The Great Atlantic & Pacific Tea Company, Inc.
Fiscal 2008
Annual Report to Stockholders
[LOGO]
Table of Contents
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Executive Chairman Letter to Stockholders.................................. 3
President and Chief Executive Officer Letter to Stockholders............... 5
Management's Discussion and Analysis....................................... 7
Consolidated Statements of Operations...................................... 42
Consolidated Statements of Stockholders' Equity
and Comprehensive (Loss) Income..................................... 43
Consolidated Balance Sheets................................................ 45
Consolidated Statements of Cash Flows...................................... 46
Notes to Consolidated Financial Statements................................. 47
Management's Annual Report on Internal Control over Financial Reporting.... 110
Report of Independent Registered Public Accounting Firm.................... 111
Five Year Summary of Selected Financial Data............................... 113
Executive Officers......................................................... 115
Board of Directors......................................................... 115
Stockholder Information.................................................... 116
Company Profile
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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
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Dear Fellow Stockholders:
This has undoubtedly been a very turbulent year. The unprecedented
challenging economic environment has resulted in the near collapse of the
financial markets and has led to a global recession. While we are fortunate to
be in the food business, we are not immune to the challenges of the recession.
Although we have begun to notice changes in our customers' behavior, there has
been progress made on many fronts in our Company during the year.
Despite these external challenges, the Company delivered solid results
with positive sales and improved earnings year-over-year, while at the same time
completing the integration of the Pathmark acquisition.
There were certainly some obstacles that had to be overcome along the
way, but combining with Pathmark has strengthened the overall Company and put us
into a more resilient position to withstand the current economic challenges. The
Company has realized significant synergies from the acquisition, which will
continue into the coming years.
I remain optimistic in our outlook; although the short-term remains
very difficult to predict, I believe the Company is well positioned to weather
the economic storm. We are very focused on liquidity and have taken all the
appropriate measures to preserve cash and maintain a prudent amount of
liquidity. Longer term, A&P's strategic position remains strong and we will
utilize this period of economic dislocation to further improve our business
operations, reduce our cost base and increase our competitiveness.
Unfortunately, our stock price performance declined significantly
during the past twelve months and I believe this is indicative of the challenges
retailers are facing in these difficult times. As such, the numerous factors
that have contributed to our decline are similar to those that have driven down
stock all over the world, including an aversion by investors to companies with
perceived higher risk and leverage. However, I believe that over time, as the
market stabilizes and the Company continues to make progress and deliver
results, our stock price will be more reflective of the Company's intrinsic
value.
Clearly, the U.S. retail market is facing one of the most difficult
years in 2009. However, our Company is prepared for the challenges ahead. The
Company's diverse retail format strategy allows us to react quickly and compete
effectively, within whatever the economic environment dictates. As such, we have
shifted our strategy to meet the demands of our customers for saving money every
time they shop in our stores, while still offering them high quality, nutritious
foods. The roll-out of our comprehensive new private label program is playing a
key role in this strategy, as well as our ability to quickly convert to our
Price Impact and Discount formats.
2009 is also significant in that it marks the Company's historic 150th
Anniversary - an important milestone not only in our history but in our
country's heritage, as we are the oldest grocery retailer in the United States.
Founded in 1859, the Great Atlantic & Pacific Tea Company has played an integral
role in shaping the way food retailers understand and serve customers,
employees, communities, and the environment. The Company's legacy is its ability
to provide shoppers with quality products at the most affordable prices. It has
been a privilege to serve American families for generations and we look forward
to continuing doing so for many more generations to come. Personally, this
anniversary is especially meaningful. My family has been in the retail business
for five generations. Their decisions, faith and fortitude grew a business
enterprise that provided employment and sustenance for countless thousands,
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while serving a fundamental societal need. But the idea of constantly striving
to build something better for those who will follow is, to me, a basic and
fundamental driver. It is my legacy, along with the Board of Directors, the
Executive Management Team and the thousands of hard working employees, that
preserves that principle and tradition and on behalf of all - I would like to
thank you for making us your neighborhood grocery store for 150 years.
I would like to also take a moment to thank our Board of Directors,
whose guidance over the past year has been critical, especially in this time of
unprecedented crisis and uncertainty. Additionally, I would like to commend the
Executive Management Team under the leadership of our CEO, Eric Claus, for their
quick actions and adjustments they made to the fast changing environment this
past year and the solid results they generated during a very difficult
environment. This team's unwavering passion is steering the Company through
these unprecedented times. Finally, I would be remiss if I did not praise the
Pathmark Integration Team for a job well done. The integration of Pathmark is
complete and has positioned Pathmark for success, which is a testament to their
focused due diligence efforts and continuing support.
As we celebrate our historic 150th Anniversary, I remain confident in
the longer-term prospects of the new A&P, as our strong strategic position in
the Northeast, our successful format strategy and the business optimization
potential we have identified, positions us to effectively navigate through the
economic storm and emerge as a stronger competitor once the economy recovers.
Sincerely,
/s/ Christian Haub
Christian Haub
Executive Chairman
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PRESIDENT AND CHIEF EXECUTIVE OFFICER LETTER TO STOCKHOLDERS
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Dear Fellow Stockholders:
Although we are living in very tumultuous times, 2008 has been a year
of true progress on many fronts. This year the Company forged a definite
trajectory path towards enhanced performance in the longer-term. While cost
inflation continued, the Company stayed committed to enhancing our price
positioning to meet our customers' financially strained budgets. In order to do
so, we continuously modified our merchandising and marketing strategies, as
necessary.
As part of these efforts, we put considerable emphasis into rebranding,
packaging and consolidating our private label portfolio, which grew
significantly to over a 17% penetration rate. Our private label program has now
been harmonized between Pathmark and our other Core A&P business, with America's
Choice and Smart Price labels as our anchor brands. The Pathmark consumer has
overwhelmingly embraced the addition of the America's Choice line as the former
Pathmark brand was phased out.
