed necessary.
During the fourth quarter of fiscal 2007, we completed the acquisition of
100% of Pathmark Stores, Inc. ("Pathmark"). In connection with this purchase, we
recorded goodwill in the amount of $380.0 million which is included in
"Goodwill" on our Consolidated Balance Sheets at February 23, 2008. Due to the
recent nature of the acquisition we have not determined the reporting units to
which the goodwill related to the Pathmark acquisition will be allocated. Also
in connection with this acquisition, we recorded intangible assets of $236.2
million which are included in "Intangible assets" in our Consolidated Balance
Sheet at February 23, 2008.
During fiscal 2006, we completed the purchase of 6 Clemens Markets stores
from C&S Wholesale Grocers, Inc. In connection with the purchase, we recorded
goodwill in the amount of $5.8 million, which is included in "Goodwill" on our
Consolidated Balance Sheet at February 24, 2007.
Changes in the carrying amount of goodwill during the fiscal years ended
February 23, 2008 and February 24, 2007 are as follows:
Goodwill balance at February 25, 2006 $ --
Goodwill acquired pursuant to business
acquisition - Clemens 5,810
---------
Goodwill balance at February 24, 2007 5,810
Goodwill acquired pursuant to business
acquisition - Pathmark 379,990
Goodwill acquired pursuant to business
acquisition - Best Cellars 1,746
---------
Goodwill balance at February 23, 2008 $ 387,546
=========
Current Liabilities
Certain accounts payable checks issued but not presented to banks
frequently result in negative book balances for accounting purposes. Such
amounts are classified as "Book overdrafts" on our Consolidated Balance Sheets.
Liabilities for compensated absences of $63.0 million and $38.4 million at
February 23, 2008 and February 24, 2007, respectively, are included in "Accrued
salaries, wages and benefits" on our Consolidated Balance Sheets. We accrue for
vested vacation pay earned by our employees.
Long-Term Real Estate Liabilities
Long-term real estate liabilities include the sales price of several
sale-leaseback transactions that did not qualify for sale-leaseback accounting
in accordance with SFAS 98, "Accounting for Leases" ("SFAS 98"). The proceeds
received are recorded as long-term real estate liabilities under the provisions
of SFAS 66, "Accounting for Sales of Real Estate" on our Consolidated Balance
Sheets with a maturity of 20 years, and will not be recognized until the end of
the respective leases or when our continuing involvement ceases.
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Long-term real estate liabilities also include various leases in which our
Company received landlord allowances to offset the costs of structural
improvements we made to the leased space. As we had paid directly for a
substantial portion of the structural improvement costs, we were considered the
owner of the building during the construction period. In all situations upon
completion of the construction, we were unable to meet the requirements under
SFAS 98 to qualify for sale-leaseback treatment; thus, the landlord allowances
have been recorded as long-term real estate liabilities on our Consolidated
Balance Sheets and have been amortized over the lease term based on rent
payments designated in the lease agreements. These leases have terms ranging
between 12 and 25 years and effective annual percentage rates between 4.74% and
78.21%. The effective annual percentage rates were implicitly calculated based
upon technical accounting guidance.
Self Insurance Reserves
Our Consolidated Balance Sheets include liabilities with respect to
self-insured workers' compensation and general liability claims. The current and
non-current liability for self-insurance reserves was $72.7 million and $149.2
million at February 23, 2008 and $42.8 million and $90.2 million at February 24,
2007, respectively. The current portion of these liabilities is included in
"Other accruals" and the non-current portion is included in "Other non-current
liabilities" on our Consolidated Balance Sheets. We estimate the required
liability of such claims on a discounted basis, utilizing an actuarial method,
which is based upon various assumptions, which include, but are not limited to,
our historical loss experience, projected loss development factors, actual
payroll, legal costs and other data. Legal expenses incurred in connection with
workers' compensation and general liability claims are charged to the specific
claim to which costs pertain. The required liability is also subject to
adjustment in the future based upon the changes in claims experience, including
changes in the number of incidents (frequency) and changes in the ultimate cost
per incident (severity).
During fiscal 2007, the increase in our workers' compensation and general
liability reserves was primarily related to the acquisition of Pathmark on
December 3, 2007, which increased the reserve $86.7 million from fiscal 2006.
Included in the change of $86.7 million was a $9.8 million charge for a change
in estimate of self-insurance settlement costs for prior year claims related to
Pathmark.
During fiscal 2006, the increase in our workers' compensation and general
liability reserves was not significant.
During fiscal 2005, we changed our method of accruing estimated workers
compensation state assessment charges for future years from an accrual basis to
an actuarial basis as required by Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SOP 97-3").
The difference between actual workers compensation state assessment expense
recognized in our Consolidated Statement of Operations and workers compensation
state assessment expense that should have been recorded per SOP 97-3 was not
significant. An adjustment of $8.5 million was recorded for expected future
workers compensation state assessment charges relating to prior year claims that
will be paid related to the incurred workers compensation claims on our
Consolidated Balance Sheet at February 25, 2006. This amount was recorded in
"Store operating, general and administrative expense" in our Consolidated
Statement of Operations for the year ended February 25, 2006.
58
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Closed Store and Warehouse Reserves
For stores and warehouses closed that are under long-term leases, we
record a discounted liability using a risk free rate for future minimum lease
payments and related costs, such as utilities and taxes, from the date of
closure to the end of the remaining lease term, net of estimated probable
recoveries from projected sublease rentals. If estimated cost recoveries exceed
our liability for future minimum lease payments, the excess is recognized as
income over the term of the sublease. We estimate net future cash flows based on
our experience in and knowledge of the market in which the closed store is
located. However, these estimates project net cash flow several years into the
future and are affected by variable factors such as inflation, real estate
markets and economic conditions. While these factors have been relatively stable
in recent years, variation in these factors could cause changes to our
estimates.
Comprehensive (Loss) Income
Our Company's other comprehensive (loss) income relates to changes in
foreign currency translation, pension and other postretirement benefits and
unrealized gains or losses on derivatives and marketable securities available
for sale.
Income Taxes
We provide deferred income taxes on temporary differences between amounts
of assets and liabilities for financial reporting purposes and such amounts as
measured by tax regulations. A valuation allowance is recorded to reduce a
deferred tax asset to the amount expected to be realized. Our Company records
sales and use tax on a net basis (excluded from "Sales" and included in "Store
operating, general and administrative expense" in our Statement of Consolidated
Operations).
Stock-Based Compensation
Beginning in fiscal 2005, we adopted and applied the fair value based
method of accounting prescribed by SFAS 123R, "Share-Based Payment" ("SFAS
123R") for all share-based payment transactions with employees. Refer to Note 13
- - Stock Based Compensation for further discussion regarding our Company's
accounting for stock based compensation.
There were no stock options granted during fiscal 2005. The fair value of
the fiscal 2007 and fiscal 2006 option grants was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
Fiscal 2007 Fiscal 2006
------------ -----------
Expected life 7 years 7 years
Volatility 54% - 55% 56%
Risk-free interest rate range 4.46% - 4.57% 4.96%
New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes -- an
Interpretation of FASB Statement 109 ("FIN 48"), which clarifies the accounting
for uncertainty in tax positions. 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
59
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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. The provisions of FIN 48 also
provide guidance on derecognition, classification, interest and penalties,
accounting in interim periods, and disclosure. We adopted these requirements 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,
2006 balance of retained earnings. Results of prior periods have not been
restated. 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 "(Provision for) benefit from income
taxes" in our Consolidated Statements of Operations. Refer to Note 11 - Income
Taxes for further discussion.
In October 2004, the government passed the Homeland Investment Act which
allows companies to repatriate cash balances from their controlled foreign
subsidiaries at a reduced rate. This was achieved by permitting a one time 85%
dividends received deduction. Our Company completed the sale of our Canadian
subsidiary to Metro, Inc. during fiscal 2005. As a result of this transaction,
our Company repatriated $949.0 million from our foreign subsidiaries, of which
$500.0 million is intended to qualify for the 85% dividends received deduction.
Until such time as the taxing authorities have affirmed the adequacy of our
Company's Domestic Reinvestment Plan, the balance sheet is and will be
grossed-up to reflect liabilities for uncertain tax positions and deferred tax
assets for net operating losses in accordance with FIN 48.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with generally accepted accounting principles, and
expands disclosures about fair value measurements. The provisions of SFAS 157
are effective for fiscal years beginning after November 15, 2007 (our year
ending February 28, 2009). The adoption of the provisions of SFAS 157 is not
expected to have a material effect on the Company's consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158 was issued to
improve the overall financial statement presentation of pension and other
postretirement plans and does not impact the determination of net periodic
benefit cost or the measurement of plan assets or obligations. This standard
requires companies to recognize the funded status of their defined benefit
pension and other postretirement benefit plans as a net liability or asset on
their balance sheets and requires any unrecognized prior service costs and
actuarial gains or losses to be recognized as a component of accumulated other
comprehensive income or loss. We adopted these requirements as of February 24,
2007. Additionally, SFAS 158 no longer allows companies to measure their plans
as of any date other than the end of their fiscal year; however, this provision
is not effective for companies until fiscal years ending after December 15, 2008
(our year ending February 28, 2009). We have chosen to early adopt this
requirement in fiscal 2007. We used the second approach as described in
paragraph 19 of SFAS 158 to transition our measurement date from December 31,
2006 to February 24, 2007. Under this approach, we have recorded an adjustment
60
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
to opening retained earnings in the amount of $0.6 million to decrease the
February 25, 2007 balance of retained earnings. Refer to Note 12 - Retirement
Plans and Benefits for further discussion.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities -- including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected will
be recognized in earnings at each subsequent reporting date. The provisions of
SFAS 159 are effective for fiscal years beginning after November 15, 2007 (our
year ending February 28, 2009). The adoption of the provisions of SFAS 159 is
not expected to have a material effect on the Company's consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations"
("SFAS 141R"). SFAS 141R establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, the goodwill acquired, and any
noncontrolling interest in the acquiree. This statement also establishes
disclosure requirements to enable the evaluation of the nature and financial
effect of the business combination. SFAS 141R is effective for fiscal years
beginning after December 15, 2008 (our year ended February 27, 2010). There is
no impact on our acquisition of Pathmark from the provisions of SFAS 141R as
there is no retroactive application.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements -- an amendment of ARB No. 51" ("SFAS
160"). SFAS 160 amends ARB 51 to establish accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008 (our year ended February 27, 2010). We
have evaluated the provisions of SFAS 160 and the guidance will not have an
impact on our Company's financial condition or results of operations.
In March 2008, the FASB issued Statement of Financial Accounting Standard
No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an
amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 amends and expands
the disclosure requirements of FASB Statement No. 133 with the intent to provide
users of financial statement with an enhanced understanding of (i.) how and why
an entity uses derivative instruments, (ii.) how derivative instruments and the
related hedged items are accounted for under FASB Statement No. 133 and its
related interpretations, and (iii.) how derivative instruments and related
hedged items affect and entity's financial position, financial performance and
cash flows. SFAS 161 is effective for financial statements issued for years and
interim periods beginning after November 15, 2008. The effect of adopting SFAS
161 is not expected to have a significant effect on our reported financial
position or earnings.
61
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 2 -- ACQUISITION OF PATHMARK STORES, INC.
On December 3, 2007, the Company completed our acquisition of 100% of
Pathmark for $1.4 billion in cash, stock, assumed or retired debt, warrants and
options, in a transaction accounted for under SFAS No. 141 "Business
Combinations" ("SFAS 141"). Pathmark is a regional supermarket chain with
supermarkets in the New York, New Jersey and Philadelphia metropolitan areas.
This acquisition creates value based on the strengths of each company,
significantly reducing overhead costs, improving buying abilities and the
combined company's ability to better serve customers in the New York, New Jersey
and Philadelphia metro areas.
CONSENT AGREEMENT
On November 27, 2007, our Company announced that the Federal Trade
Commission ("FTC") accepted a proposed consent agreement relating to our
acquisition of Pathmark. The terms of the consent agreement required the
divestiture of six stores located in the state of New York which were
subsequently sold for a gain of $19.4 million in fiscal 2007.
Included in the Consolidated Statements of Operations for the fiscal year
ended February 23, 2008, February 24, 2007 and February 25, 2006 are the sales
and operating results of the five A&P stores that were divested. The sixth
divested store was a Pathmark location and accordingly the results of operations
of that store were not included in our results of operations. The results of the
five A&P store operations are as follows:
Fiscal 2007 Fiscal 2006 Fiscal 2005
----------- ------------ -----------
Sales $ 100,514 $ 109,706 $ 107,554
=========== ============ ===========
(Loss) income from operations $ (116) $ 596 $ (230)
============ ============ ============
62
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PURCHASE PRICE
The Company purchased the Acquired Operations using a combination of cash,
stock, assumed or retired debt, warrants and options as follows:
Equity issued to Pathmark common stock holders $ 217.5
Issuance to Pathmark option holders 8.9
Issuance to Pathmark 2005 warrant holders 177.0
Issuance to Pathmark 2000 warrant holders 1.1
----------
Total equity consideration $ 404.5
Cash paid to redeem Pathmark debt 474.2
Cash paid to Pathmark common stockholders
at $9 per share 470.8
Cash paid to Pathmark option, restricted stock
and restricted stock unit holders 22.0
Cash paid for transaction fees,
excluding financing fees 41.0
----------
Total cash consideration $ 1,008.0
----------
Total consideration $ 1,412.5
==========
Issuance to Pathmark Common Stock Holders
Under the merger agreement, each share of Pathmark common stock
outstanding was converted into 0.12963 shares of A&P common stock (together with
cash in lieu of fractional shares) and $9.00 in cash. In determining the
purchase price, the common stock outstanding was valued using a Black-Scholes
valuation model using the price of A&P common stock of $32.08 per common share,
the average quoted market price of A&P common stock for two trading days before
and two trading days after the merger was announced. We issued 6,781,067 shares
of A&P common stock and paid $470.8 million to Pathmark common stockholders
based on the number of shares of Pathmark common stock outstanding, less shares
of restricted stock and shares held in treasury on November 30, 2007, of
52,310,959.
Issuance to Pathmark Option Holders
We issued 1,107,156 roll-over stock options in exchange for Pathmark
options granted prior to June 9, 2005 (i.) where consents are not obtained or
(ii.) that have exercise prices greater than or equal to $12.90, the quoted
market price of Pathmark common stock on November 30, 2007, the last trading day
before the closing date of the merger on December 3, 2007. The underlying stock
price at the closing date of the merger was calculated using a ratio of the
quoted closing market price for the Pathmark common stock on the merger closing
date. In determining the purchase price, the options are valued using a
Black-Scholes valuation model and a market price of $12.92, the average quoted
closing market price of Pathmark common stock for the two trading days prior to
the closing date and the closing date.
Issuance to Pathmark Warrant Holders
We also assumed 5,294,118 of outstanding Pathmark 2000 warrants. Upon
exercise at the price of $22.31, each warrant will entitle the holder to receive
0.12963 shares of A&P common stock and $9.00 in cash. In determining the
purchase price, the 2000 warrants are valued using a Black-Scholes valuation
model using the price of A&P common stock of $32.08 per common share, the
average quoted market price of A&P common stock for two trading days before and
two trading days after the merger was announced. A&P's stock price would need to
exceed $102.70 before the Pathmark 2000 warrants would be considered
"in-the-money". As part of the acquisition of Pathmark on December 3, 2007, we
issued 4,657,378 and 6,965,858 roll-over stock warrants in
63
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
exchange for Pathmark's 2005 Series A and Series B warrants, respectively. The
number of warrants issued was computed based on the conversion factor of
0.46296. The Series A warrants are exercisable at $18.36 and the Series B
warrants are exercisable at $32.40. These warrants were valued using the price
of A&P common stock of $30.05 per common share, the quoted market price of A&P
common stock on November 30, 2007, the last trading day before the transaction
closing date. The Tengelmann stockholders have the right to approve any issuance
of common stock under these warrants upon exercise (assuming Tengelmann's
outstanding interest is at least 25% and subject to liquidity impairments
defined within the Tengelmann Stockholder Agreement). In addition, Tengelmann
has the ability to exercise a "Put Right" whereby it has the ability to require
A&P to purchase A&P stock held by Tengelmann to settle these warrants. Based on
the rights provided to Tengelmann, A&P does not have sole discretion to
determine whether the payment upon exercise of these warrants will be settled in
cash or through issuance of an equivalent portion of A&P shares. Therefore,
these warrants are recorded as liabilities and marked-to-market each reporting
period based on A&P's current stock price. During fiscal 2007, we recorded a
gain on the market value adjustment to these liabilities of $11.5 million and
$14.8 million for Series A and Series B warrants, respectively which is included
in "Non Operating Income" on our Consolidated Statements of Operations. The
value of the Series A and Series B warrants were $44.5 million and $106.1
million, respectively as of February 23, 2008 and are included in "Current
portion of other financial liabilities" and "Other financial liabilities",
respectively, on our Consolidated Balance Sheets. The following assumptions and
estimates were used in the Black-Scholes model:
Series A Series B
---------- ----------
Expected life 0.29 years 7.29 years
Volatility 29.4% 53.3%
Dividend yield range 0% 0%
Risk-free interest rate range 2.20% 3.26%
Direct Costs of the Acquisition
Direct costs of the acquisition include investment banking fees, legal and
accounting fees and other external costs directly related to the Acquisition.
64
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PRELIMINARY PURCHASE PRICE ALLOCATION
The application of purchase accounting under SFAS 141 requires that the
purchase price paid is allocated to the tangible and identifiable intangible
assets acquired and liabilities assumed on the basis of their fair values on the
transaction date. The allocation of the purchase price and its impact on the
Consolidated Statements of Operations may differ depending on the final fair
values assigned to amortizing assets and liabilities and their related actual
remaining useful lives. Identified intangible assets, which are included in the
consolidated balance sheets, consisted of the following:
At February 23, 2008
Weighted --------------------------
Average Gross
Amortization Carrying Accumulated
Period (years) Amount Amortization
------------- ----------- ------------
Loyalty card customer relationships 7 $ 19,200 $ 633
In-store advertiser relationships 20 14,720 170
Pharmacy payor relationships 13 75,000 1,331
Pathmark trade name Indefinite 127,300 --
----------- ------------
TOTAL $ 236,220 $ 2,134
=========== ============
Amortization of intangible assets for the fiscal year February 23, 2008
was approximately $2.1 million.
The following table summarizes the estimated future amortization expense:
2008 $9,248
2009 9,248
2010 9,248
2011 9,248
2012 9,248
Thereafter 60,546
We have determined that the Pathmark trade name has an indefinite life,
and accordingly, is not subject to amortization. The allocation of the purchase
price to assets which will not be amortized may also impact classification on
the balance sheet depending on the final fair values assigned.
Under the purchase method of accounting, the assets and liabilities of
Pathmark were recorded at their respective fair values at the date of
acquisition. Simultaneously, we recorded a preliminary amount to goodwill of
approximately $380 million. We have preliminarily valued property, net,
intangible assets, and certain other assets and liabilities. Because this
transaction was completed subsequent to our third quarter ended December 1,
2007, the values of certain assets and liabilities are based on preliminary
valuations and are subject to adjustment as additional information is obtained.
Changes to the valuation of property may result in adjustments to the fair value
of certain identifiable intangible assets acquired, and when finalized, material
adjustments to goodwill may result.
65
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table summarizes the preliminary estimated fair values of
the Pathmark assets acquired and liabilities assumed at the date of acquisition:
Current assets $ 354.8
Goodwill 380.0
Intangible assets 236.2
Property, net* 1,198.6
Other assets 149.5
----------
Total assets acquired $ 2,319.1
Current liabilities (325.1)
Long-term debt (1.2)
Long-term obligations under capital leases (130.5)
Long-term financing liabilities (64.1)
Deferred taxes** (58.6)
Other non-current liabilities (327.1)
----------
Total liabilities assumed $ (906.6)
---------
Net assets acquired $ 1,412.5
==========
* In fiscal 2007, we acquired net favorable lease rights relating to the
acquisition of Pathmark in the amount of $454.6 million which is included
in Property, net and other non-current liabilities in our Consolidated
Balance Sheet at February 23, 2008. The Company's net favorable lease
rights are amortized on a straight-line basis until the end of the lease
options but not more than 25 years. The weighted average life remaining of
the net favorable lease rights at February 23, 2008 is 21.2 years.