The Company has also completed the Pathmark integration and while we
have met with some obstacles, we are definitely reaping the benefits of this
strategic decision. At the end of 2008, the Company realized our anticipated
synergies of $150 million, of which approximately $111 million were recognized
during fiscal 2008.
Our relationship with our distribution provider and partner, C&S,
continues to provide enhanced benefits as we collectively seek our cost savings
and efficiencies while managing our individual businesses. This year, service
levels were the best realized in many years.
Our format strategy continues to be highly impactful as it allows us to
be relevant in every market we serve with our teams continuously striving for
enhanced improvement of our financial performance in spite of the economic
environment.
Fresh Format
After 3 1/2 years of strategic development, our Fresh format, including
the A&P, Waldbaum's and SuperFresh banners' performance continues to deliver
year-over-year same-store sales growth and earnings. EBITDA in Fresh increased
due to the implementation of numerous initiatives. Our Fresh merchants and
operators delivered a superior shopping experience that provides value and an
exceptional Fresh offer.
Gourmet Format
Our Gourmet business, better known as The Food Emporiums in Manhattan,
is having one of the best years in recent history despite the crisis on Wall
Street. This banner had a record year with top line sales growth exceeding the
industry average and bottom line delivering nearly 50% better than in prior
year.
Price Impact Format
Our Price Impact format, known as the Pathmark banner, experienced a
softer top line than the Company average. While this was disappointing,
due to diligent efforts of our team, we were able to improve merchandising
income period-after-period through enlisting the proper people, implementing
core strategies and correcting our system and process issues.
We have realized significant synergies from the acquisition, which will
continue for years to come and provide us the necessary resources to effectively
compete in this difficult environment. The overall
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benefits of the transaction have so far been tremendous and I want to thank the
entire team for their hard work leading to the completion of the integration one
year after the close of the acquisition.
Discount Format
Our Discount business Food Basics is doing phenomenally well, as it is
a particularly relevant format during these tough recessionary times. The Food
Basics banner is realizing significant growth, with double digit comparable
sales and a bottom line that outpaces the prior year. This format has much
future growth potential.
Going forward into 2009, we are prepared to meet the challenges of a
worsening economy and are consistently tailoring new merchandising strategies to
meet the needs of our financially strained consumers. These new programs will
allow us to be more effective in driving the grocery basket down. I believe that
the Company is well positioned with a diverse retail format strategy to react to
and compete effectively.
I would like to personally thank my direct team as well as our
associates for their commitment, tremendous hard work and tireless dedication
during these tough times; and Christian Haub, our Executive Chairman and the
Board of Directors, whose leadership and direction has been instrumental in
navigating through this year.
Sincerely,
/s/ Eric Claus
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:
o Basis of Presentation -- a discussion of our Company's fiscal year-end.
o Overview -- a general description of our business; the value drivers of our
business; measurements; opportunities; challenges and risks; and
initiatives.
o Recent Announcements -- a discussion of certain major announcements during
fiscal 2008.
o Operating Results -- a summary discussion of operating results during
fiscal 2008.
o 2009 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.
o Review of Operations and Liquidity and Capital Resources - a discussion of
results for fiscal 2008, 2007 and 2006, significant business initiatives,
current and expected future liquidity and the impact of various market
risks on our Company.
o Market Risk -- a discussion of the impact of market changes on our
consolidated financial statements.
o Critical Accounting Estimates -- a discussion of significant estimates made
by Management.
BASIS OF PRESENTATION
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Our fiscal year ends on the last Saturday in February. Fiscal 2008 was
comprised of 53 weeks, consisting of 12 four-week periods and one five-week
period, which was during our fourth quarter. Fiscal 2007 and 2006 were each
comprised of 52 weeks, consisting of 13 four-week periods. Except where noted,
all amounts are presented in millions.
OVERVIEW
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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 436
stores as of February 28, 2009.
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The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
During the second quarter ended September 6, 2008, our chief operating
decision maker changed the manner by which our results are evaluated, therefore,
our reportable segments have been revised to be consistent with the way we
currently manage our business. Accordingly, we have revised our segment
reporting to report in five operating segments: Fresh, Price Impact, Gourmet,
Other and our investment in Metro, Inc. The Other segment includes our Food
Basics and Liquor businesses. Our investment in Metro, Inc. represents our
former economic interest in Metro, Inc. The criteria necessary to classify the
Midwest and Greater New Orleans area as discontinued were satisfied in fiscal
2007 and these operations have been classified as such in our Consolidated
Statements of Operations for fiscal 2008, fiscal 2007 and fiscal 2006.
RECENT ANNOUNCEMENTS
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On March 7, 2008, our Company entered into a definitive agreement with
C&S Wholesale Grocers, Inc. ("C&S") whereby C&S provides warehousing,
logistics, procurement and purchasing services (the "Services") in support of
the Company's entire supply chain. This agreement replaced and superseded 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 service 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.
On May 7, 2008, 4,657,378 Series A warrants, scheduled to expire on
June 9, 2008, were exercised by Yucaipa Corporate Initiatives Fund I, L.P.,
Yucaipa American Alliance Fund I, L.P. and Yucaipa American Alliance (Parallel)
Fund I, L.P. Our Company opted to settle the Series A warrants in cash totaling
$45.7 million rather than issuing additional common shares.
On September 27, 2008, our Company agreed to sell C&S all general
merchandise, health beauty and cosmetics, seasonal grocery and other such
merchandise warehoused at our distribution center located in Edison, New Jersey.
The cost of this inventory was approximately $29.9 million and we repurchased
the entire inventory at the end of our third quarter of fiscal 2008. No gain,
loss or revenue was recorded on the sale.
OPERATING RESULTS
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Despite the challenging economic environment, our Company has made
progress on numerous initiatives. The Pathmark integration has been completed
and while there have been some challenges we are already realizing many of the
benefits of this acquisition.