Amortization expense related to the net favorable lease rights is $4.8
million for the year ended February 23, 2008. Estimated annual
amortization expense for the next five years is as follows: fiscal 2008 -
$20.7 million; fiscal 2009 - $20.7 million, fiscal 2010 - $20.7 million,
fiscal 2011 - $19.7 million, and fiscal 2012 - $19.7 million.
** The estimated fair values reflect recognition of a significant portion of
A&P's net deferred tax assets, including net operating loss carry
forwards, which existed at the date of acquisition.
The preliminary amount of goodwill and intangibles are approximately
$380.0 million and $236.2, respectively, resulting from the Pathmark
acquisition. The purchased goodwill is not deductible for tax purposes.
FINANCING
The acquisition of Pathmark was funded by restricted cash on hand,
temporary bridge financing arrangements and the issuance of equity securities.
At acquisition, we placed $375.5 million into an irrevocable trust for the
defeasance of Pathmark's 8.75% senior notes; as such it is not shown as an
acquired liability on the opening balance sheet. See Note 8 - Indebtedness and
Other Financial Liabilities for further discussion on the funding of the
acquisition.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information presents the
combined historical results of the operations of our Company and Pathmark as if
the Pathmark acquisition had occurred at the beginning of fiscal 2007 and 2006,
respectively. Certain adjustments have been made to reflect changes in
depreciation, income taxes and interest expense that would have resulted from
the change in the accounting base of certain assets and liabilities due to the
acquisition, based on our Company's preliminary estimates of fair value and
increased debt to fund the acquisition. These adjustments are subject to change
upon finalization of the purchase price allocation.
66
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The unaudited pro forma financial information for the 52-week fiscal
year ended February 23, 2008 was prepared using the historical consolidated
statement of operations of A&P and Pathmark for the 52 weeks ended February 23,
2008 and the 43 weeks ended December 1, 2007, respectively. The unaudited pro
forma financial information for the 52-week fiscal year ended February 24, 2007
was prepared using the audited historical consolidated statement of operations
of A&P and Pathmark for the 52 weeks ended February 24, 2007 and the 53 weeks
ended February 3, 2007, respectively. This pro forma financial information is
not intended to represent or be indicative of what would have occurred if the
transactions had taken place on the dates presented and should not be taken as
representative of the Company's future consolidated results of operations or
financial position.
Pro Forma
Historical Pro Forma Combined
February 23, Impact February 23,
2008 Pathmark 2008
------------ ---------- -----------
Sales $ 6,401,130 $ 2,981,510 $ 9,382,640
Income (loss) from continuing operations 86,980 (146,510) (59,530)
Net income (loss) $ (160,680) $ (146,510) $ (307,190)
=========== =========== ===========
Net income (loss) per share - basic
Continuing operations $ 2.00 $ (1.22)
Discontinued operations (5.69) (5.05)
----------- -----------
Net income (loss) per share - basic $ (3.69) $ (6.27)
=========== ===========
Net income (loss) per share - diluted
Continuing operations $ 1.37 $ (1.22)
Discontinued operations (5.59) (5.05)
----------- -----------
Net income (loss) per share - diluted $ (4.22) $ (6.27)
=========== ===========
Pro Forma
Historical Pro Forma Combined
February 24, Impact February 24,
2007 Pathmark 2007
------------ ----------- -----------
Sales $ 5,369,203 $ 4,058,000 $ 9,427,203
Income (loss) from continuing operations 12,751 (223,545) (210,794)
Net income (loss) $ 26,893 $ (223,545) $ (196,652)
=========== =========== ===========
Net income (loss) per share - basic
Continuing operations $ 0.31 $ (4.30)
Discontinued operations 0.34 0.28
----------- -----------
Net income (loss) per share - basic $ 0.65 $ (4.02)
=========== ===========
Net income (loss) per share - diluted
Continuing operations $ 0.30 $ (4.30)
Discontinued operations 0.34 0.28
----------- -----------
Net income (loss) per share - diluted $ 0.64 $ (4.02)
=========== ===========
Included in this pro forma financial information for fiscal 2007 and
fiscal 2006 are (i.) non-recurring charges of $70.6 million for
acquisition related costs, (ii.) $9.8 million change in estimate of
self-insurance settlement costs for prior year claims related to Pathmark
and (iii.) $27.3 million for fees and interest paid in connection with the
Bridge Loan Facility. Excluded from this pro forma financial information
for fiscal 2007 are gains of $37.4 million related to marked to market
adjustments for (i.) our Series A and Series B warrants acquired in
connection
67
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
with our purchase of Pathmark, (ii.) our conversion feature of the 5.125%
convertible senior notes and the 6.75% convertible senior notes, and
(iii.) our financing warrants recorded in connection with the issuance of
our convertible senior notes. Excluded from this pro forma financial
information for fiscal 2007 and fiscal 2006 is $7.9 million and $40.0
million, respectively, in equity earnings relating to our equity
investment in Metro, Inc.
For purposes of computing pro forma net income (loss) per share we used
common shares outstanding at February 23, 2008 of 57,100,955 less shares
borrowed in our share lending agreement of 8,134,002 as it reasonably
approximates the merger effect on weighted average shares outstanding for
fiscal 2007 and fiscal 2006.
NOTE 3 - INVESTMENT IN METRO, INC.
On March 13, 2007, in connection with our agreement to acquire Pathmark
Stores, Inc., our Company sold 6,350,000 shares of our holdings in Metro, Inc.
for proceeds of approximately $203.5 million resulting in a net gain of $78.4
million. Of the proceeds received, $190 million was held as restricted cash
collateralizing letters of credit under our Letter of Credit Agreement and was
designated to be used to fund a portion of our acquisition of Pathmark Stores,
Inc.
On November 26, 2007, also in connection with our agreement to acquire
Pathmark Stores, Inc., our Company sold the remaining 11,726,645 shares of our
holdings in Metro, Inc. for proceeds of approximately $345.3 million, resulting
in a net gain of $103.6 million. The proceeds were held to fund a portion of our
acquisition of Pathmark Stores, Inc. As a result of these sales, our Company no
longer holds Class A subordinate shares of Metro, Inc. as our investment has
been fully liquidated as of the balance sheet date.
From time to time, we may enter hedging agreements in order to manage
risks incurred in the normal course of business including forward exchange
contracts to manage our exposure to fluctuations in foreign exchange rates.
Prior to the sale of our remaining shares in Metro, Inc., on November 6, 2007,
we entered into a currency exchange forward contract to purchase $380 million
United States dollars to hedge the value of our shares in Metro, Inc. against
adverse movements in exchange rates. Our Company measures ineffectiveness based
upon the change in forward exchange rates. In the third quarter of fiscal 2007
and upon completion of the sale of our shares of Metro, Inc., this forward
contract was settled.
Upon settlement, the effective portion of this hedge contract resulted in
a gain of approximately $23.9 million during fiscal 2007, which was offset by a
$23.9 million foreign exchange loss from the underlying investment. This foreign
exchange loss would have occurred if the hedge transaction was not entered into.
Both the gain and loss were recorded in "Gain on sale of Metro, Inc." in our
Consolidated Statements of Operations for fiscal 2007.
In addition, we recorded a gain of $2.4 million to settle the forward
exchange contract during fiscal 2007, as a result of the favorable movement in
the Canadian dollar at the time of sale of our remaining holdings in Metro, Inc.
The gain was recorded in "Gain on sale of Metro, Inc." in our Consolidated
Statements of Operations for fiscal 2007.
Beginning March 13, 2007, as a result of the sale of 6,350,000 shares of
Metro, Inc., our Company recorded our investment in Metro, Inc. under SFAS 115
as an available for sale security because we no longer exert significant
influence over substantive operating decisions made by Metro, Inc. Previous to
March 13, 2007, we used the equity method of accounting to account for our
investment in Metro, Inc. because we exerted significant influence over
substantive operating
68
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
decisions made by Metro, Inc. through our membership on Metro, Inc.'s Board of
Directors and its committees and through an information technology services
agreement.
The following table summarizes the status and results of our Company's
investment in Metro, Inc. from the date of ownership through February 23, 2008:
Beginning investment at August 13, 2005 $ 494,578
Deferred portion of gain on sale of
A&P Canada (171,650)
Dividends and distributions received (4,708)
Equity earnings in Metro, Inc. 7,801
Foreign currency translation 12,735
----------
Equity investment at February 25, 2006 338,756
Dividends and distributions received (6,858)
Equity earnings in Metro, Inc. 40,003
Foreign currency translation (3,030)
----------
Equity investment at February 24, 2007 368,871
Equity earnings in Metro, Inc. 7,869
----------
Equity investment at March 13, 2007 376,740
Sale of shares of Metro, Inc. (468,773)
Unrealized gain on investment 19,475
Foreign currency translation gain 72,558
----------
Investment at February 23, 2008 $ --
==========
Through March 13, 2007, we recorded our pro-rata equity earnings relating
to our equity investment in Metro, Inc. on about a three-month lag period as
permitted by APB 18, "The Equity Method of Accounting for Investments in Common
Stock." Thus, during fiscal 2007, fiscal 2006 and fiscal 2005, we recorded $7.9
million, $40.0 million and $7.8 million, respectively, in equity earnings
relating to our equity investment in Metro, Inc. and included these amounts in
"Equity in earnings of Metro, Inc." on our Consolidated Statements of
Operations. In accordance with SFAS 115, during fiscal 2007, we recorded
dividend income of $3.9 million based on Metro, Inc.'s dividend declaration on
April 17, 2007, August 8, 2007 and September 25, 2007. This amount is included
in "Interest and dividend income" on our Consolidated Statements of Operations.
There was no such income recorded during fiscal 2006 and fiscal 2005, as
dividends received were recorded as a reduction of the investment balance under
the equity method of accounting.
69
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Metro, Inc.'s summarized financial information, derived from its year
ended September 29, 2007, 12 month period ended December 23, 2006, first quarter
ended December 17, 2005, and year ended September 24, 2005 financial statements,
is as follows (in millions):
Year 12 Month First Quarter Year
Ended Period Ended Ended Ended
Sept. 29 Dec. 23, Dec. 17, Sept. 24,
2007 2006 2005 2005
---------- ------------ ------------- ---------
Balance sheet:
Current assets $ 1,048.8 $ 955.3 $ 912.9 $ 833.9
Noncurrent assets 3,201.2 2,800.1 2,584.1 2,637.6
---------- --------- --------- ---------
Total assets $ 4,250.0 $ 3,755.4 $ 3,497.0 $ 3,471.5
========== ========= ========= =========
Current liabilities $ 1,063.1 $ 971.0 $ 906.3 $ 905.8
Noncurrent liabilities* 1,265.4 1,260.8 1,259.4 1,262.7
---------- --------- --------- ---------
Total liabilities $ 2,328.5 $ 2,231.8 $ 2,165.7 $ 2,168.5
========== ========= ========= =========
Income statement:
Net sales $ 10,183.7 $ 9,624.9 $ 2,180.2 $ 5,545.8
========== ========= ========= =========
Cost of sales and operating expenses $ 9,580.3 $ 9,019.5 $ 2,071.3 $ 5,236.0
========== ========= ========= =========
Net income $ 264.6 $ 251.8 $ 27.7 $ 159.4
========== ========= ========= =========
* Includes minority interests of $6.0 million for the year ended September
29, 2007, $11.1 million for the 12 month period ended December 23, 2006
and $5.5 million for both the first quarter ended December 17, 2005 and
the year ended September 24, 2005.
NOTE 4 - CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED MARKETABLE
SECURITIES
At February 23, 2008, we had $3.7 million in restricted cash which
represented monies held in escrow for services which our Company is required to
perform in connection with the sale of our real estate properties.
At February 23, 2008, our restricted marketable securities of $19.4
million at February 23, 2008 were held by Bank of America in the Columbia Fund.
On December 6, 2007, Bank of America froze the Columbia Fund as a result of the
increased risk in subprime asset backed securities. During the fourth quarter of
fiscal 2007, we received distributions from the Columbia Fund in the amount of
$12.8 million at an amount less than 100% of the net asset value of the fund
resulting in realized losses of $0.2 million. In addition, we recorded a
realized loss of $0.3 million based on the ending net asset value of the
Columbia Fund as the decline in net asset value is considered other than
temporary at February 23, 2008 and will not be recovered in future distributions
from the fund.
At February 24, 2007, we had $51.2 million in restricted cash of which
$47.6 million was held in a money market fund, and can only be used as
collateral for our Letter of Credit Agreement that we entered into during fiscal
2005. The remaining $3.6 million represented monies held in escrow for services
which our Company is required to perform in connection with the sale of our real
estate properties. In addition, our restricted marketable securities of $20.3
million at February 24, 2007, held by Bank of America, could only be used as
collateral for our Letter of Credit Agreement that we entered into during fiscal
2005 and terminated in the fourth quarter of fiscal 2007. Refer to Note 8 -
Indebtedness and Other Financial Liabilities for further discussion of our
Letter of Credit Agreement.
70
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following is a summary of cash, cash equivalents, restricted cash, and
restricted marketable securities as of February 23, 2008 and February 24, 2007:
At February 23, 2008
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Costs Gains Losses Value
----------- ----------- ----------- -----------
CLASSIFIED AS:
Cash $ 98,382 $ -- $ -- $ 98,382
Cash equivalents:
Money market funds 2,351 -- -- 2,351
----------- ----------- ----------- -----------
Total cash and cash equivalents 100,733 -- -- 100,733
----------- ----------- ----------- -----------
Restricted cash 3,713 -- -- 3,713
Restricted marketable securities 6,796 -- -- 6,796
Restricted marketable securities
included in other assets 12,622 -- -- 12,622
----------- ----------- ----------- -----------
Total cash, cash equivalents, restricted cash and
restricted marketable securities $ 123,864 $ -- $ -- $ 123,864
=========== =========== =========== ===========
SECURITIES AVAILABLE-FOR-SALE:
Maturing within one year $ 6,796 $ 6,796
=========== ===========
Maturing greater than one year $ 12,622 $ 12,622
=========== ===========
At February 24, 2007
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Costs Gains Losses Value
----------- ----------- ----------- -----------
CLASSIFIED AS:
Cash $ 81,137 $ -- $ -- $ 81,137
Cash equivalents:
Money market funds 5,057 -- -- 5,057
----------- ----------- ----------- -----------
Total cash and cash equivalents 86,194 -- -- 86,194
----------- ----------- ----------- -----------
Restricted cash 51,176 -- -- 51,176
Restricted marketable securities:
Corporate bonds 20,357 -- (22) 20,335
----------- ----------- ------------ -----------
Total cash, cash equivalents, restricted cash and
restricted marketable securities $ 157,727 $ -- $ (22) $ 157,705
=========== =========== ============ ===========
SECURITIES AVAILABLE-FOR-SALE:
Maturing within one year $ 20,357 $ 20,335
=========== ===========
Maturing greater than one year $ -- $ --
=========== ===========
71
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At February 23, 2008 there were no investments with unrealized gains or
losses. The following table provides the breakdown of the investments with
unrealized losses at February 24, 2007.
February 24, 2007
-------------------------------------------------------------------------------------------------------
Less than 12 Months 12 Months or Longer Total
--------------------------------- -------------------------------- --------------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
-------------- ---------------- --------------- --------------- --------------- ---------------
Corporate bonds $ 20,335 $ (22) $ -- $ -- $ 20,335 $ (22)
Corporate bonds: Our unrealized losses on investments in corporate bonds
were caused by interest rate increases by the Federal Reserve. The contractual
terms of those investments do not permit the issuer to settle the security at a
price less than the amortized cost of the investment. We did not believe it is
probable that we would be unable to collect all amounts due according to the
contractual terms of these investments. Therefore, it was expected that the
debentures would not be settled at a price less than the amortized cost of the
investment. Because we had the ability and intent to hold those investments
until a recovery of fair value, which may be maturity, we do not consider those
investments to be other-than-temporarily impaired at February 24, 2007.
Gross realized losses on sales of investments were $0.5 million and $0.4
million during fiscal 2007 and fiscal 2006, respectively. There were no gross
realized gains or losses on sales of investments during fiscal 2005.
NOTE 5 - VALUATION OF LONG-LIVED ASSETS
LONG-LIVED ASSETS
In accordance with SFAS 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), we review the carrying values of our long-lived
assets for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable. Such review
is primarily based upon groups of assets and the undiscounted estimated future
cash flows from such assets to determine if the carrying value of such assets is
recoverable from their respective cash flows. If such review indicates an
impairment exists, we measure such impairment on a discounted basis using a
probability weighted approach and a 7 year U.S. Treasury risk free rate.
72
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
During fiscal 2007, fiscal 2006 and fiscal 2005, we recorded property
impairment losses as follows:
Fiscal 2007 Fiscal 2006 Fiscal 2005
---------------------------- -------------------------- --------------------------------
US(4) DO(4) Total US DO Total US DO Canada Total
-------- -------- -------- -------- ------ ------- -------- ------- ------ -------
Impairments due to
closure or conversion
in the normal course
of business $ 11,657 $ -- $ 11,657 $ 4,294 $ -- $ 4,294 $ 9,851 $ -- $ 506 $10,357
Impairments due to
unrecoverable assets -- -- -- -- -- -- 17,728 -- -- 17,728
Impairments related to
our Asset Disposition
Initiatives (1) -- -- -- 1,049 -- 1,049 8,590 -- -- 8,590
Impairments related to our
Discontinued
Operations(2) (3) -- 53,995 53,995 -- 542 542 -- 12,963 -- 12,963
-------- -------- -------- -------- ------ ------- -------- ------- ------ -------
TOTAL $ 11,657 $ 53,995 $ 65,652 $ 5,343 $ 542 $5,885 $ 36,169 $12,963 $ 506 $49,638
======== ======== ======== ======== ====== ======= ======== ======= ====== =======
(1) Refer to Note 7 - Asset Disposition Initiatives.
(2) Refer to Note 6 - Discontinued Operations.
(3) Refer to Note 16 - Hurricane Katrina and Impact on Business.
(4) The headings in the tables included above have been indexed with the
following abbreviations: U.S. Continuing Operations (US) and Discontinued
Operations (DO).
Impairments due to closure or conversion in the normal course of business
We review assets in stores planned for closure or conversion for
impairment upon determination that such assets will not be used for their
intended useful life. During fiscal 2007, fiscal 2006, and fiscal 2005, we
recorded impairment losses on property and equipment of $11.7 million, $4.3
million, and $10.4 million, respectively, related to stores that were or will be
closed in the normal course of business. All of these amounts were included in
"Store operating, general and administrative expense" in our Consolidated
Statements of Operations.
Impairments due to unrecoverable assets
During fiscal 2005, we experienced operating losses for two of the past
three years for two of our asset groups located, which we believe was a
triggering event under SFAS 144 for potential impairment of the asset group's
long-lived assets. Thus, we reviewed the carrying value of these asset groups
for potential impairment, and based upon internal analysis, we estimated the
asset groups' future cash flows from their long-lived assets, which primarily
consisted of equipment and leasehold improvements. As these asset groups'
carrying value was not recoverable from their future cash flows, we determined
the fair value of the related assets based on the same analysis, primarily using
the discounted cash flow approach. As a result of this review, we recorded an
impairment charge for these asset groups' long-lived assets of $17.7 million, as
a component of operating loss in "Store operating, general and administrative
expense" in our Consolidated Statements of Operations for the year ended
February 25, 2006.
Impairments related to our Asset Disposition Initiatives
During fiscal 2007, 2006, and 2005, we recorded impairment losses on
property of nil, $1.1 million and $8.6 million, respectively, related to
property write-downs as a result of our asset disposition initiatives as
discussed in Note 7 - Asset Disposition Initiatives. These amounts were included
in "Store operating, general and administrative expense" in our Consolidated
Statements of Operations.