We realized our anticipated synergies of $150 million, of which
approximately $111 million were recognized during fiscal 2008, comprised of
reduced administrative costs ($67 million), reduced merchandise costs ($28
million), as well as reductions in store operating and marketing and advertising
costs ($16 million).
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The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
We maintained all necessary liquidity during the fourth quarter of
fiscal 2008 with availability of $96.2 million under our Credit Agreement and
invested cash available to reduce borrowings and/or for future operations of
$67.0 million as of February 28, 2009.
Our format strategy continues to be successful as it allows us to be
relevant in every market we serve.
Fresh Format
(A&P, Waldbaum's and SuperFresh)
Our Fresh Format performance continues to deliver strong year-over-year
same store sales growth and strong earnings growth. Our Fresh Team has been
working hard to deliver a superior store experience and our stores and
performance illustrates their effectiveness.
Price Impact
(Pathmark and Pathmark Sav-A-Center)
Our Price Impact format's top line was softer than the Company average.
After acquiring Pathmark a year ago, we experienced some challenges with the
integration and operations of the business. Since the second quarter of fiscal
2008, we have experienced significant improvements in our gross margin rate,
with the exception of stock losses in our center store, which have increased
with the declining economy. In addition, we have incurred higher labor costs,
both in productive and fringe costs. We have improved gross margin rates by
increasing merchandising income as a result of the proper people and strategies
being in place and improvements to system and process issues. In-stock positions
have also continued to improve over the last two quarters. Currently we continue
to work on reducing stock losses and increasing labor efficiencies by executing
strategies that improve results in our other formats. We are confident that this
format is on track to deliver promising results although there can be no
assurance that this will happen.
Gourmet
(The Food Emporium)
Our Gourmet stores located in Manhattan continue to produce significant
growth in sales and segment income despite the impact of the economic crisis.
This banner is delivering top line sales growth that exceeds the industry
average and a bottom line that is nearly 50% better than the prior year. We
believe the Gourmet team's commitment to new product innovation and better store
standards is delivering on customer and financial expectations.
Other
(Food Basics, Best Cellars and A&P Liquors)
Our Discount business operating under the Food Basics banner is
realizing growth in both sales and segment income. This business is doing
extremely well as it is a particularly relevant format during this challenging
economic environment. The Food Basics banner is realizing double digit
comparable sales and a bottom line that outpaces the prior year and our internal
expectations. We believe this format has much future growth potential.
Additionally we have opened two additional A&P Best Cellars stand alone
liquor stores in Ridgefield, CT and Riverside, CT and expect to commence more
in-store renovations.
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The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
2009 OUTLOOK
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This has been a very turbulent year with an unprecedented challenging
economic environment. Despite this challenge, we continued to deliver solid
overall results with strong sales year-over-year, while at the same time
completing the integration of the Pathmark acquisition. We believe combining
with Pathmark has strengthened our Company and positioned us well to withstand
economic challenges. Additionally, we have realized significant synergies from
the acquisition which we believe will continue into 2009 and provide the
necessary resources to effectively compete in this difficult environment.
We expect that in 2009 the US retail market will face one of the most
difficult and challenging years as our customers are expected to have lower
disposable income. However, we believe our Company is preparing for the
challenges ahead by shifting our strategy to meet the demands of our customers
who have lowered their weekly shopping budget while still providing high
quality, nutritious foods. Our comprehensive new private label program is a
critical component of our strategy as well as strategic store conversions.
In 2009, we will celebrate our historic 150th anniversary. We believe
that our strong strategic position in the Northeast, our successful format
strategy and our resolve to implement strategic changes, positions us to
effectively manage the challenging economic environment and remain cautiously
optimistic in our long-term prospects. We recognize that this recession has been
projected to worsen and have consequently been tailoring new merchandising
strategies that we will employ to be more effective offering cost-effective
alternatives for our customers.
We believe that our present cash resources, including invested cash on
hand, available borrowings from our $675 million Credit Agreement and other
sources, are sufficient to meet our needs. Based on information available to us,
as of our filing date, we have no indication that the financial institutions
acting as lenders under our $675 million Credit Agreement would be unable to
fulfill their commitments. However, given the current economic environment and
credit market crisis, there is no assurance that this may not change in the
foreseeable future.
Various factors could have a negative effect on our Company's financial
position and results of operations. These risk factors include, among others,
the following:
o Our retail food business and the grocery retailing industry continues to
experience aggressive 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, 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
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The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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.
o 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 or applicable Medicare and Medicaid
regulations could result in the imposition of civil, as well as criminal
penalties.
o 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. Failure to achieve sufficient levels of cash
flow at reporting units could result in impairment charges on goodwill
and/or long-lived assets.
o 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.
o 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.
o 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
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The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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.
o 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.
o 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.
o 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 adverse effect on our results.
o 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. Certain multi-employer plans have reached an unfunded
status below current regulatory requirements. 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.
o We are 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.
o 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.
o Tengelmann, A&P's former majority stockholder, owns 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
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The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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.
o Our substantial indebtedness could impair our financial condition. 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, or other
general corporate purposes, impair our ability to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions, or other general corporate 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 the economy, our business and the industry in which we
operate, and place us at a competitive disadvantage compared to competitors
that have proportionately less debt. Our $675 million Credit Agreement
contains restrictive covenants customary for credit 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 repay our indebtedness prior to its scheduled
maturity, restructure or refinance our indebtedness, seek additional equity
capital or sell assets and may force liquidity issues. We may be unable to
obtain debt and/or equity financing or sell assets on 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.
o We are the primary obligor for a significant number 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 cash flow and earnings.
o 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. In the
event of rising fuel costs, we may not be able to recover 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.
o 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
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The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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.
o We have large, complex information technology systems that are important to
our 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.
o 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 issued
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.
o Current economic conditions have been, and continue to be volatile. As a
result of concern about the stability of the markets and the strength of
counterparties, many financial institutions have reduced and, in some
cases, ceased to provide funding to borrowers. Based on information
available to us, as of our filing date, we have no indication that the
financial institutions acting as lenders under our Credit Agreement would
be unable to fulfill their commitments. Continued turbulence in the global
credit markets and U.S. economy may adversely affect our results of
operations, financial condition and liquidity.
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 2008 COMPARED WITH FISCAL 2007
- -------------------------------------
Sales for fiscal 2008 were $9,516.2 million, compared with $6,401.1
million for fiscal 2007; primarily due to the acquisition of Pathmark, sales
generated during the 53rd week included in fiscal 2008, and an increase of 2% in
comparable store sales, which include stores that have been in operation for two
full fiscal years and replacement stores. These increases in sales were
partially offset by reduced sales resulting from store closures. Loss from
continuing operations of $86.2 million in fiscal 2008 decreased as compared to
income from continuing operations of $87.0 million for fiscal 2007, primarily
due to (i) the absence of the fiscal 2007 gain on disposition of Metro, Inc. of
$184.5 million. Loss from discontinued operations decreased to $53.7 million for
fiscal 2008 from $247.7 million for fiscal 2007 due to the absence
14
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
of the 2007 sale and closure of stores in the Midwest and the Greater New
Orleans areas. Net loss per share - basic and diluted for fiscal 2008 was $2.74
and $5.41, respectively, compared to net loss per share - basic and diluted of
$3.69 and $4.22, respectively, for fiscal 2007.
Favorable
Fiscal 2008 Fiscal 2007 (unfavorable) % Change
----------- ----------- ------------- --------
Sales $ 9,516.2 $ 6,401.1 $ 3,115.1 48.7%
Increase in comparable store sales 2.0% 2.4% NA NA
(Loss) income from continuing operations (86.2) 87.0 (173.2) >100%
Loss from discontinued operations (53.7) (247.7) 194.0 78.3%
Net loss (139.9) (160.7) 20.8 12.9%
Net loss per share - basic (2.74) (3.69) 0.95 25.7%
Net loss per share - diluted (5.41) (4.22) (1.19) (28.2%)
Average weekly sales per supermarket were approximately $423.8 thousand
for fiscal 2008 versus $371.4 thousand for the corresponding period of the prior
year, an increase of 14.1%, primarily due to the acquisition of Pathmark in
December of 2007, which has larger supermarkets.
SALES
- -----
Fiscal
--------------------------------
2008 2007
--------------- --------------
Sales
Fresh $ 4,818.3 $ 4,840.1
Price Impact* 4,161.2 1,065.9
Gourmet 281.8 257.5
Other 254.9 231.8
Investment in Metro, Inc. -- 5.8
------------- -------------
Total sales $ 9,516.2 $ 6,401.1
============== =============
- ---------------------------
* Includes sales from A&P stores that have been subsequently converted to
Pathmark stores.
Sales increased from $6,401.1 million in fiscal 2007 to $9,516.2
million in fiscal 2008, primarily due to the increase in the Price Impact
segment of $3,095.3 million as a result of the acquisition of Pathmark in the
fourth quarter of fiscal 2007, additional sales of $168.2 million generated
during the 53rd week included in fiscal 2008, and an increase in comparable
store sales of $94.2 million, partially offset by the absence of sales from
store closures of $195.7 million. The decrease in sales in our Fresh segment of
$21.8 million is primarily related to the absence of sales from store closures
of $185.7 million partially offset by additional sales recorded during the 53rd
week in fiscal 2008 of $83.8 million, an increase in comparable store sales of
$68.4 million, and an increase in sales from new store openings of $11.7
million. The increase in sales in our Gourmet segment of $24.3 million is
primarily due to an increase in comparable store sales. The sales increase of
$23.1 million, or 10.0%, in our Other segment, representing Discount and Liquor,
is primarily due to an increase in comparable store sales driven by our remodel
program, partially offset by decreased sales due to store closures. During
fiscal 2007, our information technology agreement with Metro, Inc. expired.
Refer to Note 18 - Segments for further discussion of our reportable segments.
15
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
GROSS MARGIN
- ------------
Gross margin as a percentage of sales decreased 26 basis points to
30.51% for fiscal 2008 from 30.77% for fiscal 2007. Excluding the impact of the
acquisition of Pathmark, which operates on lower gross margins, the gross margin
rate increased 97 basis points. This increase is primarily driven by the
realization of lower net costs from buying synergies and improved overall
margins, particularly in the fresh departments.
The following table details how volume and rate impact the gross margin
dollar increase (decrease) from fiscal 2007 to fiscal 2008:
Sales Volume Rate Total
-------------------- ------------- --------------
Total Company $ 958.6 $ (25.4) $ 933.2
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
- ---------------------------------------------------
Store operating, general and administrative ("SG&A") expense was
$2,949.8 million or 31.0% as a percentage of sales for fiscal 2008, as compared
to $2,009.1 million or 31.4% as a percentage of sales for fiscal 2007.
SG&A expenses for fiscal 2008 included (i) net real estate expenses of
$40.2 million, or 42 basis points; (ii) Pathmark acquisition related costs of
$36.6 million, or 38 basis points; (iii) pension obligation costs of $28.9
million, or 30 basis points, recorded in connection with our withdrawal from the
UFCW Local 342 Amalgamated Pension Plan; (iv) costs relating to a voluntary
labor buyout program of $3.1 million, or 3 basis points; (v) costs relating to
our withdrawal of the Grocery Haulers, Inc. employees servicing Pathmark Stores
from the Local 863 Union Multiemployer Pension Plan of $2.7 million, or 3 basis
points; and (vi) net losses on restructuring activity of $0.4 million. These
charges were partially offset by recoveries from our VISA/MasterCard antitrust
class action litigation (Refer to Note 21 - Commitments and Contingencies) of
$2.2 million, or 2 basis points; and a reversal of $5.2 million, or 5 basis
points, for compensation expense related to restricted stock that had been
previously recognized for performance targets that are no longer probable of
being met (Refer to Note 16 - Stock Based Compensation).