73
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Impairments related to our discontinued operations
During fiscal 2007, fiscal 2006 and fiscal 2005, we recorded impairment
losses of $54.0 million, $0.5 million and $13.0 million, respectively, related
to stores closed in the Greater New Orleans, Midwest and Kohl's markets. These
amounts were included in our Consolidated Statements of Operations under the
caption "(Loss) gain on disposal of discontinued operations, net of tax" as
discussed in Note 6 - Discontinued Operations.
Included in the total charges above are the following impairment charges:
During fiscal 2005, we recorded impairment losses on property and
equipment in the Greater New Orleans area that were not covered by insurance of
$6.1 million as discussed in Note 16 - Hurricane Katrina and Impact on Business.
This amount was included in our Consolidated Statements of Operations under the
caption "(Loss) gain on disposal of discontinued operations, net of tax" for the
year ended February 25, 2006. There were no such amounts recorded during fiscal
2007 or fiscal 2006.
Our impairment reviews may also be triggered by appraisals of or offers
for our long-lived assets we receive in the normal course of business. There
were no such amounts recorded during fiscal 2007, fiscal 2006 and fiscal 2005.
The effects of changes in estimates of useful lives were not material to
ongoing depreciation expense.
NOTE 6 - - DISCONTINUED OPERATIONS
We have had multiple transactions throughout the years which met the
criteria for discontinued operations. These events are described based on the
year the transaction was initiated.
2007 EVENTS
On May 30, 2007, our Company announced advanced negotiations for the sale
of our non-core stores located within the Greater New Orleans area, including
inventory related to these stores. Our Company ceased sales operations in all
stores not sold as of November 1, 2007. Planned sale transactions for these
stores have been completed resulting in a loss on disposal of $16.5 million.
(This event was referenced as Greater New Orleans in previous disclosures.)
On April 24, 2007, based upon unsatisfactory operating trends and the need
to devote resources to our expanding Northeast core business, our Company
announced negotiations for the sale of our non-core stores within our Midwest
operations, including inventory related to these stores. Our Company ceased
sales operations in all stores not sold as of July 7, 2007. Planned sale
transactions for these stores have been completed resulting in a loss on
disposal of $34.3 million. (This event was referenced as Midwest 2007 in
previous disclosures.)
74
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2005 EVENT
During the first quarter of fiscal 2005, we announced plans for a major
strategic restructuring that would consolidate efforts in the Midwest. Thus, we
initiated efforts to close a total of 35 stores in the Midwest. All of which
were closed as of February 25, 2006. (This event was referenced as Midwest 2005
in previous disclosures.)
2003 EVENTS
During fiscal 2003, we adopted a formal plan to exit the Wisconsin markets
through the sale and/or disposal of these assets. In February 2003, we announced
the sale of a portion of our non-core assets, including seven stores in Madison,
Wisconsin and 23 stores in Milwaukee, Wisconsin. Also in fiscal 2003, we
announced an initiative to close 6 stores and convert 13 stores to our Food
Basics banner in the Detroit, Michigan and Toledo, Ohio markets. (These events
were referenced as Kohl's Market and Midwest 2004 in previous disclosures.)
Summarized below are the operating results for these discontinued
businesses, which are included in our Consolidated Statements of Operations,
under the caption "(Loss) income from operations of discontinued businesses, net
of tax" and "(Loss) gain on disposal of discontinued businesses, net of tax" for
fiscal years ended 2007, 2006 and 2005.
Fiscal 2007 Fiscal 2006 Fiscal 2005
-------------- -------------- -------------
(LOSS) INCOME FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ 562,654 $ 1,481,065 $ 1,650,329
============== ============== =============
(Loss) income from operations of
discontinued businesses, before tax (196,848) 5,307 (140,432)
Tax benefit -- 1,781 25,360
-------------- -------------- -------------
(Loss) income from operations of
discontinued operations, net of tax $ (196,848) $ 7,088 $ (115,072)
============== ============== =============
(LOSS) GAIN ON DISPOSAL OF
DISCONTINUED OPERATIONS
Property impairments $ (53,995) $ (542) $ (12,963)
Gain on sale of fixed assets 3,183 5,644 161
-------------- -------------- -------------
(Loss) gain on disposal of
discontinued operations, before tax (50,812) 5,102 (12,802)
Tax benefit -- 1,952 2,445
-------------- -------------- -------------
(Loss) gain on disposal of
discontinued operations, net of tax $ (50,812) $ 7,054 $ (10,357)
============== ============== =============
75
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Summarized below is a reconciliation of the liabilities related to
restructuring obligations resulting from these activities, pursuant to SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" and SFAS
No. 112, "Employers' Accounting for Postemployement Benefits."
Fiscal 2007
----------------------------------------------------------------------------------
Balance at Interest Balance at
2/24/2007 Accretion (1) Adjustments(2) Utilization(3) 2/23/2008
--------------- -------------- --------------- -------------- ------------
2007 Events
Occupancy $ -- $ 2,865 $ 81,234 $ (21,226) $ 62,873
Severance -- -- 81,642 (23,122) $ 58,520
--------------- -------------- --------------- -------------- ------------
2007 events total -- 2,865 162,876 (44,348) 121,393
2005 Event
Occupancy 83,111 3,457 (7,117) (12,569) 66,882
2003 Events
Occupancy 22,262 1,269 1,141 (3,093) 21,579
--------------- -------------- --------------- -------------- ------------
Fiscal 2007 total $ 105,373 $ 7,591 $ 156,900 $ (60,010) $ 209,854
=============== ============== =============== ============== ============
Fiscal 2006
----------------------------------------------------------------------------------
Balance at Interest Balance at
2/25/2006 Accretion (1) Adjustments(2) Utilization(3) 2/24/2007
--------------- --------------- --------------- --------------- ------------
2005 Event
Occupancy $ 89,640 $ 3,567 $ 3,969 $ (14,065) $ 83,111
Severance 227 - (16) (211) --
--------------- -------------- --------------- -------------- ------------
2005 event total 89,867 3,567 3,953 (14,276) 83,111
2003 Events
Occupancy 28,733 1,126 (3,437) (4,160) 22,262
Severance 1,183 4 (146) (1,041) --
--------------- -------------- --------------- -------------- ------------
2003 events total 29,916 1,130 (3,583) (5,201) 22,262
--------------- -------------- --------------- -------------- ------------
Fiscal 2006 total $ 119,783 $ 4,697 $ 370 $ (19,477) $ 105,373
=============== ============== =============== ============== ============
Fiscal 2005
----------------------------------------------------------------------------------
Balance at Interest Balance at
2/26/2005 Accretion (1) Adjustments(2) Utilization(3) 2/25/2006
--------------- --------------- --------------- --------------- ------------
2005 Event
Occupancy $ -- $ 1,582 $ 97,596 $ (9,538) $ 89,640
Severance -- -- 2,666 (2,439) 227
--------------- -------------- --------------- -------------- ------------
2005 event total -- 1,582 100,262 (11,977) 89,867
2003 Events
Occupancy 33,357 1,272 77 (5,973) 28,733
Severance 2,691 44 582 (2,134) 1,183
--------------- -------------- --------------- -------------- ------------
2003 events total 36,048 1,316 659 (8,107) 29,916
--------------- -------------- --------------- -------------- ------------
Fiscal 2006 total $ 36,048 $ 2,898 $ 100,921 $ (20,084) $ 119,783
=============== ============== =============== ============== ============
(1) The additions to occupancy and severance represents the interest accretion
on future occupancy costs and future obligations for early withdrawal from
multi-employer union pension plans which were recorded at
76
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
present value at the time of the original charge. Interest accretion is
recorded as a component of "(Loss) income from operations of discontinued
business" on the Consolidated Statements of Operations.
(2) At each balance sheet date, we assess the adequacy of the balance of the
remaining liability to determine if any adjustments are required as a
result of changes in circumstances and/or estimates. Adjustments are
recorded as a component of "(Loss) income from operations of discontinued
business" on the Consolidated Statements of Operations.
Fiscal 2007
The charge to occupancy for the 2007 events represents charges related to
the closures of 39 stores in fiscal 2007 in conjunction with our decision
to close and/or sell stores in the Midwest and the Greater New Orleans
area. The charge to severance and benefits of $81.6 million for the 2007
events related to (i.) individual severings and retention incentives that
were accrued as earned of $24.6 million as a result of the sale or closing
of these facilities and (ii.) future obligations for early withdrawal from
multi-employer union pension plans of $57.0 million. During fiscal 2007,
we also recorded adjustments for the 2005 event for a reduction in
occupancy related costs for our properties of $7.1 million due to (i.)
changes in our estimation of such future costs of $6.4 million and (ii.) a
new sublease agreement for one property of $0.7 million. We recorded
adjustments for the 2003 events for additional occupancy related costs for
our properties of $1.1 million due to changes in our estimation of such
future costs.
Fiscal 2006
During fiscal 2006, we recorded adjustments for the 2005 event for
additional occupancy related costs for our properties of $4.0 million due
to changes in our estimation of such future costs and changes to our
estimate to terminate certain leases, partially offset by the favorable
result of terminating a lease on one property. We also recorded a decrease
of $0.02 million for the reversal of previously accrued severance and
benefits due to changes in individual severings and associated benefit
costs. We recorded an adjustment of $3.4 million to the 2003 events for
(i.) a reduction in occupancy related costs for our properties due to
favorable results of terminating leases at certain locations of $0.7
million and changes in our estimation of such future costs of $2.6 million
and (ii.) a reversal of previously accrued pension withdrawal payments of
$0.1 million that were no longer required to be paid.
Fiscal 2005
The charge to occupancy for the 2005 events represents charges related to
closures of 35 stores in conjunction with our decision to close stores in
the Midwest. The charge to severance for the 2005 events related to
individual severings as a result of these store closures. We recorded
adjustments of $0.1 million relating to the 2003 events for (i.) an
increase of $4.4 million in occupancy accruals due to changes in our
original estimate of when we would terminate certain leases, obtain
sublease rental income related to such leases and changes in our original
estimate of our future occupancy obligations for closed stores, (ii.) a
reversal of previously accrued occupancy costs of $3.7 million due to
favorable results of terminating a warehouse lease and (iii.) the
reclassification of $0.6 million between the liabilities for occupancy and
severance to properly state their respective ending balances at February
25, 2006.
(3) Occupancy utilization represents payments made during those periods for
rent. Severance utilization represents payments made to terminated
employees during the period.
77
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Summarized below are the payments made to date from the time of the
original charge and expected future payments related to these events:
2007 2005 2003
Events Event Events
--------------- -------------- ------------
Total severance payments made to date $ 23,122 $ 2,650 $ 22,528
Expected future severance payments 58,520 -- --
--------------- -------------- ------------
Total severance payments expected to be incurred 81,642 2,650 $ 22,528
--------------- -------------- ------------
Total occupancy payments made to date 21,226 36,172 26,326
Expected future occupancy payments,
excluding interest accretion 62,873 66,882 21,579
--------------- -------------- ------------
Total occupancy payments expected to be incurred,
excluding interest accretion 84,099 103,054 47,905
--------------- -------------- ------------
Total severance and occupancy payments made to date 44,348 38,822 48,854
Expected future severance and occupancy payments,
excluding interest accretion 121,393 66,882 21,579
--------------- -------------- ------------
Total severance and occupancy payments
expected to be incurred, excluding interest accretion $ 165,741 $ 105,704 $ 70,433
=============== ============== ============
Payments to date were primarily for occupancy related costs such as rent,
common area maintenance, real estate taxes, lease termination costs, severance,
and benefits. The remaining obligation relates to expected future payments under
long term leases and expected future payments for early withdrawal from
multi-employer union pension plans. The expected completion dates for the 2007,
2005, and 2003 events are 2026, 2022, and 2022, respectively.
Summarized below are the amounts included in our balance sheet captions on
our Company's Consolidated Balance Sheets related to these events:
February 23, 2008
--------------------------------------------------------------------
2007 2005 2003
Events Event Events Total
--------------- --------------- --------------- ---------------
Accrued salaries, wages and benefits $ 1,513 $ -- $ -- $ 1,513
Other accruals $ 24,733 $ 10,985 $ 3,241 $ 38,959
Other non-current liabilities $ 95,147 $ 55,897 $ 18,338 $ 169,382
February 24, 2007
---------------------------------------------
2005 2003
Event Events Total
--------------- --------------- ----------
Other accruals $ 22,449 $ 3,556 $ 26,005
Other non-current liabilities $ 60,662 $ 18,706 $ 79,368
We evaluated the reserve balances as of February 23, 2008 based on current
information and have concluded that they are adequate to cover future costs. We
will continue to monitor the status of the vacant and subsidized properties,
severance and benefits, and pension withdrawal liabilities, and adjustments to
the reserve balances may be recorded in the future, if necessary.
NOTE 7 - ASSET DISPOSITION INITIATIVES
In addition to the events described in Note 6 - Discontinued Operations,
there were restructuring transactions which were not primarily related to our
discontinued operations
78
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
businesses. These events are referred to based on the year the transaction was
initiated, as described below.
Restructuring charges relate principally to employee severance and
occupancy costs resulting from the closure of facilities and other workforce
reductions attributable to our efforts to reduce costs. The costs of these
reductions have been and will be funded through cash from operations. Occupancy
costs represent facility consolidation and lease termination costs associated
with our decision to consolidate and close duplicative or excess warehouse and
office facilities, unproductive and excess facilities and the continued
softening of real estate markets, which resulted in lower than expected sublease
income.
2005 EVENT
During fiscal 2005, our Company sold our U.S. distribution operations and
some warehouse facilities and related assets to C&S Wholesale Grocers, Inc. The
Asset Purchase Agreement included the assignment of our leases in Central Islip,
New York and Baltimore, Maryland, and a warranty deed for our owned facilities
in Dunmore, Pennsylvania. (This event was referenced in previous disclosures as
Distribution 2005.)
2001 EVENT
During the third quarter of fiscal 2001, our Company determined that
certain underperforming operations, including 39 stores (30 in the United States
and 9 in Canada) and 3 warehouses (2 in the United States and 1 in Canada)
should be closed and/or sold, and certain administrative streamlining should
take place. (This event was referenced in previous disclosures as 2001 Asset
Disposition.)
1998 EVENT
In May 1998, we initiated an assessment of our business operations in
order to identify the factors that were impacting our performance. As a result
of this assessment, in fiscal 1998 and 1999, we announced a plan to close two
warehouse facilities and a coffee plant in the U.S., a bakery plant in Canada
and 166 stores (156 in the United States and 10 in Canada) including the exit of
the Richmond, Virginia and Atlanta, Georgia markets. (This event was referenced
in previous disclosures as Project Great Renewal.)
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Summarized below is a reconciliation of the liabilities related to
restructuring obligations resulting from these activities, pursuant to SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" and SFAS
No. 112, "Employers' Accounting for Postemployement Benefits."
Fiscal 2007
----------------------------------------------------------------------------------
Balance at Interest Balance at
2/24/2007 Accretion (1) Adjustments(2) Utilization(3) 2/23/2008
--------------- -------------- --------------- -------------- ------------
2005 Event
Continuing Operations
Occupancy $ 1,453 $ 51 $ 200 $ (473) $ 1,231
Severance 876 -- 2,366 (1,556) 1,686
Discontinued Operations
Occupancy 3,997 92 (3,197) (892) --
--------------- -------------- --------------- -------------- ------------
2005 event total 6,326 143 (631) (2,921) 2,917
2001 Event
Continuing Operations
Occupancy 7,338 401 10 (994) 6,755
Discontinued Operations
Occupancy 13,248 747 -- (1,714) 12,281
--------------- -------------- --------------- -------------- ------------
2001 event total 20,586 1,148 10 (2,708) 19,036
1998 Event
Continuing Operations
Occupancy 9,438 429 (351) (2,558) 6,958
Severance 1,210 -- -- (210) 1,000
Discontinued Operations
Occupancy 1,598 79 -- (584) 1,093
--------------- -------------- --------------- -------------- ------------
1998 event total 12,246 508 (351) (3,352) 9,051
--------------- -------------- --------------- -------------- ------------
Fiscal 2007 total $ 39,158 $ 1,799 $ (972) $ (8,981) $ 31,004
=============== ============== =============== ============== ============
80
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Fiscal 2006
----------------------------------------------------------------------------------
Balance at Interest Balance at
2/25/2006 Accretion (1) Adjustments(2) Utilization(3) 2/24/2007
--------------- --------------- --------------- -------------- ------------
2005 Event
Continuing Operations
Occupancy $ 10,242 $ 25 $ 2,198 $ (11,012) $ 1,453
Severance 3,623 -- 33 (2,780) 876
Discontinued Operations
Occupancy 4,841 219 -- (1,063) 3,997
--------------- -------------- --------------- -------------- ------------
2005 event total 18,706 244 2,231 (14,855) 6,326
2001 Event
Continuing Operations
Occupancy 14,381 634 2,664 (10,341) 7,338
Severance 17 -- -- (17) --
Discontinued Operations
Occupancy 12,337 810 1,635 (1,534) 13,248
--------------- -------------- --------------- -------------- ------------
2001 event total 26,735 1,444 4,299 (11,892) 20,586
1998 Event
Continuing Operations
Occupancy 17,698 781 (5,429) (3,612) 9,438
Severance 1,437 -- (95) (132) 1,210
Discontinued Operations
Occupancy 2,301 113 -- (816) 1,598
--------------- -------------- --------------- -------------- ------------
1998 event total 21,436 894 (5,524) (4,560) 12,246
--------------- -------------- --------------- -------------- ------------
Fiscal 2006 total $ 66,877 $ 2,582 $ 1,006 $ (31,307) $ 39,158
=============== ============== =============== ============== ============
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Fiscal 2005
----------------------------------------------------------------------------------
Balance at Interest Balance at
2/26/2005 Accretion (1) Adjustments(2) Utilization(3) 2/25/2006
--------------- -------------- --------------- -------------- ------------
2005 Event
Continuing Operations
Occupancy $ -- $ -- $ 10,579 $ (337) $ 10,242
Severance -- -- 46,872 (43,249) 3,623
Discontinued Operations
Occupancy -- -- 4,841 -- 4,841
Severance -- -- 348 (348) --
--------------- -------------- --------------- -------------- ------------
2005 event total -- -- 62,640 (43,934) 18,706
2001 Event
Continuing Operations
Occupancy 17,918 1,167 (775) (3,929) 14,381
Severance 114 -- -- (97) 17
Discontinued Operations
Occupancy 13,981 1,003 (1,314) (1,333) 12,337
--------------- -------------- --------------- -------------- ------------
2001 event total 32,013 2,170 (2,089) (5,359) 26,735
1998 Event
Continuing Operations
Occupancy 25,461 1,377 (3,738) (5,402) 17,698
Severance 1,660 -- -- (223) 1,437
Discontinued Operations
Occupancy 2,753 171 -- (623) 2,301
--------------- -------------- --------------- -------------- ------------
1998 event total 29,874 1,548 (3,738) (6,248) 21,436
--------------- -------------- --------------- -------------- ------------
Fiscal 2005 total $ 61,887 $ 3,718 $ 56,813 $ (55,541) $ 66,877
=============== ============== =============== ============== ============
(1) Represents the interest accretion on future occupancy costs which were
recorded at present value at the time of the original charge. These
adjustments are recorded to "Store operating, general and administrative
expense" for continuing operations and "(Loss) income from operations of
discontinued operations" for discontinued operations on our Consolidated
Statements of Operations.
(2) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. These adjustments are recorded to "Store
operating, general and administrative expense" for continuing operations
and "(Loss) income from operations of discontinued operations" as noted
for discontinued operations on our Consolidated Statements of Operations.
Fiscal 2007
During fiscal 2007, adjustments to occupancy costs related to changes in
our estimation of such future costs. We recorded additions to severance of
$2.4 million for the 2005 event for health and welfare benefits for
warehouse retirees of $1.7 million and pension withdrawal costs of $0.7
million.
Fiscal 2006
During fiscal 2006, we recorded adjustments for additional occupancy
related costs related to the 2005 and 2001 events due to changes in our
estimation of such future costs. We recorded reductions in occupancy
related costs related to the 1998 event due to lease terminations for two
properties, assignment of one property and changes in our estimation of
such future costs. Adjustments to severance relate to the reversal
82
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
of previously accrued severance and benefits due to changes in individual
severings and associated benefit costs as well as retention and
productivity incentives that were accrued as earned.
Fiscal 2005
The charge to occupancy for the 2005 event related to future occupancy
costs such as rent, common area maintenance and real estate taxes, and
future obligations for the warehouses sold to C&S Wholesale Grocers, Inc.
The charge to severance for the 2005 event of $47.2 million related to
(i.) individual severings as well as retention and productivity incentives
that were accrued as earned of $14.4 million and (ii.) costs for future
obligations for early withdrawal from multi-employer union pension plans
of $32.8 million. We recorded adjustments of $2.1 million for the 2001
event related to the reversals of previously accrued occupancy costs due
to the favorable result of subleasing one of the closed properties and
changes in our original estimate of our future occupancy obligations for
closed stores. We recorded an additional reduction of $3.6 million in
occupancy accruals for the 1998 event due to subleasing additional closed
stores and converting a previously closed store to a store that was opened
in fiscal 2006. In addition, we sold our Canadian business and as a
result, the Canadian occupancy accruals of $0.1 million are no longer
consolidated in our Consolidated Balance Sheet at February 25, 2006.
(3) Occupancy utilization represents payments made during those periods for
rent. Severance and benefits utilization represents payments made to
terminated employees during the period.
Summarized below are the payments made to date from the time of the
original charge and expected future payments related to these events:
2005 2001 1998
Event Event Event Total
-------------- --------------- -------------- ------------
Total severance payments made to date $ 47,933 $ 28,205 $ 30,464 $ 106,602
Expected future severance payments 1,686 -- 1,000 2,686
-------------- --------------- -------------- ------------
Total severance payments expected
to be incurred 49,619 28,205 31,464 109,288
-------------- --------------- -------------- ------------
Total occupancy payments made to date 13,777 59,020 111,945 184,742
Expected future occupancy payments,
excluding interest accretion 1,231 19,036 8,051 28,318
-------------- --------------- -------------- ------------
Total occupancy payments expected
to be incurred, excluding interest
accretion 15,008 78,056 119,996 213,060
-------------- --------------- -------------- ------------
Total severance and occupancy
payments made to date 61,710 87,225 142,409 291,344
Expected future severance and
occupancy payments, excluding
interest accretion 2,917 19,036 9,051 31,004
-------------- --------------- -------------- ------------
Total severance and occupancy
payments expected to be incurred,
excluding interest accretion $ 64,627 $ 106,261 $ 151,460 $ 322,348
============== =============== ============== ============
Payments to date were primarily for occupancy related costs such as rent,
common area maintenance, real estate taxes, lease termination costs, severance,
and benefits. The remaining obligation relates to expected future payments under
long-term leases and expected future payments for early withdrawal from
multi-employer union pension plans. The expected completion dates for the 2005,
2001 and 1998 events are 2021, 2022 and 2020, respectively.
83
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Summarized below are the amounts included in our balance sheet captions on
our Company's Consolidated Balance Sheets related to these events:
February 23, 2008
----------------------------------------------------------------
2005 2001 1998
Event Event Event Total
-------------- --------------- -------------- ------------
Other accruals $ 434 $ 2,754 $ 2,827 $ 6,015
Other non-current liabilities $ 2,483 $ 16,282 $ 6,224 $ 24,989
February 24, 2007
----------------------------------------------------------------
2005 2001 1998
Event Event Event Total
-------------- --------------- --------------- ------------
Other accruals $ 1,712 $ 2,977 $ 3,015 $ 7,704
Other non-current liabilities $ 4,614 $ 17,609 $ 9,231 $ 31,454
We evaluated the reserve balances as of February 23, 2008 based on current
information and have concluded that they are adequate to cover future costs. We
will continue to monitor the status of the vacant and subsidized properties,
severance and benefits, and pension withdrawal liabilities, and adjustments to
the reserve balances may be recorded in the future, if necessary.
NOTE 8 - INDEBTEDNESS AND OTHER FINANCIAL LIABILITIES
Debt consists of the following:
February 23, February 24,
2008 2007
------------- -----------
Line of Credit $ 11,600 $ --
Borrowings under Credit Agreement 169,900 70,000
7.75% Notes, due April 15, 2007 -- 31,905
9.125% Senior Notes, due December 15, 2011 12,840 12,840
5.125% Convertible Senior Notes, due June 15, 2011 140,101 --
6.750% Convertible Senior Notes, due December 15, 2012 233,792 --
Other 2,528 1,538
9.375% Notes, due August 1, 2039 200,000 200,000
----------- -----------
770,761 316,283
Less current portion of long-term debt (11,875) (32,069)
----------- -----------
Long-term debt $ 758,886 $ 284,214
=========== ===========
LINE OF CREDIT
On January 16, 2008, we entered into a secured line of credit agreement
with Blue Ridge Investments, L.L.C. This agreement enables us to borrow funds on
a revolving basis of up to $32.7 million. Each borrowing bears interest at a
rate per annum equal to the BBA Libor Daily Floating Rate plus 0.10%. At
February 23, 2008 we had borrowings outstanding under this line of credit
agreement of $11.6 million. This agreement expires December 31, 2008. These
loans are collateralized by a first priority perfected security interest in our
ownership interest in the Columbia Fund. See Note 4 - Cash, Cash Equivalents,
Restricted Cash and Restricted Marketable Securities, for further discussion on
the Columbia Fund.
CREDIT AGREEMENT
On December 3, 2007, the 2005 Revolving Credit Agreement and Letter of
Credit Agreement were refinanced pursuant to a new $675 million Credit Agreement
("Credit Agreement"), with Banc of America Securities LLC, Bank of America, N.A.
Subject to borrowing base requirements, the Credit Agreement provides for a
five-year term loan of $82.9 million and a
84
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
five-year revolving credit facility of $592.1 million enabling us to borrow
funds and issue letters of credit on a revolving basis. The Credit Agreement
includes a $100 million accordion feature which gives us the ability to increase
commitments from $675 million to $775 million. The Credit Agreement is
collateralized by all assets of the company, including, but not limited to,
inventory, certain accounts receivable, pharmacy scripts, owned real estate and
certain Pathmark leaseholds. Borrowings under the Credit Agreement bear interest
based on LIBOR or Prime interest rate pricing. Subject to certain conditions, we
are permitted to pay cumulative cash dividends on common shares as well as make
bond repurchases. At February 23, 2008, there were $169.9 million of loans and
$234.5 million in letters of credit outstanding under this agreement. As of
February 23, 2008, after reducing availability for borrowing base requirements,
we had $259.1 million available under the Credit Agreement.
On December 27, 2007, in order to facilitate the syndication of the Credit
Agreement under current market conditions, we entered into an Amended and
Restated Credit Agreement, whereby a portion of the revolving commitment was
converted into a $50 million term loan tranche which was collateralized by
certain real estate assets at an increased margin rate. This agreement expires
in December 2012. Fees paid and capitalized in connection with the Credit
Agreement were $22.5 million and are included in "Other Assets" on our
Consolidated Balance Sheet at February 23, 2008.
BRIDGE LOAN FACILITY
On December 3, 2007, we entered into a one year, $370 million Senior
Secured Bridge Credit Agreement (the "Bridge Loan Facility") with Banc of
America Securities LLC, Bank of America, N.A. and Bank of America Bridge LLC,
Lehman Brothers Commercial Bank, Lehman Brothers Inc. and Lehman Commercial
Paper Inc. which, at maturity, and subject to the satisfaction of certain
conditions, the loans then outstanding would either remain outstanding or be
exchanged for exchange notes, in each case having a maturity of December 3, 2015
prior to the completion of the fiscal year, the Bridge Loan Facility was
refinanced. During fiscal 2007, fees and interest paid in connection with the
Bridge Loan Facility was $27.3 million and are included in "Interest Expense" on
our Consolidated Statement of Operations.
We used our restricted cash on hand and borrowings under the Credit
Agreement and the Bridge Loan Facility to fund the acquisition of Pathmark,
terminate our existing Revolver which had outstanding borrowings of $11.3
million, terminate Pathmark's obligation under their revolver and term loan of
$114.0 million and to place $375.5 million into an irrevocable trust for the
defeasance of Pathmark's Senior Subordinated Notes with a face value of $350
million due 2012.
LETTER OF CREDIT AGREEMENT
During fiscal 2005, we entered into a cash collateralized, Letter of
Credit Agreement that enabled us to issue letters of credit up to $200 million.
This agreement was terminated as of December 3, 2007 and letters of credit are
issued under the Credit Facility with Bank of America N.A described in the
Credit Agreement above. In March 2007, our Letter of Credit Agreement and
Revolver were amended to allow for the sale of Metro, Inc. shares provided that
the net proceeds from such sales are deposited in a restricted cash account.
Refer to Note 3 - Investment in Metro, Inc. for further discussion regarding the
sale of these Metro, Inc. shares.
At February 23, 2008 and February 24, 2007, there were nil and $138.3
million, respectively, in letters of credit outstanding under this agreement.
85
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
REVOLVING CREDIT AGREEMENT
Our Company had a $250 million Revolving Credit Agreement ("Revolver")
with four lenders enabling us to borrow funds on a revolving basis for working
capital loans and letters of credit. This Revolver was terminated as of December
3, 2007 and replaced by the Credit Facility with Bank of America N.A. described
in the Credit Agreement above. The Revolver was collateralized by inventory,
certain accounts receivable and pharmacy scripts. Borrowings under the Revolver
bear interest based on LIBOR or Prime interest rate pricing. At February 23,
2008 and February 24, 2007, there were no letters of credit outstanding under
this agreement and there were nil and $70.0 million, respectively, in
outstanding borrowings under the Revolver.
PUBLIC DEBT OBLIGATIONS
Outstanding notes totaling $586.7 million at February 23, 2008 consisted
of $12.8 million of 9.125% Senior Notes due December 15, 2011, $140.1 million of
5.125% Convertible Senior Notes due June 15, 2011, $233.8 million of 6.75%
Convertible Senior Notes due December 15, 2012 and $200.0 million of 9.375%
Notes due August 1, 2039. Interest is payable quarterly on the 9.375% Notes and
semi-annually on the 9.125%, 5.125% and 6.75% Notes. The 9.375% Notes are now
callable at par ($25 per bond) and the 9.125% Notes are now callable at a
premium to par (103.042%). The 9.375% Notes are unsecured obligations and were
issued under the terms of our senior debt securities indenture, which contains
among other provisions, covenants restricting the incurrence of secured debt.
The 9.375% Notes are effectively subordinate to the Credit Agreement and do not
contain cross default provisions. All covenants and restrictions for the 9.125%
Senior Notes have been eliminated in connection with the cash tender offer in
fiscal 2005. Our notes are not guaranteed by any of our subsidiaries.
During the first quarter of fiscal 2007, the outstanding principal amount
of our 7.75% Notes of $31.9 million due April 15, 2007 matured and was paid in
full.
To pay down our Bridge Loan Facility as discussed above, on December 18,
2007, we completed a public offering and issued $165 million 5.125% convertible
senior notes due 2011 and $255 million 6.75% convertible senior notes due 2012.
The 2011 notes are not redeemable at our option at any time. The 2012 notes are
redeemable at our option on or after December 15, 2010, at a redemption price of
102.70% and on or after December 15, 2011, at a redemption price of 101.35%. The
initial conversion price of the 2011 notes is $36.40 representing a 30.0%
premium to the offering price of $28.00 and the initial conversion price of the
2012 notes is $37.80 representing a 35.0% premium to the offering price of
$28.00 at maturity, and at our option, the notes are convertible into shares of
our stock, cash, or a combination of stock and cash. Concurrent with this
offering, we entered into call options and financing warrant transactions with
financial institutions that are affiliates of the underwriters of the notes to
effectively increase the conversion price of these notes and to reduce the
potential dilution upon future conversion. Conversion prices were effectively
increased to $46.20 or 65% and $49.00 or 75% for the 2011 and 2012 notes,
respectively.
As of the date of the transaction, our Company did not have sufficient
authorized shares to provide for all potential issuances of common stock.
Therefore, in accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", our Company accounted for the conversion
features as freestanding instruments. The notes were recorded at a discounted
amount equal to the value of the conversion features at the transaction date and
will be accreted to the par value of the notes over the life of the notes. The
value of the conversion features were determined
86
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
utilizing the Black-Scholes option pricing model, recorded as a long term
liability and marked to market on February 23, 2008. In fiscal 2007, the gain
that was recorded in "Non Operating Income" on our Consolidated Statements of
Operations for the conversion features of the 5.125% and 6.75% convertible
senior notes was $3.2 million and $2.3 million, respectively. The fair value of
the conversion features as of February 23, 2008 were $23.2 million and $19.8
million for the 5.125% and 6.75% convertible notes, respectively. The following
assumptions and estimates were used in the Black-Scholes model:
Fiscal 2007
-----------------------
Expected life 3.3 years - 4.8 years
Volatility 33.0% - 35.4%
Dividend yield range 0%
Risk-free interest rate range 2.24% - 2.81%
DEBT MATURITIES
Maturities on indebtedness for the next five fiscal years and thereafter
are: 2008 - $11.9 million; 2009 - $0.3 million; 2010 - $0.2 million; 2011 -
$178.1 million; 2012 - $425.1 million; 2013 and thereafter - $201.4 million.
Interest payments on indebtedness were approximately $51.4 million for fiscal
2007, $27.7 million for fiscal 2006 and $48.4 million for fiscal 2005.
OTHER FINANCIAL LIABILITIES
As part of the acquisition of Pathmark on December 3, 2007, we issued
4,657,378 and 6,965,858 roll-over stock warrants in exchange for Pathmark's 2005
Series A and Series B warrants, respectively. The number of warrants issued was
computed based on the conversion factor of 0.46296. The Series A warrants are
exercisable at $18.36 and the Series B warrants are exercisable at $32.40. These
warrants were valued using the price of A&P common stock of $30.05 per common
share, the quoted market price of A&P common stock on November 30, 2007, the
last trading day before the transaction closing date. The Tengelmann
stockholders have the right to approve any issuance of common stock under these
warrants upon exercise (assuming Tengelmann's outstanding interest is at least
25% and subject to liquidity impairments defined within the Tengelmann
Stockholder Agreement). In addition, Tengelmann has the ability to exercise a
"Put Right" whereby it has the ability to require A&P to purchase A&P stock held
by Tengelmann to settle these warrants. Based on the rights provided to
Tengelmann, A&P does not have sole discretion to determine whether the payment
upon exercise of these warrants will be settled in cash or through issuance of
an equivalent portion of A&P shares. Therefore, these warrants are recorded as
liabilities and marked-to-market each reporting period based on A&P's current
stock price. During fiscal 2007, we recorded a gain on the market value
adjustment to these liabilities of $11.5 million and $14.8 million for Series A
and Series B warrants, respectively, which is included in "Non Operating Income"
on our Consolidated Statements of Operations. The value of the Series A and
Series B warrants were $44.5 million and $106.1 million, respectively, as of
February 23, 2008 and are included in "Current portion of other financial
liabilities" and "Other financial liabilities", respectively, on our
Consolidated Balance Sheets. The following assumptions and estimates were used
in the Black-Scholes model:
87
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Series A Series B
---------- ----------
Expected life 0.29 years 7.29 years
Volatility 29.4% 53.3%
Dividend yield range 0% 0%
Risk-free interest rate range 2.20% 3.26%
Concurrent with the issuance of the convertible senior notes, our Company
issued financing warrants in conjunction with the call options discussed in Note
14 - Capital Stock to increase the conversion price of these notes and reduce
the potential dilution upon future conversion. The financing warrants allow
holders to purchase common shares at $46.20 with respect to the 5.125% notes and
$49.00 with respect to the 6.75% notes. The financing warrants were valued at
$36.8 million at the issuance date. At the issuance date our Company did not
have sufficient authorized shares to provide all potential issuances of common
stock. Therefore, the financing warrants are accounted for as freestanding
derivatives, required to be settled in cash until sufficient shares are
available and are recorded as a long-term liability in the Consolidated Balance
Sheet. The financing warrants are marked to market each reporting period
utilizing the Black-Scholes option pricing model and are valued at $31.2 million
as of February 23, 2008. In fiscal 2007, we recorded a gain of $5.6 million
included in "Non operating income" on our Consolidated Statements of Operations.
The following assumptions and estimates were used in the Black-Scholes model:
Fiscal 2007
---------------------
Expected life 3.6 years - 5.1 years
Volatility 27.2% - 29.6%
Dividend yield range 0%
Risk-free interest rate range 2.24% - 2.81%
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of our financial instruments are as follows:
February 23, 2008 February 24, 2007
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Line of Credit $ 11,600 $ 11,600 $ -- $ --
Borrowings under Credit Agreement 169,900 169,900 70,000 70,000
7.75% Notes, due April 15, 2007 -- -- 31,982 31,506
9.125% Senior Notes, due December 15, 2011 12,840 13,209 12,840 13,033
5.125% Convertible Senior Notes, due June 15, 2011 140,101 145,350 -- --
Conversion feature of 5.125% Convertible Senior Notes 23,156 23,156 -- --
6.75% Convertible Senior Notes, due December 15, 2012 233,792 238,707 -- --
Conversion feature of 6.750% Convertible Senior Notes 19,799 19,799 -- --
Financing Warrants 31,194 31,194 -- --
Other 2,528 2,528 1,460 1,460
9.375% Notes, due August 1, 2039 200,000 205,200 200,000 204,800
Warrant Series A 44,539 44,539 -- --
Warrant Series B 106,102 106,102 -- --
The fair value for the public debt securities is based on quoted market
prices for such notes. As of February 23, 2008 and February 24, 2007, the
carrying values of cash and cash equivalents, accounts receivable and accounts
payable approximated fair values due to the short-term maturities of these
instruments. Marketable securities and warrants are recorded at fair value at
February 23, 2008 and February 24, 2007. Refer to Note 1 - Summary of
Significant Accounting Policies for discussion of SFAS 157 and SFAS 159 and the
expected impact of its adoption.
88
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 10 - LEASE OBLIGATIONS
We operate primarily in leased facilities. Lease terms generally range up
to twenty-five years for store leases and thirty years for other leased
facilities, with options to renew for additional periods. In addition, we also
lease some store equipment and trucks. The majority of the leases contain
escalation clauses relating to real estate tax increases and certain store
leases provide for increases in rentals when sales exceed specified levels.
Depending on the specific terms of the leases, our obligations are in
three forms: capital leases, operating leases and long-term real estate
liabilities.
The Consolidated Balance Sheets include the following capital leases:
February 23, February 24,
2008 2007
----------- -------------
Property under capital leases $ 166,058 $ 41,135
Accumulated amortization (16,695) (20,459)
--------- --------
Net property under capital leases $ 149,363 $ 20,676
========= ========
During fiscal 2007 and fiscal 2006, we did not enter into any new capital
leases. During fiscal 2005, we entered into a capital lease totaling $10
million. This capital lease amount is a non-cash transaction and, accordingly,
has been excluded from the Consolidated Statements of Cash Flows. During fiscal
2007, in connection with the acquisition of Pathmark, we acquired 38 capital
leases relating to buildings totaling $126.7 million and several capital leases
relating to equipment totaling $15.1 million. Interest paid as part of our
capital lease obligations was approximately $7.2 million in fiscal 2007, $3.5
million in fiscal 2006 and $6.3 million in fiscal 2005.