SG&A expenses for fiscal 2007 included (i) Pathmark acquisition related
costs of $17.9 million, or 28 basis points; (ii) a change in estimate of
self-insurance settlement costs for prior year claims related to Pathmark of
$9.8 million, or 15 basis points; (iii) costs related to a mass withdrawal from
a multi-employer union pension plan for Local 174 of $5.9 million, or 9 basis
points and (iv) net losses on restructuring activity of $4.4 million, or 7 basis
points. These charges were partially offset by net gains on real estate activity
of $14.1 million, or 22 basis points, recorded during fiscal 2007.
Excluding the items listed above, SG&A as a percentage of sales
decreased 111 basis points for fiscal 2008 as compared to fiscal 2007, primarily
due to a decrease in corporate and banner administrative expenses of 61 basis
points, a decrease in occupancy related costs of 54 basis points and a decrease
in advertising related costs of 17 basis points, partially offset by increased
labor costs of 17 basis points.
16
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
During fiscal 2008 and fiscal 2007, we recorded impairment losses on
long-lived assets relating to closure or conversion of stores in the normal
course of business of $14.1 million and $11.7 million, respectively.
The effects of changes in estimates of useful lives were not material
to ongoing depreciation expense. If current operating levels do not continue to
improve, there may be additional future impairments on long-lived assets,
including the potential for impairment of assets that are held and used.
SEGMENT INCOME (LOSS)
- ---------------------
Fiscal
---------------------
2008 2007
-------- --------
Segment income
Fresh $ 147.1 $ 77.4
Price Impact* 20.5 20.8
Gourmet 24.9 16.6
Other 2.2 (2.9)
-------- --------
Total segment income $ 194.7 $ 111.9
======== ========
- -----------------------
* Includes results from A&P stores that have been subsequently converted to
Pathmark stores.
Segment income increased $82.8 million from $111.9 million in fiscal
2007 to $194.7 million in fiscal 2008. Included within the Price Impact segment
income were results from our Pathmark business acquired during the fourth
quarter of fiscal 2007 and the conversion of Pathmark Sav-A-Center stores during
the third quarter of fiscal 2008. Our Fresh segment experienced an increase in
segment income of $69.7 million, primarily resulting from decreased labor and
occupancy related costs. Segment income from our Gourmet business improved by
$8.3 million, primarily as a result of an improved gross margin rate, partially
offset by increased operating costs, mainly relating to labor and occupancy. The
increase in segment income of $5.1 million in our Other segment, representing
Discount and Liquor, is primarily due to improved sales and margin rates. Refer
to Note 18 - Segments for further discussion of our reportable segments.
GAIN ON SALE OF METRO, INC.
- ---------------------------
During fiscal 2007, we sold all shares of our holding in Metro, Inc.,
resulting in a gain of $184.5 million. There were no such gains during fiscal
2008.
NONOPERATING INCOME
- -------------------
During fiscal 2008 and 2007, we recorded $116.9 million and $37.4
million, respectively, of fair value favorable adjustments related to our Series
A and Series B warrants acquired in connection with our purchase of Pathmark,
the conversion features related to our 5.125% convertible senior notes and our
6.75% convertible senior notes, and our financing warrants issued in connection
with our convertible senior notes.
INTEREST EXPENSE
- ----------------
Interest expense increased to $154.1 million in fiscal 2008 from $111.8
million in fiscal 2007, primarily due to the higher level of indebtedness
related to our acquisition of Pathmark, which was primarily attributable to
additional interest expense of $33.2 million ($12.1 million of which was
non-cash) relating to the issuance of our $165 million 5.125% convertible senior
notes due 2011 and our $255 million 6.75%
17
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
convertible senior notes due 2012 in December 2007, additional interest expense
of $19.7 resulting from increased borrowings under our Line of Credit and Credit
Agreement, and additional interest expense of $15.9 million primarily related to
interest on capital leases for Pathmark. These increases were partially offset
by the absence of the fiscal 2007 interest expense of $27.3 million on the
Bridge Loan Facility.
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,
we recorded $7.9 million in equity earnings relating to our equity investment in
Metro, Inc.
On March 13, 2007, we sold 6,350,000 shares of Metro, Inc. and no
longer exerted significant influence over Metro, Inc. Accordingly, we recorded
our remaining investment in Metro, Inc. as an available-for-sale security. Our
dividend income relating to Metro, Inc.'s dividends declared on April 17, 2007,
August 8, 2007 and September 25, 2007 was recorded in "Interest and dividend
income" on our Consolidated Statements of Operations for fiscal 2007. On
November 26, 2007, in connection with our agreement to acquire Pathmark Stores,
Inc., we sold the remaining 11,726,645 shares of our holdings in Metro, Inc.
INCOME TAXES
- ------------
Our provision for income taxes from continuing operations for fiscal
2008 was $2.7 million compared to a provision of $5.6 million for fiscal 2007.
Consistent with the prior year, we continue to record a valuation allowance
against our net deferred tax assets.
The effective tax rate on continuing operations of 3.2% for fiscal 2008
varied from the statutory rate of 35%, primarily due to the recording of state
and local income taxes, the recording of additional valuation allowance and the
impact of the Pathmark financing.
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 in our valuation allowance as a result of
utilization of losses not previously benefited because of a lack of history of
earnings.
DISCONTINUED OPERATIONS
- -----------------------
The loss from operations of discontinued businesses, net of tax, for
fiscal 2008 of $58.4 million decreased from loss from operations of discontinued
business, net of tax, of $196.8 million for fiscal 2007, primarily due to the
decrease in vacancy related costs relating to store closures in the Midwest and
the Greater New Orleans area recorded during fiscal 2008 as compared to fiscal
2007. The gain on disposal of discontinued operations of $4.7 million for fiscal
2008 increased from the loss on disposal of discontinued operations in the prior
year of $50.8 million, primarily due to the absence of impairment losses
recorded on the property, plant and equipment in the Greater New Orleans area
and Midwest during fiscal 2007, as we adjusted the assets to fair value based on
proceeds received and expected proceeds less costs to sell. The
18
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
$4.7 million gain on disposal of discontinued operations for fiscal 2008
primarily consisted of a $2.6 million gain related to the sale of our Eight
O'Clock Coffee business in fiscal 2003. This gain was a result of the settlement
of a contingent note and the value and payment was based upon certain elements
of the future performance of the Eight O'Clock Coffee business and was not
originally recorded in the gain during fiscal 2003. In addition, we recorded a
gain of $1.8 million during fiscal 2008 relating to the sale of land in the
Greater New Orleans area.
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 disposition of Metro, Inc. of $184.5 million, partially offset by
increased interest expense of $45.9 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 $371.4 thousand
for fiscal 2007 versus $342.6 thousand for the corresponding period of the prior
year, an increase of 8.4% primarily attributable to Pathmark stores.
SALES
- -----
Fiscal
---------------------------
2007 2006
----------- -----------
Sales
Fresh $ 4,840.1 $ 4,745.0
Price Impact* 1,065.9 145.4
Gourmet 257.5 248.9
Other 231.8 212.2
Investment in Metro, Inc. 5.8 17.7
----------- -----------
Total sales $ 6,401.1 $ 5,369.2
=========== ===========
- ------------------------
* Includes sales from A&P stores that have been subsequently converted to
Pathmark stores.
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 of fiscal 2007, contributing $921.3 million in sales, as
19
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
well as an increase in the overall comparable stores sales of $130.5 million.
The $95.1 million increase in sales in our Fresh segment was primarily due to an
increase in comparable store sales and our purchase of five stores in the second
half of 2006, partially offset by store closures. The $8.6 million increase in
sales in our Gourmet segment was primarily due to comparable store sales
increases. 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, partially offset by decreased sales
due to 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 18 - Segments for further
discussion of our reportable segments.
GROSS MARGIN
- ------------
Gross margin as a percentage of sales decreased 26 basis points to
30.77% for fiscal 2007 from 31.03% for fiscal 2006, primarily due to a decrease
in sales relating to the expiration of an information technology agreement with
Metro, Inc. in 2007 of approximately 24 basis points.
The following table details how sales volume and rate impact 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
- ---------------------------------------------------
SG&A expense was $2,009.1 million or 31.39% as a percentage of sales
for fiscal 2007, as compared to $1,693.5 million or 31.54% as a percentage of
sales for fiscal 2006. The increase in SG&A was primarily related to the
acquisition of Pathmark of $271.2 million.
SG&A expenses for fiscal 2007 included: (i) Pathmark acquisition
related costs of $17.9 million, or 28 basis points; (ii) a change in estimate of
self-insurance settlement costs for prior year claims related to Pathmark of
$9.8 million, or 15 basis points; (iii) costs related to a mass withdrawal from
a multi-employer union pension plan for Local 174 of $5.9 million, or 9 basis
points, and (iv) net losses related to restructuring of $4.4 million, or 7 basis
points. These charges were partially offset by net gains on real estate activity
of $14.1 million, or 22 basis points, recorded during fiscal 2007.
SG&A expenses for fiscal 2006 primarily represent net losses on
restructuring activity of $10.5 million, or 20 basis points, partially offset by
net gains on real estate activity of $11.2 million, or 21 basis points.
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,
partially 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 8 -- 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)
Fresh $ 77.4 $ 84.4
Price Impact* 20.8 (0.4)
Gourmet 16.6 15.1
Other (2.9) (9.4)
--------- ---------
Total segment income $ 111.9 $ 89.7
========= =========
- -------------------------
* Includes results A&P stores that have been subsequently converted to Pathmark
stores.
Segment income increased $22.2 million from $89.7 million in fiscal
2006 to $111.9 million in fiscal 2007. Fiscal 2007 results included segment
income of $20.8 million from the recently acquired Pathmark business. Our Fresh
segment's results declined by $7.0 million, primarily due to an increase in
marketing, utilities and depreciation expenses, partially offset by an
improvement in labor costs. Segment income from our Gourmet business improved by
$1.5 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 $6.5 million in our Other segment, representing Discount and Liquor, is
primarily due to improving sales and margin rates in both businesses. Refer to
Note 18 - Segments for further discussion of our reportable 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.
NONOPERATING INCOME
- -------------------
During fiscal 2007, we recorded $37.4 million in marked to market
adjustments related to our Series A and Series B warrants acquired in connection
with our purchase of Pathmark, the conversion features of our 5.125% convertible
senior notes and our 6.75% convertible senior notes, and our financing warrants
21
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
issued in connection with the issuance of our convertible senior notes. There
were no such adjustments during fiscal 2006.
INTEREST EXPENSE
- ----------------
Interest expense of $111.8 million for fiscal 2007 increased from the
prior year amount of $65.9 million, primarily due to: (i) increased interest
expense of $7.8 million ($3.0 million of which was non-cash) relating to the
issuance of $165 million 5.125% convertible senior notes due 2011 and $255
million 6.75% convertible senior notes due 2012, (ii) increased interest expense
of $27.3 million related to financing fees on our $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., which were amortized over the two week period the Bridge Loan
Facility was outstanding in the fourth quarter of fiscal 2007 and (iii)
increased interest expense of $5.9 million primarily related to interest on
capital leases for Pathmark.
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.
On March 13, 2007, we sold 6,350,000 shares of Metro, Inc. and no
longer had significant influence over Metro Inc.'s operations. Accordingly, we
recorded our remaining investment in Metro, Inc. as an available-for-sale
security. Our dividend income relating to Metro, Inc.'s dividend declarations on
April 17, 2007, August 8, 2007 and September 25, 2007 was recorded in "Interest
and dividend income" on our Consolidated Statements of Operations for fiscal
2008. On November 26, 2007, in connection with our agreement to acquire Pathmark
Stores, Inc., we sold the remaining 11,726,645 shares of our holdings in Metro,
Inc.