Rent expense for operating leases during the last three fiscal years
consisted of the following:
Minimum Rentals Fiscal 2007 Fiscal 2006 Fiscal 2005
--------------- ------------ ------------ -----------
U.S. continuing operations $ 145,682 $ 125,704 $ 135,171
Discontinued Operations 20,452 44,629 51,608
Canada -- -- 21,335
------------ ------------ -----------
166,134 170,333 208,114
------------ ------------ -----------
Contingent Rentals
U.S. continuing operations 2,136 2,394 2,387
Discontinued Operations 64 92 70
Canada -- -- 1,275
------------ ------------ -----------
2,200 2,486 3,732
------------ ------------ -----------
Total rent expense $ 168,334 $ 172,819 $ 211,846
============ ============ ===========
89
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Future minimum annual lease payments for capital leases and noncancelable
operating leases in effect at February 23, 2008 are shown in the table below.
Operating Leases
--------------------------------------------------------------------------
Future Net Future
Future Minimum Rental Payments Minimum Minimum
------------------------------------ -----------------------
Capital Open Closed Sublease Rental
Fiscal Leases Stores Sites Total Rentals Payments
- ------ --------- ----------- --------- ---------- ---------- ----------
2008 $ 27,778 $ 194,889 $ 68,619 $ 263,508 $ 32,372 $ 231,136
2009 27,447 190,207 65,748 255,955 30,259 225,696
2010 27,104 182,181 58,544 240,725 26,157 214,568
2011 26,858 170,189 52,644 222,833 22,648 200,185
2012 26,066 159,514 49,570 209,084 19,774 189,310
2013 and thereafter 180,646 968,233 310,346 1,278,579 78,807 1,199,772
--------- ----------- --------- ---------- ---------- ----------
Net minimum rentals 315,899 $ 1,865,213 $ 605,471 $2,470,684 $ 210,017 $2,260,667
=========== ========= ========== ========== ==========
Less interest portion (147,125)
---------
Present value of future
minimum rentals $ 168,774
=========
Included in the future minimum rental payments of closed sites of $605.5
million are amounts that are classified as current and non-current liabilities
on our Consolidated Balance Sheets. These amounts are estimated net cash flows
based on our experience and knowledge of the market in which the closed store is
located. Refer to our discussion of Closed Store Reserves in Note 1 - Summary of
Significant Accounting Policies.
During fiscal 2007, we acquired four sale lease back locations in
connection with the acquisition of Pathmark. Due to Pathmark's continuing
involvement with these four properties, as all four leases contain renewal
options that extend beyond the economic useful life of the properties, these
sales did not qualify for sale-leaseback accounting in accordance with SFAS 98,
but rather as long-term real estate liabilities under the provisions of SFAS 66.
The fair market value of these properties as of the acquisition date was $64.1
million with associated long-term real estate liabilities of $64.1 million.
These liabilities with maturities between 14 and 17 years are recorded within
"Long-term real estate liabilities" on our Consolidated Balance Sheets at
February 23, 2008.
During fiscal 2006 and fiscal 2005, we sold one and five properties,
respectively, and simultaneously leased them back from the purchaser.
Due to our Company's continuing involvement with one of the properties
sold in fiscal 2005, as (i.) we receive sublease income that is more than 10% of
the fair market value of this property, (ii.) lease contains renewal options
that extend beyond the economic useful life of the property, and (iii.) we are
obligated to repurchase the property if certain circumstances occur, the sale
did not qualify for sale-leaseback accounting in accordance with SFAS 98, but
rather as a long-term real estate liability under the provisions of SFAS 66. In
accordance with SFAS 66, the carrying value of this property of approximately
$9.0 million remained on our Consolidated Balance Sheets at February 25, 2006,
and no sale was recognized. Instead the sales price of this property of $20.8
million was recorded as a long-term real estate liability with a maturity of 20
years within "Long-term real estate liabilities" on our Consolidated Balance
Sheets at February 25, 2006. In addition, the lease payments are being charged
to "Interest expense" in our Consolidated Statements of Operations. This
property was sold for a profit resulting in a gain, after deducting expenses,
which
90
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
has been deferred and will not be recognized until the end of the lease when our
continuing involvement ceases.
"Long-term real estate liabilities" on our Consolidated Balance Sheets
also include various leases in which we received landlord allowances to offset
the costs of structural improvements we made to the leased space. As we had
directly paid for a substantial portion of the structural improvement costs, we
were considered the owner of the building during the construction period. In all
situations upon completion of the construction, we were unable to meet the
requirements under SFAS 98, to qualify for sale-leaseback treatment; thus, the
landlord allowances have been recorded as long-term real estate liabilities on
our Consolidated Balance Sheets and are being amortized over the lease term
based on rent payments designated in the lease agreements. These leases have
terms ranging between 12 and 25 years and effective annual percentage rates
between 4.74% and 78.21%. The effective annual percentage rates were implicitly
calculated based upon technical accounting guidance.
The future minimum annual lease payments relating to these leases as well
as those leases for properties that we previously sold but did not qualify for
sale-leaseback treatment have been included in the table below.
Long-term Real Estate Liabilities
---------------------------------------
Net
Future Future Future
Minimum Minimum Minimum
Rental Sublease Rental
Payments Rentals Payments
-------------- --------- ----------
Fiscal
2008 $ 36,394 $ 4,823 $ 31,571
2009 36,556 4,480 32,076
2010 36,706 3,604 33,102
2011 36,872 2,699 34,173
2012 37,061 2,085 34,976
2013 and thereafter 416,838 5,579 411,259
-------------- --------- ---------
600,427 23,270 577,157
Less interest portion (254,317) -- (254,317)
-------------- --------- ---------
Present value of future minimum
rental payments $ 346,110 $ 23,270 $ 322,840
============== ========= =========
The remaining one and four properties sold and simultaneously leased back
from the purchaser during fiscal 2006 and fiscal 2005, respectively, had a
carrying value of approximately $2.5 million and $16.1 million, respectively.
Net proceeds received related to these transactions amounted to approximately
$9.2 million and $32.6 million, respectively. These properties were sold for a
profit resulting in (i.) a gain that was immediately recognized of $1.3 million
and $5.1 million, respectively, as we are leasing back more than a minor part
but less than substantially all of the property sold in accordance with SFAS 28,
"Accounting for Sales with Leasebacks," and (ii.) a deferred gain after
deducting expenses of $5.4 million and $11.1 million, respectively, which will
be recognized as an offset to rent expense over the remaining life of the
leases.
During fiscal 2007, fiscal 2006, and fiscal 2005, we recognized gains
related to our sale-leaseback transactions of $27.6 million, of which $24.1
million related to the reversal of gains on terminated or assigned properties,
$5.3 million, of which $1.3 million related to recognition of a portion of the
gain on sale in the current year as we are leasing back more than a minor part
but
91
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
less than substantially all of the property sold as discussed above, and
$8.8 million, of which $5.1 million related to recognition of a portion of the
gain on sale in the current year as we are leasing back more than a minor part
but less than substantially all of the property sold as discussed above,
respectively. The remaining deferred gain at February 23, 2008 and February 24,
2007 amounted to $37.2 million and $64.7 million, respectively.
NOTE 11 - INCOME TAXES
The components of income (loss) from continuing operations before income
taxes were as follows:
Fiscal 2007 Fiscal 2006 Fiscal 2005
------------- ----------- -----------
United States $ 92,572 $ (45,330) $ 628,189
Canada -- -- 48,201
------------- ----------- -----------
Total $ 92,572 $ (45,330) $ 676,390
============= ============ ===========
A reconciliation of income taxes from continuing operations at the 35%
federal statutory income tax rate for fiscal 2007, 2006 and 2005 to income taxes
as reported is as follows:
Fiscal 2007 Fiscal 2006 Fiscal 2005
----------- ----------- -----------
Income tax (provision for) benefit from continuing
operations computed at federal
statutory income tax rate $ (32,401) $ 15,880 $ (236,737)
State and local income taxes, net of
federal tax benefit (1,792) 781 (16,481)
Tax rate differential relating to Canadian
operations -- -- (2,271)
Permanent difference relating to the sale of
Canadian assets (5,590) 55,868 (129,096)
Permanent items relating to Pathmark financing 13,088 -- --
U.S. valuation allowance 21,357 (14,030) 226,653
Other (254) (418) (399)
----------- ----------- -----------
Income tax (provision) benefit, as reported $ (5,592) $ 58,081 $ (158,331)
=========== =========== ===========
The effective tax rate on continuing operations of 6.0% for fiscal 2007
varied from the statutory rate of 35% primarily due to state and local income
taxes, the impact of the sale of our Canadian operations, the impact of the
Pathmark financing and the decrease to our valuation allowance as a result of
utilization of losses not previously benefited because of a lack of history of
earnings.
The effective tax rate on continuing operations of 128.1% for fiscal 2006,
varied from the statutory rate of 35% primarily due to state and local income
taxes, the impact of the sale of our Canadian operations and the decrease to our
valuation allowance as a result of losses not benefited because of a lack of
history of earnings.
The effective tax rate on continuing operations of 23.4% for fiscal 2005,
varied from the statutory rate of 35% primarily due to state and local income
taxes, the impact of the sale of our Canadian operations and the decrease to our
valuation allowance as a result of utilization of losses not previously
benefited because of a lack of history of earnings.
92
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The (provision for) benefit from income taxes from continuing operations
consisted of the following:
Fiscal 2007 Fiscal 2006 Fiscal 2005
----------- ----------- -----------
Current:
Federal $ -- $ 56,727 $ (114,309)
Canadian -- -- (17,965)
State and local (2,757) 1,202 (25,355)
Canadian tax on dividends (195) 152 (702)
----------- ----------- -----------
(2,952) 58,081 (158,331)
----------- ----------- -----------
Deferred:
Federal (2,640) -- --
Canadian -- -- --
State and local -- -- --
----------- ----------- -----------
(2,640) -- --
----------- ----------- -----------
(Provision for) benefit from income taxes $ (5,592) $ 58,081 $ (158,331)
=========== =========== ===========
The deferred income tax (provision) benefit resulted primarily from the
annual change in temporary differences between amounts of assets and liabilities
for financial reporting purposes and such amounts as measured by tax
regulations, net operating loss ("NOL") carryforwards and, in fiscal 2007,
fiscal 2006 and fiscal 2005, the U.S. valuation allowance. In accordance with
SFAS 109 "Accounting for Income Taxes", a valuation allowance is created and
offset against the net deferred tax asset if, based on existing facts and
circumstances, it is more likely than not that some portion or all of the
deferred tax asset will not be realized. In future periods, we will continue to
record a valuation allowance against net deferred tax assets that are created by
U.S. losses. The valuation allowance will be adjusted when and if, in our
opinion, significant positive evidence exists which indicates that it is more
likely than not that we will be able to realize the U.S. deferred tax asset.
During fiscal 2007, the U.S. valuation allowance decreased by $19.5
million as a result an increase of $78.4 million that was recorded through the
current year tax provision in our Consolidated Statement of Operations offset by
a decrease of $97.9 million relating to several reclassifications to various
balance sheet items in our Consolidated Balance Sheet at February 23, 2008.
Included in this amount is a reduction of the Valuation Allowance associated
with the acquisition of Pathmark Stores, Inc. as well as the impact of the
adoption of FIN 48 "Accounting for Uncertain Tax Positions". During fiscal 2006,
the U.S. valuation allowance was decreased by $2.7 million resulting from an
increase of $19.1 million that was recorded through the current year tax benefit
in our Consolidated Statement of Operations offset by a decrease of $21.8
million relating to several reclassifications to various balance sheet items in
our Consolidated Balance Sheet at February 24, 2007.
93
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The components of net deferred tax assets (liabilities) are as follows:
February 23, February 24,
2008 2007
----------- -----------
CURRENT ASSETS:
Insurance reserves $ 28,356 $ 17,583
Other reserves and accrued benefits 45,766 33,845
Accrued postretirement and postemployment benefits 1,005 603
Lease obligations - 526
Pension obligations 19,276 15,374
Other 21,637 2,993
----------- ----------
116,040 70,924
----------- ----------
CURRENT LIABILITIES:
Inventories (37,588) (7,839)
Health and welfare (1,804) (1,596)
Other (2,970) (1,917)
------------ -----------
(42,362) (11,352)
------------ -----------
Valuation allowance (8,892) (19,360)
------------ -----------
Deferred income taxes included in prepaid expenses and
other current assets $ 64,786 $ 40,212
=========== ==========
NON-CURRENT ASSETS:
Net Operating Losses $ 190,152 $ -
Foreign Tax Credits 69,261 -
Alternative minimum tax credits and general business credits 52,584 38,048
Other reserves including asset disposition charges 96,203 55,751
Lease obligations 7,743 4,318
Equity investment in Metro, Inc. - 21,627
Insurance reserves 63,875 39,122
Accrued postretirement and postemployment benefits 13,949 10,843
Pension obligations 31,579 756
Step rents 21,921 24,702
State tax credits 29,940 5,582
Pathmark Financing 10,381 -
Other 12,389 723
----------- ----------
599,977 201,472
----------- ----------
NON-CURRENT LIABILITIES:
Depreciation (228,982) (177,888)
Pension obligations (3,324) (7,892)
Lease valuations (171,111) -
Intangibles (98,316) -
Other (14,255) (908)
------------ -----------
(515,988) (186,688)
------------ -----------
Valuation allowance (45,974) (54,996)
------------ -----------
Net non-current deferred income tax asset (liability)
included in other assets (liabilities) $ 38,015 $ (40,212)
=========== ==========
At February 23, 2008, our Company had $364,921 in federal NOL
carryforwards from our U.S. operations, which expire between 2023 and 2027. In
addition, the Company had state loss carryforwards that will expire between
fiscal 2008 and fiscal 2026. The Company's general business credits consist of
federal and state work incentive credits, which expire between fiscal 2009 and
fiscal 2026, some of which are subject to an annual limitation.
On December 3, 2007, our Company acquired Pathmark Stores, Inc. (Refer to
Note 2 - Acquisition of Pathmark Stores, Inc.) The acquired federal net
operating loss carryforwards of $56.3 million are subject to limitations.
94
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Management believes these limitations will not have a
material impact on the Company's ability to utilize such pre-acquisition net
operating losses.
Effective February 25, 2007, we adopted FIN 48. Refer to Note 1 - Impact
of New Accounting Pronouncements for further discussion. As a result of our
adoption of FIN 48, we recorded the following transition adjustments:
- - An increase to the opening balance in retained earnings of $24.4 million;
- - a $165.0 million increase in our tax liabilities for uncertain tax
positions and an increase to our deferred tax assets to gross-up our
balance sheet for the tax benefits of net operating losses ("NOLs") that
had previously been netted in our uncertain tax position liability.
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; and
- - an increase in deferred tax assets of $65.0 million related to foreign tax
credit carryforwards offset by an increase in deferred tax liabilities of
$25.1 million as a result of the book versus tax basis of our foreign
subsidiary and a corresponding increase in the valuation allowance of
$39.9 million upon initial adoption of the standard.
Reconciliation of Unrecognized Tax Benefits
Tax Interest Total
--------- -------- ---------
Balance at February 25, 2007 $153,841 $ -- $ 153,841
Tax positions of Pathmark Stores, Inc. 9,344 972 10,316
Increase related to prior periods
tax positions -- -- --
Decreases related to prior periods
tax positions -- -- --
Increases related to current period
tax positions 53 74 127
Settlements -- -- --
Lapse of statute of limitations -- -- --
-------- -------- ---------
Balance at February 23, 2008 $163,238 $ 1,046 $ 164,284
======== ======== =========
At February 23, 2008, we had unrecognized tax benefits of $164.3 million
(including accrued interest of $1.0 million) that if recognized would affect the
effective tax rate. However, the recognition of the unrecognized tax benefits
would result in an increase in our valuation allowance on any remaining net
deferred tax asset. Our Company classifies interest and penalty expense related
to unrecognized tax benefits as income tax expense. We remain subject to
examination by federal state and local tax authorities for tax years 2004
through 2007. With a few exceptions, we are no longer subject to federal, state
or local examinations by tax authorities for tax years 2003 and prior. It is
reasonably possible that the amount of our Company's unrecognized tax benefits
will change in the next 12 months; however, we do not expect any change to have
a significant impact on the results of operations, financial position or cash
flows.
Income tax payments, net of income tax refunds for fiscal 2007, 2006 and
2005 were approximately $2.2 million, $4.4 million and $23.8 million,
respectively.
95
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 12 - RETIREMENT PLANS AND BENEFITS
On February 24, 2007, we adopted SFAS 158 which requires that we recognize
the funded status of our defined benefit pension and other postretirement
benefit plans as a net liability or asset on our balance sheets and requires any
unrecognized prior service costs and actuarial gains or losses to be recognized
as a component of accumulated other comprehensive income or loss. Minimum
pension liabilities and related intangible assets were derecognized upon
adoption. SFAS 158 also requires that beginning in fiscal 2008, our assumptions
used to measure our annual expenses be determined as of the balance sheet date
(February 28, 2009), and all plan assets and liabilities to be reported as of
that date. We have chosen to early adopt this requirement in fiscal 2007. We
used the second approach as described in paragraph 19 of SFAS 158 to transition
our measurement date from December 31, 2006 to February 24, 2007. Under this
approach, we have recorded an adjustment to opening retained earnings in the
amount of $0.6 million to decrease the February 25, 2007 balance of retained
earnings.
DEFINED BENEFIT PLANS
We provide retirement benefits to certain non-union and union employees
under various defined benefit plans. Our defined benefit pension plans are
non-contributory and benefits under these plans are generally determined based
upon years of service and, for salaried employees, compensation. We fund these
plans in amounts consistent with the statutory funding requirements. We use our
fiscal year end as the measurement date.
In fiscal 2007, we recorded a curtailment gain of $0.2 million reflecting
a reduction in the estimated future costs of previously recorded pension
benefits as a result of the closure of stores in the Midwest. This amount was
included in "(Loss) income from operations of discontinued businesses, net of
tax" on our Consolidated Statements of Operations. In addition, we recorded a
settlement gain of $1.0 million resulting from lump sum payments of benefits in
excess of our recorded liabilities for both former employees in the Midwest and
the Northeast. Of this amount $0.9 million was included in "(Loss) income from
operations of discontinued businesses, net of tax" and $0.1 million was included
in "Store operating, general and administrative expense" on our Consolidated
Statements of Operations for fiscal 2007.
96
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following tables set forth the change in benefit obligations, the
change in plan assets, the funded status, and the accumulated benefit obligation
for fiscal 2007 and 2006 for our defined benefit plans:
2007 2006
-------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation - beginning of year $218,021 $212,231
Benefit obligation - acquisition at December 3, 2007 238,941 --
Service cost 5,320 5,609
Interest cost 15,609 11,368
Actuarial loss 8,393 3,656
Benefits paid (15,459) (15,984)
Impact of the adoption of change in measurement date 2,843 --
Amendments -- 1,141
Settlements (12,854) --
Curtailments (213) --
-------- --------
Benefit obligation - end of year $460,601 $218,021
======== ========
2007 2006
-------- --------
CHANGE IN PLAN ASSETS
Plan assets at fair value - beginning of year $202,185 $197,107
Plan assets at fair value - acquisition at December 3, 2007 291,314 --
Actual return on plan assets (3,318) 16,758
Company contributions 5,103 4,304
Settlements (12,854) --
Benefits paid (15,459) (15,984)
-------- --------
Plan assets at fair value - end of year $466,971 $202,185
======== ========
RECONCILIATION OF FUNDED STATUS
Funded status $ 6,370 $(15,836)
Unrecognized actuarial loss -- --
Unrecognized prior service cost -- --
-------- -------
Net asset (liability) recognized 6,370 (15,836)
-------- -------
Prepaid benefit cost 82,291 18,790
Current accrued benefit liability (4,997) (2,503)
Accrued benefit liability (70,924) (32,123)
-------- -------
Net asset (liability) recognized $ 6,370 $(15,836)
======== ========
ACCUMULATED BENEFIT OBLIGATION $454,028 $214,866
======== ========
Our Company expects approximately $0.1 million of the net actuarial loss
and $0.3 million of the prior service cost to be recognized as a component of
net periodic benefit cost in fiscal 2008.
The prepaid pension asset is included in "Other assets" on the
Consolidated Balance Sheets while the pension liability is included in "Accrued
salaries, wages and benefits" and "Other non-current liabilities".
Amounts recognized in accumulated other comprehensive loss at February 23,
2008 are as follows:
Net actuarial loss $(30,388)
Prior service cost (2,615)
--------
Total $(33,003)
=========
97
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Plans with accumulated benefit obligation in excess of plan assets
consisted of the following:
2007 2006
-------- -------
Accumulated benefit obligation $135,033 $97,719
Projected benefit obligation $136,019 $98,780
Plan assets at fair value $ 64,160 $64,154
The components of net pension cost were as follows:
2007 2006 2005
-------- -------- ------------------
U.S. U.S. U.S. Canada
-------- -------- ---------- -------
Service cost $ 5,320 $ 5,609 $ 5,998 $ 4,576
Interest cost 15,609 11,368 11,887 6,519
Expected return on plan assets (18,114) (12,350) (13,423) (8,369)
Amortization of unrecognized
net prior service cost (credit) 255 (128) (294) 286
Amortization of unrecognized net
actuarial loss 98 162 58 900
Curtailments (166) -- -- --
Settlements (1,037) -- -- --
Special termination benefits -- -- 936 --
Administrative expenses and other -- -- -- 138
-------- -------- -------- -------
Net pension cost $ 1,965 $ 4,661 $ 5,162 $ 4,050
======== ======= ======== =======
The weighted average assumptions in the following table represent the
rates used to develop the actuarial present value of projected benefit
obligation for the year listed and also the net periodic benefit cost for the
following year:
2007 2006 2005
---- ---- ----
Weighted average discount rate 5.75% 5.75% 5.50%
Weighted average rate of compensation increase 2.75% 2.75% 2.50%
Expected long-term rate of return on plan assets 6.75% 6.75% 6.50%
The expected long-term rate of return on plan assets for fiscal 2007 is
6.75% and represents the weighted average of expected returns for each asset
category. We determine our expected long-term rate of return based on historical
performance, adjusted for current trends.
Our defined benefit pension plan weighted average asset allocations by
asset category were as follows:
Target Feb. 23, Dec. 31,
Allocation 2008 2006
---------- ------- ------
Equities 50 - 60% 63% 65%
Bonds 30 - 40% 35% 33%
Cash 5 - 10% 2% 2%
---- ----
Total 100% 100%
==== ====
Our defined benefit pension plan has target asset allocation ranges of 30%
- - 60% for equity and fixed income securities. The Plan's assets are held in
trust funds and are actively managed by
98
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
external fund managers. Equity security investments consist of a broad range of
publicly traded securities, ranging from small to large capitalization stocks
and are diversified in both growth and value orientated strategies as well as
diverse industry sectors. Fixed income securities consist of a broad range of
investments including U.S. government securities, corporate debt securities,
mortgages and other asset backed obligations. The Plan does not allow for direct
investments in the publicly traded securities of our Company and investments in
derivatives for speculative purposes.
Estimated future defined benefit payments expected to be paid are as
follows:
2008 $25,205
2009 24,897
2010 25,397
2011 25,535
2012 26,593
Years 2013 - 2017 143,497
We also expect to contribute $4.5 million in cash to our defined benefit
pension plans in fiscal 2008.
DEFINED CONTRIBUTION PLANS
We maintain defined contribution retirement plans to which we contribute
an amount equal to 4% of eligible participants' salaries and savings plans to
which eligible participants may contribute a percentage of eligible salary. We
contribute to the savings plans based on specified percentages of the
participants' eligible contributions. Participants become fully vested in our
contributions after 5 years of service. Our contributions charged to operations
for all plans were approximately $8.3 million, $9.0 million and $9.3 million in
fiscal years 2007, 2006 and 2005, respectively.
MULTI-EMPLOYER UNION PENSION PLANS
We participate in various multi-employer union pension plans which are
administered jointly by management and union representatives and which sponsor
most full-time and certain part-time union employees who are not covered by our
other pension plans. The pension expense for these plans approximated $97.3
million, $32.1 million and $37.8 million in fiscal 2007, 2006 and 2005,
respectively. The fiscal 2007 amount of $97.3 million includes $62.9 million for
costs related to our Company's withdrawals from multi-employer union pension
plans during the year. We could, under certain circumstances, be liable for
unfunded vested benefits or other expenses of jointly administered
union/management plans, which benefits could be significant and material for our
Company.
POSTRETIREMENT BENEFITS
We provide postretirement health care and life insurance benefits to
certain union and non-union employees. We recognize the cost of providing
postretirement benefits during employees' active service periods. We use our
fiscal year end as the measurement date for both our postretirement benefits.
99
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following tables set forth the change in benefit obligations, the
change in plan assets, and the reconciliation of funded status for fiscal 2007
and 2006 for our postretirement benefit plans:
2007 2006
---------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation - beginning of year $ 18,814 $ 22,052
Benefit obligation - acquisition at December 3, 2007 14,488 --
Service cost 409 375
Interest cost 1,265 1,172
Benefits paid (1,564) (1,499)
Actuarial loss (gain) 7,480 (3,286)
Impact of the adoption of change in measurement date 56 --
Retiree drug subsidy received 141 --
---------- --------
Benefit obligation - end of year $ 41,089 $ 18,814
========== ========
CHANGE IN PLAN ASSETS
Plan assets at fair value - beginning of year $ -- $ --
Company contributions 1,564 1,499
Benefits paid (1,564) (1,499)
---------- -------
Plan assets at fair value - end of year $ -- $ --
========== ========
RECONCILIATION OF FUNDED STATUS
Funded status $ (41,089) $(18,814)
Unrecognized actuarial loss - -
Contributions - 173
---------- -------
Net liability recognized (41,089) (18,641)
---------- -------
Current liability (2,481) (1,036)
Noncurrent liability (38,608) (17,605)
---------- --------
Net liability recognized $ (41,089) $(18,641)
========== ========
Assumed discount rate 5.75% 5.75%
========== ========
Our Company expects approximately $2.3 million of interest cost and $0.3
million of the prior service credit to be recognized as a component of net
periodic benefit cost in fiscal 2008.
The postretirement pension liability is included in "Accrued salaries,
wages and benefits" and "Other non-current liabilities".
Amounts recognized in accumulated other comprehensive income at February
23, 2008 are as follows:
Net actuarial gain $ 477
Prior service credit 3,551
------------
Total $ 4,028
============
100
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The components of net postretirement benefits cost (income) are as
follows:
Fiscal Fiscal Fiscal
U.S. PLANS 2007 2006 2005
- ---------- ------- --------- ---------
Service cost $ 409 $ 375 $ 338
Interest cost 1,265 1,172 1,198
Prior service cost (1,347) (1,347) (1,347)
Amortization of gain (455) (222) (278)
------- ------- -------
Net postretirement benefits income $ (128) $ (22) $ (89)
======= ======= =======
Discount rate 5.75% 5.50% 5.75%
======= ======= =======
Fiscal Fiscal Fiscal
CANADIAN PLANS 2007 2006 2005
- -------------- ------- ------- -------
Service cost $ $ -- $ 75
Interest cost -- -- 270
Prior service cost -- -- (148)
Amortization of loss -- -- 118
------- ------- -------
Net postretirement benefits cost $ $ -- $ 315
======= ======= =======
Discount rate -- -- 5.75%
======= ======= =======
The assumed rate of future increase in health care benefit cost for fiscal
2008 was 9.0% - 10.0% and is expected to decline to 4.5% - 5.0% by the year 2018
and remain at that level thereafter. For the U.S. plan, the effect of a 1%
change in the assumed health care cost trend rate for each future year on the
sum of service and interest cost would either be an increase or decrease of $0.4
million, while the accumulated postretirement benefit obligation would either
increase by $4.2 million or decrease by $3.6 million.
Estimated future postretirement benefit payments expected to be paid in
the U.S. are as follows:
2008 $2,481
2009 2,537
2010 2,637
2011 2,767
2012 2,981
Years 2013 - 2017 18,392
POSTEMPLOYMENT BENEFITS
We accrue costs for pre-retirement, postemployment benefits provided to
former or inactive employees and recognize an obligation for these benefits. The
costs of these benefits have been included in operations for each of the fiscal
years ended February 23, 2008, February 24, 2007 and February 25, 2006. As of
February 23, 2008 and February 24, 2007, we had a liability reflected on the
Consolidated Balance Sheets of $38.9 million and $15.2 million, respectively,
related to such benefits.
101
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 13 - STOCK BASED COMPENSATION
During fiscal 2007, fiscal 2006 and fiscal 2005, compensation expense
related to share-based incentive plans was $7.1 million, $8.2 million and $9.0
million, after tax, respectively. Included in share-based compensation expense
recorded during fiscal 2007, fiscal 2006 and fiscal 2005, was $0.6 million, $1.1
million and $2.5 million, respectively, related to expensing of stock options,
$6.0 million, $6.0 million and $4.8 million, respectively, relating to expensing
of restricted stock, nil, nil and $1.1 million relating to the immediate vesting
of certain stock options, and $0.5 million, $1.1 million and $0.6 million,
respectively, relating to expensing of common stock granted to our Board of
Directors at the Annual Meeting of Stockholders.
At February 23, 2008, we had two stock-based compensation plans. The
general terms of each plan, the method of estimating fair value for each plan
and fiscal 2007 and 2006 activity is reported below.
I. The 1998 Long Term Incentive and Share Award Plan: This plan provides for
the grant of awards in the form of options, SAR's, restricted shares,
restricted share units, performance shares, performance units, dividend
equivalent, or other share based awards to our Company's officers and key
employees. The total number of shares available for issuance under this
plan is 6,000,000 subject to anti-dilution provisions. Options and SAR's
issued under this plan vest 25% on each anniversary date of issuance over
a four year period.
Performance restricted stock units issued under this plan during fiscal
2005 were earned based on our Company achieving in fiscal 2007 a profit
after taxes, after adjusting for specific matters which our Company
considers to be of a non-operating nature, with an outlook for continued,
sustainable profitability on the same basis. On June 15, 2007, the Human
Resources & Compensation Committee and the Governance Committee (together,
the "Committees") decided to recognize our Company's performance to date
for these units subject to the closing of the Pathmark transaction. Upon
the closing of the Pathmark transaction on December 3, 2007, the
applicable performance criteria was deemed to have been met with respect
to two-thirds of the units granted and one-third of the units granted were
forfeited, in fiscal 2005. These units will vest 50% on the first day of
fiscal 2008 and the remaining 50% will vest on the first day of fiscal
2009, in accordance with and subject to all other terms, conditions,
limitations, restrictions and eligibility requirements. At two-thirds of
the units have been earned upon the closing of the Pathmark transaction on
December 3, 2007, this modification of terms did not result in the
recording of any additional compensation expense during fiscal 2007.
Performance restricted stock units issued under this plan during fiscal
2006 were earned based on our Company achieving certain operating targets
in fiscal 2008 and are 100% vested in fiscal 2008 upon achievement of
those targets. On June 15, 2007, the Committees decided to recognize our
Company's performance to date for these units subject to the closing of
the Pathmark transaction. Upon the closing of the Pathmark transaction on
December 3, 2007, the applicable performance criteria was met with respect
to 125% of one-third of the units granted in fiscal 2006. These units will
vest on or around May of 2009, in accordance with and subject to all other
terms, conditions, limitations, restrictions and eligibility requirements.
As one-third of the units have been earned upon the closing of the
Pathmark transaction on December 3, 2007, this modification of terms
resulted in the recording of additional compensation expense of $0.3
million for an additional 24,777 shares granted.
102
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Performance restricted stock units issued under this plan during fiscal
2007, are earned based on our Company achieving certain operating targets
in fiscal 2009 and are 100% vested in fiscal 2009 upon achievement of
those targets.
On June 15, 2007, the Committees approved an executive Acquisition Closing
and Integration Incentive Compensation Program (the "Integration
Program"). The executive Integration Program is subject to: a) the closing
of the Pathmark transaction; b) the achievement of certain Pathmark
transaction closing performance criteria or certain Pathmark transaction
synergy targets; c) the achievement of certain Company stock price targets
over a performance period comprised of the three calendar years following
the closing of the Pathmark transaction; and d) other terms, conditions,
limitations, restrictions and eligibility requirements. Depending on
actual performance as compared with the foregoing targets, each executive
officer can earn up to a maximum of 200% of the performance restricted
share units awarded them under the Integration Plan.
Also on June 15, 2007, the Committees approved a non-executive Integration
Program. The non-executive Integration Program is subject to: a) the
closing of the Pathmark transaction; b) the achievement of certain
Pathmark transaction closing performance criteria or certain Pathmark
transaction synergy targets; c) the achievement of certain Company stock
price targets over a performance period comprised of the 24 month period
following the closing of the Pathmark transaction; and d) other terms,
conditions, limitations, restrictions and eligibility requirements.
Depending on actual performance as compared with the foregoing targets,
each non-executive officer can earn up to a maximum of 125% of the
performance restricted share units awarded them under the Integration
Plan.
In accordance with SFAS 123R (revised 2004), "Share-Based Payment" ("SFAS
123R"), the executive and non-executive Integration Programs awarded to
each executive officer were considered granted on June 15, 2007 and each
non-executive officer were considered granted on August 7, 2007 and
December 20, 2007. With the closing of the Pathmark transaction on
December 3, 2007, compensation expense will be recorded over the vesting
period as these units are earned upon achievement of the other terms as
described above. During fiscal 2007, additional compensation expense of
$1.0 million was recorded under these plans.
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The stock option awards under The 1998 Long Term Incentive and Share Award
Plan are granted at the fair market value of the Company's common stock at
the date of grant. Fair value calculated under SFAS 123, as amended,
"Accounting for Stock-Based Compensation" is used to recognize expense
upon adoption of SFAS 123R. Fair values for each grant were estimated
using a Black-Scholes valuation model which utilized assumptions as
detailed in the following table for expected life based upon historical
option exercise patterns, historical volatility for a period equal to the
stock option's expected life, and risk-free rate based on the U.S.
Treasury constant maturities in effect at the time of grant. Our stock
options have a contractual term of 10 years. During fiscal 2005, our
Company did not grant any stock options under this plan. The following
assumptions were in place during fiscal 2007 and fiscal 2006:
Fiscal 2007 Fiscal 2006
------------ -----------
Expected life 7 years 7 years
Volatility 54% - 55% 56%
Risk-free interest rate range 4.46% - 4.57% 4.96%
The SAR awards under The 1998 Long Term Incentive and Share Award Plan
were granted at the fair market value of the Company's common stock at the
date of the grant.
Performance restricted stock units issued under The 1998 Long Term
Incentive and Share Award Plan are granted at the fair market value of the
Company's common stock at the date of grant, adjusted by an estimated
forfeiture rate.
Stock options
The following is a summary of the stock option activity during fiscal
2005, fiscal 2006, and fiscal 2007:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term (years) Value
------------- ---------- ------------ ---------
Outstanding at February 26, 2005 4,464,134 14.53
Granted -- --
Canceled or expired (551,064) 17.04
Exercised (2,378,685) 10.92
------------- ----------
Outstanding at February 25, 2006 1,534,385 $ 19.24
Adjustment for dividend* 371,995 --
Granted 86,430 27.71
Canceled or expired (253,726) 21.44
Exercised (414,104) 14.35
------------- ----------
Outstanding at February 24, 2007 1,324,980 $ 15.50
Granted 84,961 32.28
Roll-over options 1,107,156 31.74
Canceled or expired (104,481) 35.50
Exercised (585,087) 18.06
------------- -----------
Outstanding at February 23, 2008 1,827,529 $ 24.21 3.5 $ 11.6
============= ========== ============ =========
Exercisable at:
February 23, 2008 1,680,705 $ 23.80 4.5 $ 11.3
============ =========
Nonvested at:
February 23, 2008 146,824 $ 28.90 8.5 $ 0.2
============ =========
104
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The total intrinsic value of options exercised during fiscal 2007 and
fiscal 2006 was $7.9 million and $5.9 million, respectively.
As of February 23, 2008, approximately $1.2 million, after tax, of total
unrecognized compensation expense related to unvested stock option awards
will be recognized over a weighted average period of 2.6 years.
The weighted average grant date fair value of stock options granted during
fiscal 2007 and fiscal 2006 was $19.47 and $17.25, respectively.
The amount of cash received from the exercise of stock options in fiscal
2007 was approximately $10.6 million.
SAR's
The following is a summary of the SAR's activity during fiscal 2005,
fiscal 2006, and fiscal 2007:
Weighted
Average
Exercise
Shares Price
------------- ----------
Outstanding at February 26, 2005 12,500 $ 31.63
Granted -- --
Canceled or expired (12,500) 31.63
Exercised -- --
------------- ----------
Outstanding at February 25, 2006 -- --
Granted -- --
Canceled or expired -- --
Exercised -- --
------------- ----------
Outstanding at February 24, 2007 -- --
Granted -- --
Canceled or expired -- --
Exercised -- --
------------- ----------
Outstanding at February 23, 2008 -- $ --
============= ==========
Performance Restricted Stock Units
During fiscal 2007 and fiscal 2006, our Company granted 782,723 shares and
393,162 shares of performance restricted stock units to selected
employees, respectively, for a total grant date fair value of $25.4
million and $10.8 million, respectively. Approximately $19.9 million of
unrecognized fair value compensation expense relating to these performance
restricted stock units, and those issued in the previous year are expected
to be recognized through fiscal 2010 based on estimates of attaining
vesting criteria.
105
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following is a summary of the performance restricted stock units
activity during fiscal 2006 and fiscal 2007:
Weighted
Average
Grant Date
Shares Fair Value
------------- ----------
Nonvested at February 25, 2006 1,285,000 $ 14.42
Adjustment for dividend* 339,369 --
Granted 393,162 27.59
Canceled or expired (250,080) 13.38
------------- ----------
Nonvested at February 24, 2007 1,767,451 14.73
Granted 782,723 32.44
Canceled or expired (639,747) 12.80
Vested (5,000) 34.83
------------- ----------
Nonvested at February 23, 2008 1,905,427 $ 22.60
============= ==========
* As discussed in Note 14 - Capital Stock, 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.
II. 2004 Non-Employee Director Compensation Plan: This plan provides for the
annual grant of Company common stock equivalent of $90 to members of our
Board of Directors. The $90 grant of common stock shall be made on the
first business day following the Annual Meeting of Stockholders. The
number of shares of our Company's $1.00 common stock granted annually to
each non-employee Director will be based on the closing price of the
common stock on the New York Stock Exchange, as reported in the Wall
Street Journal on the date of grant. Only whole shares will be granted;
any remaining amounts will be paid in cash as promptly as practicable
following the date of grant.
NOTE 14 - CAPITAL STOCK
Share Lending Agreements
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. If an
event of default should occur under the stock lending agreement and a legal
obstacle exists that prevents the Borrower from returning the shares, the
Borrower shall, upon written request of our Company, pay our Company, using
available funds, in lieu of the delivery of loaned shares, to settle its
obligation.
These financial institutions will sell the "borrowed shares" to investors
to facilitate hedging transactions relating to the issuance of our 5.125% and
6.75% Convertible Notes. Pursuant to these agreements, we loaned 8,134,002
shares of our stock of which 6,300,752 shares were sold to the public on
December 18, 2007 in a public offering. We did not receive any proceeds from the
106
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
sale of the borrowed shares. We received a nominal lending fee from the
financial institutions pursuant to the share lending agreements.
Any shares 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 return 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. On a net
basis, this transaction will have no impact on earnings per share.
Call Options
Concurrent with the issuance of the senior convertible notes, as discussed
in Note 8 - Indebtedness and Other Financial Liabilities, our Company entered
into call options with financial institutions that are affiliates of the
underwriters together with the financing warrants discussed in Note 8 -
Indebtedness and Other Financial Liabilities to reduce the potential dilution
upon future conversion of the notes and effectively increase the conversion
price of the notes. The call options allow the Company to purchase common shares
at $36.40 with respect to the 5.125% Notes and $37.80 with respect to the 6.75%
Notes. These instruments are accounted for as free standing derivatives and are
recorded as equity of $73.5 million in the Consolidated Balance Sheet.