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
continued to record a valuation allowance against our net deferred tax assets.
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
22
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
and the increase in our valuation allowance as a result of losses not previously
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 our
strategy to expand our 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 was
satisfied in fiscal 2007 and, as such, have been reclassified in our
Consolidated Statements of Operations for fiscal 2007 and 2006. 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 "Gain (loss) on disposal of
discontinued businesses, net of tax" on our Consolidated Statements of
Operations.
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 a decrease in income from operations for the Greater New Orleans area and the
Midwest, and additional vacancy costs that were recorded during fiscal 2007 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.
23
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 2008 Fiscal 2007 Fiscal 2006
-------------- --------------- --------------
Net cash (used in) provided by operating activities $ (2,446) $ (42,544) $ 33,192
------------- -------------- -------------
Net cash (used in) provided by investing activities $ (64,530) $ (356,577) $ 48,755
------------- -------------- -------------
Net cash provided by (used in) financing activities $ 141,696 $ 413,646 $ (225,407)
-------------- -------------- -------------
Net cash flow used in operating activities of $2.4 million for fiscal
2008 primarily reflected our net loss of $139.9 million, adjusted for (i)
nonoperating income of $116.9 million related to mark-to-market adjustments for
financial instruments, partially offset by (ii) non-cash charges for
depreciation and amortization of $261.0 million, (iii) asset disposition
initiatives of $38.2 million, (iv) property impairments of $14.1 million and (v)
interest accretion on our convertible notes of $12.0 million. In addition, cash
used in operating activities reflected a decrease in other non-current
liabilities of $52.7 million, an increase in accounts receivable of $28.6
million, an increase in other assets of $18.2 million, and a decrease in accrued
salaries, wages, benefits and taxes of $21.2 million, partially offset by
decreased inventories of $29.7 million and an increase in other accruals of
$12.6 million. Refer to Working Capital below for discussion of changes in
working capital items. Net cash flow used in operating activities of $42.5
million for fiscal 2007 primarily reflected our net loss of $160.7 million,
adjusted for non-cash items for (i) gain on disposal of Metro, Inc. of $184.5
million and (ii) nonoperating income related to mark-to-market adjustments for
financial instruments of $37.4 million, partially offset by (iii) depreciation
and amortization of $186.8 million, (iv) asset disposition initiatives of $124.0
million, (v) loss on disposal of discontinued operations of $50.8 million, and
(vi) financing fees related to our bridge loan of $25.4 million. Further, cash
was used in operating activities by a decrease in account payable of $72.7
million primarily due to timing, a decrease in other non-current liabilities of
$65.4 million, a decrease in other accruals of $47.6 million, and a decrease in
accrued salaries, wages and benefits and taxes of $42.3 million, partially
offset by a a decrease in inventories of $116.0 million, a decrease in
receivables of $37.1 million, and a decrease in other assets of 16.9 million.
Net cash flow provided by operating activities of $33.2 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, partially
offset by (ii) and income tax benefit of $66.4 million, (iii) our equity in
earnings of Metro, Inc of $40.0 million, and (iv) gains on the disposal of owned
property of $22.5 million. Further, cash was provided by a decrease in
receivables of $62.7 million, partially offset by a decrease in other accruals
of $61.2 million, primarily due to timing and a decrease in non-current
liabilities of $37.6 million, mainly due to the utilization of closed store
accruals.
Net cash used in investing activities of $64.5 million for fiscal 2008
primarily consisted of $116.0 million of property expenditures, which included 1
new liquor store, 2 liquor store remodels, 1 Gourmet store remodel, 16 major
remodels, 1 major enlargement, 2 conversions, 7 Pathmark Price-Impact remodels
and 3 Starbucks remodels, partially offset by $37.6 million of proceeds on
disposal of property and proceeds from maturities of marketable securities of
$12.3 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
24
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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 net proceeds from the sale of
shares of Metro, Inc. of $548.8 million, proceeds received from the sale of
certain of our assets of $153.6 million, a decrease in restricted cash of $47.5
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 net proceeds from maturities of marketable
securities of $145.8 million, a decrease in restricted cash of $95.1 million,
and proceeds received from the sale of certain of our assets of $41.9 million,
partially offset by property expenditures of $208.2 million, which included 4
new supermarkets and 30 major remodels and 35 minor remodels, and the purchase
of 6 Clemens Markets stores from C&S Wholesale Grocers, Inc. of $24.6 million.
Our planned capital expenditures for fiscal 2009 are approximately $100
million, which relate primarily to enlarging or remodeling supermarkets, and
converting supermarkets to more optimal formats.
Net cash provided by financing activities of $141.7 million for fiscal
2008 primarily reflected proceeds under our lines of credit of $1,738.8 million,
an increase in book overdrafts of $24.4 million and proceeds from a promissory
note of $10.0 million, partially offset by principal payments on our lines of
credit of $1,583.5 million, $45.7 million relating to the settlement of Series A
warrants and $9.0 relating to principal payments on capital leases. Net cash
flow provided by financing activities of $413.6 million for fiscal 2007
primarily reflected 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, and 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
$225.4 million for fiscal 2006 primarily reflected principal payments on
revolving lines of credit of $1,687.1 million and dividends paid of $299.1
million, partially offset by proceeds under revolving lines of credit of
$1,757.1 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 2009 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
for the next twelve months.
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 they do not otherwise provide sufficient
resources to operate effectively, we anticipate that we would be able to modify
the operating plan, by reducing capital investments and through other
contingency actions. We may also look to raise capital through the issuance of
additional debt or equity in order to ensure that we have appropriate resources.
However, there is no assurance that we will pursue such actions or that they
will be successful in generating resources necessary to operate the business.