2000 Warrants
As part of the acquisition of Pathmark, we assumed 5,294,118 of
outstanding Pathmark 2000 warrants. Upon exercise at the price of $22.31, each
warrant will entitle the holder to receive 0.12963 shares of A&P common stock
and $9.00 in cash. In determining the purchase price, the 2000 warrants are
valued using a Black-Scholes valuation model using the price of A&P common stock
of $32.08 per common share, the average quoted market price of A&P common stock
for two trading days before and two trading days after the merger was announced.
A&P's stock price would need to exceed $102.70 before the Pathmark 2000 warrants
would be considered "in-the-money". As part of the acquisition of Pathmark on
December 3, 2007, we issued 4,657,378 and 6,965,858 roll-over stock warrants in
exchange for Pathmark's 2005 Series A and Series B warrants, respectively.
Other
Our articles of incorporation permit our board of directors to issue
preferred shares without first obtaining stockholder approval. If we issued
preferred shares, these additional securities may have dividend or liquidation
preferences senior to our common stock. If we issue convertible preferred
shares, a subsequent conversion may dilute the current common stockholders'
interest. Issuance of such preferred stock could adversely affect the price of
our common stock. Although we could issue preferred shares, our Company's
practice is not to issue preferred shares. As such, we do not intend to issue
preferred shares in the normal course of business.
On April 26, 2006, our Company paid a special one-time dividend to our
shareholders of record on April 17, 2006 equal to $7.25 per share. This dividend
payout totaling $299.1 million was recorded as a reduction of "additional paid
in capital" in our Consolidated Balance Sheets at February 24, 2007. Although we
paid this one-time special dividend, our Company's practice is to not pay
dividends. As such, we do not intend to pay dividends in the normal course of
business.
107
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In connection with the payment of the special one-time dividend discussed
above, our Company also 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. Refer
to Note 13 - Stock Based Compensation for adjustments made to stock options
outstanding and nonvested performance restricted stock units as a result of the
dividend.
NOTE 15 - OPERATING SEGMENTS
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS 131"), establishes
standards for reporting information about operating segments. This standard
requires segmentation based on our internal organization and reporting of
revenue and segment income. The segments are designed to allocate resources
internally and provide a framework to determine management responsibility.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Our chief operating decision maker is our President and
Chief Executive Officer. In the fourth quarter of 2007, we acquired Pathmark and
we revised our reporting segments to be consistent with the manner in which our
chief operating decision maker currently manages the business. Accordingly we
have revised our segment reporting to report seven operating segments: North,
Central, South, Pathmark, Gourmet, Other and Investment in Metro, Inc. The Other
segment includes our Food Basics and Liquor businesses. Our Investment in Metro,
Inc. represents our economic interest in Metro, Inc. and is required to be
reported as an operating segment in accordance with SFAS No. 131, as our
investment was greater than 10% of our Company's combined assets in the prior
fiscal year of all operating segments and the investment generated operating
income during the current fiscal year. We sold our Canadian operations during
fiscal 2005, thus we have included the operating results through the date of the
sale.
During fiscal 2006, our retail supermarkets were reported in one segment;
however, during fiscal 2007, we satisfied the criteria necessary to report the
Greater New Orleans area and the Midwest as discontinued operations and these
operations have been reclassified as such in our Consolidated Statements of
Operations for the fiscal years ended February 23, 2008, February 24, 2007 and
February 25, 2006. Refer to Note 6 - Discontinued Operations for further
discussion. Further, in fiscal 2007 we revised our reportable segments for prior
years to reflect our operating segments described above. Prior year information
has been restated to conform to current year presentation. Our Company is
evaluating the impact of the acquisition of Pathmark on our internal reporting
structure.
The accounting policies for these segments are the same as those described
in the summary of significant accounting policies in Note 1. We measure segment
performance based upon segment income (loss). Reconciling amounts include
corporate-level activity not specifically attributed to a segment including our
corporate administration group, which coordinates 1) the purchase of all
merchandise (including the design and production of private label merchandise
sold in our retail stores), 2) distribution and 3) real estate management and
other reconciling items primarily attributed to nonrecurring activities.
108
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Assets and capital expenditures are not allocated to segments for internal
reporting presentations.
The following is segment information for the years ended February 23,
2008, February 24, 2007, and February 25, 2006:
OPERATING DATA Fiscal 2007 Fiscal 2006 Fiscal 2005
- ---------------------- --------------- --------------- ----------------
Sales by category
Grocery (1) $ 4,364,970 $ 3,623,792 $ 4,670,700
Meat (2) 1,253,847 1,037,651 1,422,680
Produce (3) 776,521 690,088 987,457
Other (4) 5,792 17,672 9,181
--------------- --------------- ----------------
Total Company $ 6,401,130 $ 5,369,203 $ 7,090,018
=============== =============== ================
(1) The grocery category includes grocery, frozen foods, dairy, general
merchandise/health and beauty aids, liquor and pharmacy.
(2) The meat category includes meat, deli, bakery and seafood.
(3) The produce category includes produce and floral.
(4) Other includes sales from an information technology services agreement
with Metro, Inc. Refer to Note 17 - Related Party Transactions for further
discussion.
109
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Fiscal
------------------------------------------
2007 2006 2005
----------- ----------- -----------
Sales
North $ 1,891,967 $ 1,838,416 $ 1,830,389
Central 1,403,852 1,397,910 1,404,741
South 1,656,641 1,620,666 1,631,998
Pathmark 921,267 -- --
Gourmet 289,775 282,350 282,650
Other 231,836 212,189 207,180
Investment in Metro, Inc. 5,792 17,672 9,181
Canada -- -- 1,723,879
----------- ----------- -----------
Total sales $ 6,401,130 $ 5,369,203 $ 7,090,018
=========== =========== ===========
Segment income (loss)
North $ 76,247 $ 70,891 $ 65,315
Central 18,207 11,917 8,607
South (19,375) (1,946) 9,471
Pathmark 20,694 -- --
Gourmet 19,105 18,220 14,980
Other (2,639) (9,400) (12,108)
Canada -- -- 57,224
----------- ----------- -----------
Total segment income 112,239 89,682 143,489
Corporate (130,960) (135,716) (153,967)
Reconciling items* (20,519) 18,864 (160,382)
----------- ----------- -----------
Loss from operations (39,240) (27,170) (170,860)
(Loss) gain on sale of Canadian operations (436) (1,299) 912,129
Gain on sale of Metro, Inc. 184,451 -- --
Non operating income 37,394 -- --
Interest expense (111,816) (65,884) (84,404)
Interest and dividend income 14,350 9,020 12,855
Equity earnings in Metro 7,869 40,003 7,801
Minority interest -- -- (1,131)
----------- ----------- -----------
Income (loss) from continuing operations before income taxes $ 92,572 $ (45,330) $ 676,390
=========== =========== ===========
Segment depreciation and amortization - continuing operations
North $ 37,000 $ 36,593 $ 34,460
Central 30,359 28,028 25,367
South 33,920 30,748 29,524
Pathmark 15,934 -- --
Gourmet 10,570 9,175 7,894
Other 4,377 3,386 3,973
Canada -- -- 10,942
----------- ----------- -----------
Total segment depreciation and amortization - continuing operations 132,160 107,930 112,160
Corporate 45,992 40,832 61,880
----------- ----------- -----------
Total depreciation and amortization - continuing operations 178,152 148,762 174,040
Discontinued operations 8,637 28,992 33,289
----------- ----------- -----------
Total company depreciation and amortization $ 186,789 $ 177,754 $ 207,329
=========== =========== ===========
- -------------
* Reconciling items which are not included in segment income (loss) include
LIFO reserve adjustment, stock awards expense, restructuring events,
real-estate related activity and other nonrecurring adjustments.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 16 - HURRICANE KATRINA AND IMPACT ON BUSINESS
During the second quarter of fiscal 2005, Hurricane Katrina had a major
effect on certain portions of the Gulf Coast region and resulted in the closure
of our 28 stores and warehouse facilities. As of February 23, 2008, all of these
stores were closed. As of February 24, 2007, 23 of these stores were open and
operating and the remaining 5 stores were closed in fiscal 2005.
During fiscal 2005, we recorded a charge for future occupancy costs of
$7.1 million for our 5 closed stores, which has been included in our
Consolidated Statement of Operations, under the caption "Income (loss) from
operations of discontinued businesses, net of tax" for fiscal 2005.
As of the balance sheet date, February 25, 2006, we were able to determine
that we incurred impairment losses of $6.1 million for property, plant &
equipment that were not covered by insurance. This amount has been included in
our Consolidated Statements of Operations, under the caption "Income (loss) from
operations of discontinued businesses, net of tax" for fiscal 2005 and in
"Impairment loss relating to Hurricane Katrina" in our Consolidated Statement of
Cash Flows for fiscal 2005.
We maintain property insurance coverage which provides for reimbursement
from losses resulting from property damage, loss of product as well as business
interruption coverage. We have recovered and expect to recover the remaining
losses caused by Hurricane Katrina in excess of our estimated insurance
deductible of approximately $5.0 million, which was recorded in our Consolidated
Statements of Operations, under the caption "Income (loss) from operations of
discontinued businesses, net of tax" for fiscal 2005. During fiscal 2007 and
fiscal 2006, we recorded a gain of $2.3 million and $9.2 million, respectively;
representing an insurance settlement for a portion of our losses caused by
Hurricane Katrina, which has been included in our Statement of Consolidated
Operations, under the caption "Income (loss) from operations of discontinued
businesses, net of tax" for fiscal 2006.
NOTE 17 - RELATED PARTY TRANSACTIONS
On January 4, 2008 the Company entered into an extension of a real estate
lease for a residence for the benefit of Andreas Guldin, the Company's Executive
Managing Director and a member of the Board of Directors. The term of the lease,
as extended, will run through May 31, 2010, and the aggregate amount of rent
payable through the extended term is $0.2 million. The payment of Mr. Guldin's
living expenses is a Company obligation under the Company's employment agreement
with Mr. Guldin.
At the close of business on August 13, 2005, our Company completed the
sale of our Canadian business to Metro, Inc., a supermarket and pharmacy
operator in the Provinces of Quebec and Ontario, Canada, for $1.5 billion in
cash, stock and certain debt that was assumed by Metro, Inc. We used the equity
method of accounting to account for our investment in Metro, Inc. until March
13, 2007 because we had significant influence over substantive operating
decisions
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
made by Metro, Inc. through our membership on Metro, Inc.'s Board of Directors
and its committees and information technology services agreement.
Simultaneously with the sale, we entered into an Information Technology
Transition Services Agreement with Metro, Inc., where our Company will provide
certain information technology and other services, to Metro, Inc. for a period
of 2 years from the date of sale with the potential to extend the agreement for
two additional six month renewal periods. This agreement provided for Metro,
Inc. to pay our Company a fee of C$20 million (U.S. $19.1 million) per year.
Accordingly, we have recorded $5.8 million, $17.7 million and $9.2 million in
"Sales" in our Consolidated Statements of Operations for fiscal 2007, fiscal
2006 and fiscal 2005, respectively.
Metro, Inc. also leased a shopping center in Toronto, Ontario, Canada from
our Company. The lease commenced at the time of the sale and expires on October
4, 2015. It included four 5 year renewal options. The base annual rent was C$0.8
million (U.S. $0.7 million). During the third quarter of fiscal 2006, our
Company sold this shopping center to Metro, Inc. generating proceeds of C$10.3
million (U.S. $9.1 million) and a net gain, after transaction related costs, of
$4.5 million which was recorded in "Store operating, general and administrative
expense" in our Consolidated Statements of Operations in fiscal 2006.
Beginning March 13, 2007, as a result of the sale of 6,350,000 shares of
Metro, Inc., our Company recorded our investment in Metro, Inc. under SFAS 115
as an available for sale security for the fiscal year ended February 23, 2008
because we no longer exert significant influence over substantive operating
decisions made by Metro, Inc. In accordance with SFAS 115, we recorded dividend
income of $3.9 million based on Metro, Inc.'s dividend declaration on April 17,
2007, August 8, 2007 and September 25, 2007 and included this amount in
"Interest and dividend income" on our Consolidated Statements of Operations for
the fiscal year ended February 23, 2008. On November 26, 2007, in connection
with our agreement to acquire Pathmark Stores, Inc., our Company sold the
remaining 11,726,645 shares of our holdings in Metro, Inc. After these sales,
our Company no longer holds Class A subordinate shares of Metro, Inc. as of the
balance sheet date. Refer to Note 3 - Equity Investment in Metro, Inc. for
further discussion.
A&P Properties Limited, a former subsidiary of our Company, leased a store
in Windsor, Ontario, Canada from Tenga Capital Corporation, which is owned by
Erivan and Helga Haub. Erivan Haub is the father of Christian W. E. Haub, our
Executive Chairman, and is a general partner, together with Tengelmann
Verwaltungs- und Beteiligungs GmbH, Karl-Erivan W. Haub and Christian W. E. Haub
of Tengelmann, which owns a controlling interest of our common stock. Helga Haub
is the mother of Christian W. E. Haub. The lease, which commenced in 1983 and
expires on October 31, 2013, includes four 5-year renewal options. The base
annual rental was C$0.5 million (U.S. $0.4 million) until October 31, 2003, when
it decreased to C$0.4 million (U.S. $0.3 million). As a result of the sale of
our Canadian operations as discussed above, we no longer lease this store from
Tenga Capital Corporation. Through the date of its sale, we paid $0.2 million to
Tenga Capital Corporation for this lease during fiscal 2005.
During fiscal 2003, we entered into a three year agreement with OBI
International Development and Service GMBH ("OBI International"), a subsidiary
of Tengelmann, to purchase seasonal merchandise to be sold in our stores. Our
purchases from OBI International totaled nil, $0.7 million and $2.1 million in
fiscal 2007, fiscal 2006 and fiscal 2005, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
We own a jet aircraft, which Tengelmann leases under a full cost
reimbursement lease. During fiscal 2007, fiscal 2006 and fiscal 2005, Tengelmann
was obligated to and has reimbursed us $4.6 million, $4.1 million and $3.1
million, respectively, for their use of the aircraft.
NOTE 18 - HEDGE OF NET INVESTMENT IN FOREIGN OPERATIONS
From time to time, we may enter hedging agreements in order to manage
risks incurred in the normal course of business including forward exchange
contracts to manage our exposure to fluctuations in foreign exchange rates.
Refer to Note 3 - Investment in Metro, Inc. for a discussion of the
currency exchange forward contract entered into during fiscal 2007.
During the first quarter of fiscal 2005, we entered into a six month
currency exchange forward contract totaling $900 million Canadian dollar
notional value to hedge our net investment in our Canadian foreign operation
against adverse movements in exchange rates. Our Company measures
ineffectiveness based upon the change in forward exchange rates. In the second
quarter of fiscal 2005 and upon completion of the sale of our Canadian
operations, this forward contract was terminated prior to its expiration.
Upon settlement, the effective portion of this net investment hedge
contract resulted in a loss, after tax, of approximately $21.1 million during
fiscal 2005 and was recognized as an offset to the gain recorded in connection
with the sale of our Canadian subsidiary. The gain was recorded in "Gain on sale
of Canadian operations" in our Consolidated Statements of Operations for fiscal
2005.
In addition, the amount excluded from the measure of effectiveness on this
net investment hedge amounted to $15.4 million, before income taxes, and was
recorded as "Store operating, general and administrative expense" in our
Consolidated Statements of Operations for fiscal 2005.
NOTE 19 - COMMITMENTS AND CONTINGENCIES
Lease Assignment
On August 14, 2007, Pathmark entered into a leasehold assignment contract
for the sale of its leasehold interests in one of its stores to CPS Operating
Company LLC, a Delaware limited liability company ("CPS"). Pursuant to the terms
of the agreement, Pathmark was to receive $87 million for assigning and
transferring to CPS all of Pathmark's interest in the lease and CPS was to have
assumed all of the duties and obligations of Pathmark under the lease. CPS
deposited $6 million in escrow as a deposit against the purchase price for the
lease, which is non-refundable to CPS, except as otherwise expressly provided in
the agreement. The assignment of the lease was scheduled to close on December
28, 2007. On December 27, 2007, CPS issued a notice terminating the agreement
for reason of a purported breach of the agreement, which, if proven, would
require the return of the escrow. We are disputing the validity of CPS's notice
of termination as we believe CPS's position is without merit. Because we are
challenging the validity of CPS's December 27, 2007 notice of termination, we
issued our own notice to CPS on December 31, 2007, asserting CPS's breach of the
agreement as a result of their failure to close on December 28, 2007. CPS's
breach, if proven, would entitle us to keep the escrow. Both parties have taken
legal action to obtain the $6 million deposit held in escrow.
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Legal Settlement
On November 5, 2007, the Superior Court of the State of New Jersey,
Middlesex County, approved the negotiated settlement of the two putative class
action complaints that were filed in New Jersey State court on March 6, 2007,
and March 12, 2007, and subsequently consolidated on June 15, 2007 and amended
on July 16, 2007 (Superior Court of the State of New Jersey, Middlesex County,
Civil Action No. C-111-07), alleging, inter alia, that the preliminary joint
prospectus/proxy statement regarding the transaction between A&P and Pathmark
included insufficient disclosures, breach of fiduciary duty by the directors of
Pathmark, and aiding and abetting the breach of that duty by Pathmark and A&P.
Pursuant to the negotiated settlement, the litigation was dismissed, releases
were exchanged, Pathmark and A&P made certain disclosures in the definitive
joint proxy statement/prospectus regarding the transaction between A&P and
Pathmark and, in connection with the acquisition of Pathmark subsequent to our
third quarter end, we agreed to pay plaintiffs' attorneys' fees and expenses in
the aggregate amount of $1.3 million.
LaMarca et al v. The Great Atlantic & Pacific Tea Company, Inc ("Defendants")
On June 24, 2004, a class action complaint was filed in the Supreme Court
of the State of New York against The Great Atlantic & Pacific Tea Company, Inc.,
d/b/a A&P, The Food Emporium, and Waldbaum's alleging violations of the overtime
provisions of the New York Labor Law. Three named plaintiffs, Benedetto Lamarca,
Dolores Guiddy, and Stephen Tedesco, alleged on behalf of a class that our
Company failed to pay overtime wages to full-time hourly employees who were
either required or permitted to work more than 40 hours per week.
In April 2006, the plaintiffs filed a motion for class certification. In
July 2007, the Court granted the plaintiffs' motion and certified the class as
follows: All full-time hourly employees of Defendants who were employed in
Defendants' supermarket stores located in the State of New York, for any of the
period from June 24, 1998 through the date of the commencement of the action,
whom Defendants required or permitted to perform work in excess of 40 hours per
week without being paid overtime wages. The Court also ruled that the issue of
whether to include an "opt-in" or "opt-out" provision is premature and can be
decided after discovery has been had.
As class certification was granted only recently, and as discovery on the
prospective plaintiffs comprising the class has yet to be conducted, neither the
number of class participants nor the sufficiency of their respective claims can
be determined at this time.
Antitrust Class Action Litigation
In connection with a settlement reached in the VISA/Mastercard antitrust
class action litigation, our Company is entitled to a portion of the settlement
fund that will be distributed to class members. Pursuant to our initial review
of our historical records as well as estimates provided by the Claims
Administrator, we recorded an estimated pretax recovery of $1.5 million as a
credit to "Selling, general and administrative expense" in our Consolidated
Statements of Operations during fiscal 2005.
During fiscal 2006, our Company received a cash payment of $1.6 million
for our portion of the settlement funds for this class action litigation. During
fiscal 2007, we did not receive any additional monies. During fiscal 2008, we
will continue to work with the Claims Administrator to
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
ensure that any additional monies owed to our Company in connection with this
litigation are received. This process may result in additional recoveries being
recorded in future periods.
Other
We are subject to various legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business. We are also subject
to certain environmental claims. While the outcome of these claims cannot be
predicted with certainty, Management does not believe that the outcome of any of
these legal matters will have a material adverse effect on our consolidated
results of operations, financial position or cash flows.
We adopted the accounting and disclosure requirements of FASB
Interpretation 45 ("FIN 45" or the "Interpretation"), "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107
and Rescission of FASB Interpretation No. 34" during fiscal 2002. As required to
be disclosed by this Interpretation, we are the guarantor of a loan of $1.3
million related to a shopping center, which will expire in 2013.
In the normal course of business, we have assigned to third parties
various leases related to former operating stores (the "Assigned Leases"). When
the Assigned Leases were assigned, we generally remained secondarily liable with
respect to these lease obligations. As such, if any of the assignees were to
become unable to continue making payments under the Assigned Leases, we could be
required to assume the lease obligation. As of February 23, 2008, 235 Assigned
Leases remain in place. Assuming that each respective assignee became unable to
continue to make payments under an Assigned Lease, an event we believe to be
remote, we estimate our maximum potential obligation with respect to the
Assigned Leases to be approximately $741.6 million, which could be partially or
totally offset by reassigning or subletting such leases.
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.
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 20 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following table summarizes our results of operations by quarter for
fiscal 2007 and fiscal 2006. The first quarter of each fiscal year contains
sixteen weeks, while the second, third and fourth quarters each contain twelve
weeks.
First Second Third Fourth Total
2007 (unaudited) Quarter(d) Quarter Quarter Quarter(a)(d) Year
- -------------------------------------- ----------- ----------- ----------- ------------- -----------
(Dollars in thousands, except per share amounts)
Sales $ 1,679,169 $ 1,274,338 $ 1,251,123 $ 2,196,500 $ 6,401,130
Gross margin 522,982 398,637 381,675 666,537 1,969,831
Depreciation and amortization (47,712) (33,611) (32,654) (64,175) (178,152)
(Loss) income from operations (6,374) 7,390 (21,133) (19,123) (39,240)
Gain on sale of Metro, Inc. 78,388 -- 106,063 -- 184,451
Non operating income -- -- -- 37,394 37,394
Interest expense (19,713) (14,594) (14,499) (63,010) (111,816)
Equity in earnings of Metro, Inc. 7,869 -- -- -- 7,869
Income (loss) from
continuing operations 61,406 (2,939) 73,082 (44,569) 86,980
Loss from discontinued
operations (126,548) (88,383) (15,775) (16,954) (247,660)
Net (loss) income (65,142) (91,322) 57,307 (61,523) (160,680)
Per share data(b)
Income (loss) from continuing
operations - basic 1.47 (0.07) 1.74 (0.90) 2.00
(Loss) income from discontinued
operations - basic (3.03) (2.11) (0.38) (0.34) (5.69)
Net (loss) income - basic (1.56) (2.18) 1.36 (1.24) (3.69)
Income (loss) from continuing
operations - diluted 1.45 (0.07) 1.73 (1.40) 1.37
(Loss) income from discontinued
operations - diluted (2.99) (2.11) (0.38) (0.33) (5.59)
Net (loss) income - diluted (1.54) (2.18) 1.35 (1.73) (4.22)
Market price: (c)
High 34.97 35.77 32.60 31.40
Low 30.17 29.15 28.60 27.80
Number of stores at end of period 403 337 322 447
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
First Second Third Fourth Total
2006 (unaudited) Quarter Quarter Quarter Quarter Year
- ----------------------------------- ------------ ----------- ----------- ----------- ----------
(Dollars in thousands, except per share amounts)
Sales $ 1,653,095 $ 1,236,859 $ 1,213,476 $ 1,265,773 $5,369,203
Gross margin 508,476 390,643 375,727 391,474 1,666,320
Depreciation and amortization (45,604) (33,780) (33,930) (35,448) (148,762)
(Loss) income from operations (7,977) (5,977) (5,699) (7,517) (27,170)
Interest expense (19,701) (15,124) (15,342) (15,717) (65,884)
Equity in earnings of Metro, Inc. 7,947 11,870 11,023 9,163 40,003
(Loss) income from
continuing operations (6,348) (2,170) 32,257 (10,988) 12,751
Income from discontinued
operations 239 1,659 8,450 3,794 14,142
Net (loss) income (6,109) (511) 40,707 (7,194) 26,893
Per share data:
(Loss) income from continuing
operations - basic (0.15) (0.05) 0.78 (0.26) 0.31
(Loss) income from discontinued
operations - basic (0.00) 0.04 0.20 0.09 0.34
Net (loss) income - basic (0.15) (0.01) 0.98 (0.17) 0.65
(Loss) income from continuing
operations - diluted (0.15) (0.05) 0.77 (0.26) 0.30
(Loss) income from discontinued
operations - diluted (0.00) 0.04 0.20 0.09 0.34
Net (loss) income - diluted (0.15) (0.01) 0.97 (0.17) 0.64
Market price: (c)
High 28.30 24.10 28.04 31.44
Low 21.25 20.97 22.60 25.51
Number of stores at end of period 405 403 410 406
(a) On December 3, 2007, our Company completed the acquisition of Pathmark
Stores, Inc.
(b) The sum of quarterly basic and diluted (loss) income per share differs
from full year amounts because the number of weighted average common
shares outstanding has increased each quarter.
(c) Our Company stock is listed on the New York Stock Exchange; refer to the
Five Year summary of Selected Financial Data for the number of registered
stockholders at the end of the fiscal year.
(d) During the first quarter of fiscal 2007, our Company withdrew from the
multi-employer union pension plan for Local 174. Included in the fourth
quarter of fiscal 2007 is an adjustment for $5.9 million, relating to our
Company's portion of the mass withdrawal from the plan. The impact of this
adjustment was not significant to the individual quarters in fiscal 2007.
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 21 - SUBSEQUENT EVENT
On March 7, 2008, the Company entered into a definitive agreement with C&S
Wholesale Grocers, Inc. ("C&S") whereby C&S will provide warehousing, logistics,
procurement and purchasing services (the "Services") in support of the Company's
entire supply chain. This agreement replaces and supersedes three (3) separate
wholesale supply agreements under which the parties have been operating. The
term of the agreement is ten and one-half (10-1/2) years, which includes a
six-month "ramp-up" period during which the parties will transition to the new
contractual terms and conditions. The agreement provides that the actual costs
of performing the services shall be reimbursed to C&S on an "open-book" or
"cost-plus" basis, whereby the parties will negotiate annual budgets that will
be reconciled against actual costs on a periodic basis. The parties will also
annually negotiate services specifications and performance standards that will
govern warehouse operations. The agreement defines the parties' respective
responsibilities for the procurement and purchase of merchandise intended for
use or resale at the Company's stores, as well as the parties' respective
remuneration for warehousing and procurement/purchasing activities. In
consideration for the services it provides under the agreement, C&S will be paid
an annual fee and will have incentive income opportunities based upon A&P's cost
savings and increases in retail sales volume.
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of our Company, including the President and Chief Executive
Officer and the Senior Vice President, Chief Financial Officer, is responsible
for establishing and maintaining adequate internal control over financial
reporting, as defined in Rules 13a - 15(f) and 15d - 15(f) of the Securities
Exchange Act of 1934, as amended. Our Company's internal control over financial
reporting was designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of the consolidated financial
statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures that: (i.)
pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of our Company;
(ii.) provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of our
Company are being made only in accordance with authorizations of management and
directors of our Company; and (iii.) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our Company's assets that could have a material effect on the financial
statements.
Our management conducted an evaluation of the effectiveness of the
Company's internal control over financial reporting based on the framework in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. This evaluation included review of the
documentation of controls, evaluation of the design effectiveness of controls,
testing of the operating effectiveness of controls and a conclusion on this
evaluation. Our evaluation did not include the internal controls over financial
reporting of Pathmark Stores, Inc. which was acquired on December 3, 2007.
Total assets and total sales for the acquisition represent 27.5% and 14.4%,
respectively, of the related consolidated financial statement amounts as of and
for the fiscal year ended February 23, 2008. Based on the evaluation, management
has concluded our Company's internal control over financial reporting was
effective as of February 23, 2008.
/s/ Eric Claus /s/ Brenda M. Galgano
- ------------------ ------------------------
Eric Claus Brenda M. Galgano
President and Senior Vice President,
Chief Executive Officer Chief Financial Officer
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
The Great Atlantic & Pacific Tea Company, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity, comprehensive
income (loss) and cash flows present fairly, in all material respects, the
financial position of The Great Atlantic & Pacific Tea Company, Inc. and its
subsidiaries at February 23, 2008 and February 24, 2007, and the results of
their operations and their cash flows for each of the three years in the period
ended February 23, 2008 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of February 23, 2008, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for these financial statements, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Management's Annual Report on Internal Control over Financial Reporting. Our
responsibility is to express opinions on these financial statements and on the
Company's internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company
changed the manner in which it accounts for defined pension and other post
retirement plans in 2006 and the manner in which it accounts for uncertain tax
positions in 2007.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company;
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
and (iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As described in Management's Annual Report on Internal Control over Financial
reporting, Management has excluded Pathmark Stores, Inc. from its assessment of
internal control over financial reporting as of February 23, 2008 because it was
acquired by the Company in a purchase business combination during 2007. We have
also excluded Pathmark Stores, Inc. from our audit of internal control over
financial reporting. Pathmark Stores, Inc. is a wholly-owned subsidiary whose
total assets and total sales represent 27.5% and 14.4%, respectively, of the
related consolidated financial statement amounts as of and for the year ended
February 23, 2008.
/s/ PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
May 8, 2008
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
Fiscal 2007(a)(b)(c) Fiscal 2006 Fiscal 2005(d)(e) Fiscal 2004 Fiscal 2003
(52 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) (53 Weeks)
-------------------- ----------- ----------------- ----------- -----------
(Dollars in thousands, except per share amounts)
OPERATING RESULTS
Sales $ 6,401,130 $ 5,369,203 $ 7,090,018 $ 8,923,508 $ 8,829,477
(Loss) income from operations (39,240) (27,170) (170,860) 23,300 33,377
Depreciation and amortization (178,152) (148,762) (174,040) (220,504) (225,129)
(Loss) gain on sale of Canadian
operations (436) (1,299) 912,129 -- --
Gain on sale of Metro, Inc. 184,451 -- -- -- --
Interest expense(f) (111,816) (65,884) (84,404) (107,397) (98,124)
Income (loss) from continuing
operations 86,980 12,751 518,059 (81,686) (78,612)
(Loss) income from discontinued
operations (247,660) 14,142 (125,429) (106,412) (70,290)
(Loss) income before cumulative effect
of change in accounting principle (160,680) 26,893 392,630 (188,098) (148,902)
Cumulative effect of a change in
accounting principle - FIN 46-R(g) -- -- -- -- (8,047)
Net (loss) income (160,680) 26,893 392,630 (188,098) (156,949)
PER SHARE DATA
Income (loss) from continuing
operations - basic 2.00 0.31 12.85 (2.12) (2.04)
(Loss) income from discontinued
operations - basic (5.69) 0.34 (3.11) (2.76) (1.83)
Cumulative effect of a change in
accounting principle - FIN 46-R(g) -- -- -- -- (0.21)
Net (loss) income - basic (3.69) 0.65 9.74 (4.88) (4.08)
Income (loss) from continuing
operations - diluted 1.37 0.30 12.72 (2.12) (2.04)
(Loss) income from discontinued
operations - diluted (5.59) 0.34 (3.08) (2.76) (1.83)
Cumulative effect of a change in
accounting principle - FIN 46-R(g) -- -- -- -- (0.21)
Net (loss) income - diluted (4.22) 0.64 9.64 (4.88) (4.08)
Cash dividends (h) -- 7.25 -- -- --
Book value per share (h) 7.32 10.36 16.32 6.03 10.20
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THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA - CONTINUED
Fiscal 2007(a)(b)(c) Fiscal 2006 Fiscal 2005(c)(d) Fiscal 2004 Fiscal 2003
(52 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) (53 Weeks)
-------------------- ----------- ----------------- ----------- -----------
(Dollars in thousands, except per share amounts)
FINANCIAL POSITION
Current assets $ 884,426 $ 748,908 $ 1,210,014 $ 1,164,681 $ 1,198,950
Current liabilities 767,337 558,391 610,273 1,078,202 1,083,235
Working capital (h) 117,089 190,517 599,741 86,479 115,715
Current ratio (h) 1.15 1.34 1.98 1.08 1.11
Expenditures for property 122,850 208,159 191,050 216,142 160,951
Total assets 3,647,918 2,111,623 2,498,865 2,801,968 2,902,846
Current portion of
long-term debt (i) 11,875 32,069 569 2,278 2,271
Current portion of
capital lease obligations 11,344 1,554 2,274 8,331 15,901
Long-term debt (f) 758,886 284,214 246,282 634,028 642,296
Long-term portion of
capital lease obligations 157,430 29,938 32,270 52,184 55,243
Total debt 939,535 347,775 281,395 696,821 715,711
Debt to total capitalization (h) 69% 45% 30% 75% 65%
EQUITY
Stockholders' equity (j) 418,143 430,670 671,727 233,802 392,759
Weighted average shares
outstanding - basic 43,551,459 41,430,600 40,301,132 38,558,598 38,516,750
Weighted average shares
outstanding - diluted 44,295,214 41,902,358 40,725,942 38,558,598 38,516,750
Number of registered
stockholders (h) 5,856 4,649 4,916 5,289 5,469
OTHER (h)
Number of employees 51,000 38,000 38,000 73,000 74,185
New store openings 10 10 3 24 19
Total number of stores at year end 447 406 405 647 633
Total store area
(square feet) 18,813,135 16,538,410 16,508,969 25,583,138 24,724,168
Number of franchised
stores served at year end -- -- -- 42 63
Total franchised store
area (square feet) -- -- -- 1,375,611 2,048,016
(a) On December 3, 2007, our Company completed the acquisition of Pathmark
Stores, Inc.
(b) As of February 23, 2008 our Midwest and Greater New Orleans operations
were classified as discontinued operations.
(c) In November 2007, the Company completely disposed of its investment in
Metro, Inc.
(d) At the close of business on August 13, 2005, our Company completed the
sale of our Canadian business to Metro, Inc.
(e) On February 27, 2005 (the first day of our 2005 fiscal year), our Company
adopted FAS 123R and recorded share-based compensation expense of $8.2
million and $9.0 million in fiscal 2006 and fiscal 2005, respectively.
(f) In fiscal 2005, we repurchased the majority of our 7.75% Notes due April
15, 2007 and our 9.125% Senior Notes due December 15, 2011.
(g) In fiscal 2003, the Financial Accounting Standards Board issued revised
Interpretation No. 46, "Consolidation of Variable Interest Entities - an
interpretation of `Accounting Research Bulletin No. 51' ". As of February
23, 2003 we adopted its guidance as we were deemed the primary beneficiary
and included the franchisee operations in our consolidated financial
statements for fiscal 2003, fiscal 2004 and fiscal 2005.
(h) Not derived from audited financial information.
(i) In April 2007, our 7.75% Notes become due and payable in full.
(j) On April 25, 2006, our Company paid a special one-time dividend to our
stockholders of record on April 17, 2006 equal to $7.25 per share. This
dividend payout totaling $299.1 million was recorded as a reduction of
"Additional paid in capital" in our Consolidated Balance Sheets at
February 24, 2007.
123
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
EXECUTIVE OFFICERS
CHRISTIAN W. E. HAUB
Executive Chairman
ERIC CLAUS
President and
Chief Executive Officer
BRENDA M. GALGANO
Senior Vice President,
Chief Financial Officer
ANDREAS GULDIN
Executive Managing Director,
Strategy & Development
JENNIFER MAC LEOD
Senior Vice President,
Marketing and Communications
ALLAN RICHARDS
Senior Vice President,
Human Resources, Labor Relations,
Legal Services & Secretary
REBECCA PHILBERT
Senior Vice President,
Merchandising & Supply and Logistics
PAUL WISEMAN
Senior Vice President,
Store Operations
WILLIAM MOSS
Vice President and Treasurer
MELISSA E. SUNGELA
Vice President and Corporate Controller
BOARD OF DIRECTORS
CHRISTIAN W. E. HAUB (c)(e)
Executive Chairman
JOHN D. BARLINE, ESQ. (c)
Williams, Kastner & Gibbs LLP,
Tacoma, Washington
JENS-JURGEN BOCKEL (d)
Chief Financial Officer and
Member of the Managing Board
Tengelmann Warenhandelsgesellschaft KG
Mulheim, Germany
BOBBIE A. GAUNT (a)(b)(c)(d)(e)
Former President and CEO,
Ford Motor Company of Canada
ANDREAS GULDIN (c)(e)
Executive Managing Director,
Strategy & Development
DAN P. KOURKOUMELIS (a)(c)(d)
Former President and CEO,
Quality Food Centers, Inc.
EDWARD LEWIS (a)(b)(d)
Chairman and Founder,
Essence Communications Inc.
GREGORY MAYS (a)(b)(d)
Former Chairman and CEO,
Wild Oats Markets
MAUREEN B. TART-BEZER (a)(b)(d)(e)
Former Executive Vice President &
Chief Financial Officer
Virgin Mobile USA, LLC
(a) Member of Audit/Finance Committee (Maureen B. Tart-Bezer, Chair)
(b) Member of Human Resources & Compensation Committee (Bobbie A. Gaunt,
Chair)
(c) Member of Executive Committee (Christian W. E. Haub, Chair)
(d) Member of Governance Committee (Dan P. Kourkoumelis, Chair)
(e) Member of Closing & Integration Committee (Andreas Guldin and Maureen B.
Tart-Bezer, Co-Chairs)
124
STOCKHOLDER INFORMATION
EXECUTIVE OFFICES
Box 418
2 Paragon Drive
Montvale, NJ 07645
Telephone 201-573-9700
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
PricewaterhouseCoopers LLP
400 Campus Drive
PO Box 988
Florham Park, NJ 07932
STOCKHOLDER INQUIRIES AND PUBLICATIONS
Stockholders, security analysts, members of the media and others interested in
further information about our Company are invited to contact the Investor
Relations Help Line at 201-571-4537.
Internet users can access information on A&P at: www.aptea.com
CORRESPONDENCE CONCERNING STOCKHOLDER ADDRESS CHANGES OR OTHER STOCK ACCOUNT
MATTERS SHOULD BE DIRECTED TO OUR COMPANY'S TRANSFER AGENT & REGISTRAR
American Stock Transfer and Trust Company
59 Maiden Lane
New York, NY 10038
Telephone 800-937-5449
www.amstock.com
COMMUNICATIONS WITH THE BOARD OF DIRECTORS
Stockholders who would like to contact our Company's Board of Directors,
including a committee thereof or a specific Director, can send an e-mail to
bdofdirectors@aptea.com or write to the following address:
c/o The Great Atlantic & Pacific Tea Company, Inc., Senior Vice President, Human
Resources, Labor Relations, Legal Services & Secretary, 2 Paragon Drive,
Montvale, NJ 07645
FORM 10-K
Copies of Form 10-K filed with the Securities and Exchange Commission will be
provided to stockholders upon written request to the Secretary at the Executive
Offices in Montvale, New Jersey. Exhibits to the Form 10-K include the most
recent certifications by A&P's Chief Executive Officer and Chief Financial
Officer. We have also filed with the New York Stock Exchange the most recent
Annual CEO Certification as required by Section 303A.12(a) of the New York Stock
Exchange Listed Company Manual.
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 9:00 a.m. (EDT) on
Thursday, July 17, 2008 at
The Woodcliff Lake Hilton
200 Tice Boulevard
Woodcliff Lake, New Jersey, USA
COMMON STOCK
Common stock of our Company is listed and traded on the New York Stock Exchange
under the ticker symbol "GAP" and has unlisted trading privileges on the Boston,
Midwest, Philadelphia, Cincinnati, and Pacific Stock Exchanges. The stock is
generally reported in newspapers and periodical tables as "GtAtPc".
(C) 2008 The Great Atlantic & Pacific Tea Co., Inc. All rights reserved.
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