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 Sheet at February 24, 2007. The
25
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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 $170.7 million at February 28, 2009, compared
to working capital of $112.6 million at February 23, 2008. We had cash and cash
equivalents aggregating $175.4 million at February 28, 2009 compared to $100.7
million at February 23, 2008. The increase in working capital was attributable
primarily to the following:
o An increase in cash and cash equivalents as detailed in the Consolidated
Statements of Cash Flows;
o A decrease in current portion of other financial liabilities due to the
exercise of Series A warrants by Yucaipa Corporate Initiatives Fund I,
L.P., Yucaipa American Alliance Fund I, L.P. and Yucaipa American Alliance
(Parallel) Fund I, L.P.;
o An increase in accounts receivable, primarily related to timing; and
o A decrease in accrued salaries, wages and benefits, and taxes primarily due
to payouts of the prior year accruals relating to Pathmark's severance
programs.
Partially offset by the following:
o A decrease in prepaid expenses and other current assets mainly due to a
decrease in deferred tax assets;
o A decrease in inventories primarily due to the sale of the Pathmark general
merchandise inventory to C&S and our inventory reduction program partially
offset by cost inflation;
o An increase in accounts payable (inclusive of book overdrafts) due to the
timing of payments; and
o An increase in other accruals (Refer to Note 9 - Other Accruals).
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, or up to the value of the investment
in the Columbia Cash Fund. Each borrowing bears interest at a rate per annum
equal to the BBA Libor Daily Floating Rate plus 0.10%. Our weighted-average
interest rates on this line of credit were 2.5% and 3.3% for fiscal 2008 and
fiscal 2009, respectively. At February 28, 2009 and February 23, 2008, we had
borrowings outstanding under this line of credit agreement of $5.0 million and
$11.6 million, respectively. This agreement had an original expiration of
December 31, 2008. However, on November 26, 2008, this agreement was extended to
expire on December 31, 2009. These loans are collateralized by a first priority
perfected security interest in our ownership interest in the Columbia Fund.
Refer to Note 3 - 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 and Bank of America,
N.A. as the co-lead arranger. 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
26
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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 provides us with the ability to increase commitments
from $675 million to $775 million, subject to agreement of new and existing
lenders. Our obligations under the Credit Agreement are secured by some of the
assets of the Company, including, but not limited to, inventory, certain
accounts receivable, pharmacy scripts, owned real estate and certain Pathmark
leaseholds. The Pathmark leaseholds are removed as eligible collateral
throughout fiscal 2009, resulting in a reduction in borrowing availability of
$25.0 million on March 1, 2009, an additional $25.0 million on June 1, 2009 and
approximately $23.0 million on December 1, 2009, for a total reduced borrowing
availability of approximately $73.0 million. 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. As of February 28, 2009, there
were $331.8 million of loans and $206.3 million in letters of credit outstanding
under this agreement. As of February 28, 2009, after reducing availability for
borrowing base requirements, we had $96.2 million available under the Credit
Agreement. In addition, we have invested cash available to reduce borrowings
under this Credit Agreement or to use for future operations of $67.0 million as
of February 28, 2009.
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 $50.0 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 $20.4 million and the net amortized amounts are included in
"Other assets" on our Consolidated Balance Sheet at February 28, 2009 and
February 23, 2008.
Based on information available to us, as of our filing date, we have no
indication that the financial institutions acting as lenders under our Credit
Agreement would be unable to fulfill their commitments.
RELATED PARTY PROMISSORY NOTE
- -----------------------------
On September 2, 2008, our Company issued a three year, unsecured
promissory note in the amount of $10 million to Erivan Karl Haub. Erivan Haub is
the father of Christian W. E. Haub, our Executive Chairman, and is a limited
partner of Tengelmann which owns an interest in our Company's stock. The
principal is due in a lump sum payment on August 18, 2011 and bears interest at
a rate of 6% per year, payable in twelve equal quarterly payments of $0.15
million over the term of the note. During fiscal 2008, $0.15 million of interest
was paid on this note and we recorded interest expense of $0.3 million.
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. At maturity, subject to the satisfaction of certain conditions, the
loans outstanding under the Bridge Loan Facility would either remain outstanding
or be exchanged for exchange notes, in each case having a maturity of December
3, 2015. On December 18, 2007, the Bridge Loan Facility was refinanced with the
convertible notes discussed below. During fiscal 2007, fees and interest paid in
27
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
connection with the Bridge Loan Facility was $27.3 million and were 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.
PUBLIC DEBT OBLIGATIONS
- -----------------------
As of February 28, 2009 and February 23, 2008, we had outstanding notes
of $598.8 million and $586.7 million, respectively. Our public debt obligations
are comprised of 9.125% Senior Notes due December 15, 2011, 5.125% Convertible
Senior Notes due June 15, 2011, 6.75% Convertible Senior Notes due December 15,
2012 and 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.
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 a 65% premium and
$49.00 or a 75% premium for the 2011 and 2012 notes, respectively. We understand
that on or about October 3, 2008, Lehman Brothers OTC Derivatives, Inc. or
"LBOTC" who accounts for 50% of the call option and financing warrant
transactions filed for bankruptcy protection, which is an event of default under
such transactions. We are carefully monitoring the developments affecting LBOTC,
noting the impact of the LBOTC bankruptcy effectively reduced conversion prices
for 50% of our Notes to their stated prices of $36.40 for the 2011 notes and
$37.80 for the 2012 notes.
As of December 18, 2007, our Company did not have sufficient authorized
shares to provide for all potential issuances of common stock. Therefore, our
Company accounted for the conversion features as freestanding instruments. The
notes were recorded with a discount equal to the value of the conversion
28
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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 and recorded as a
long-term liability. The portion of the conversion features for which there was
not shares available for settlement of conversions were marked to market each
balance sheet date. On June 26, 2008, at a special meeting of shareholders, the
number of shares of common stock we have the authority to issue was increased to
160,000,000, based on a majority vote by our shareholders. During fiscal 2008
and 2007, gains recorded in "Nonoperating income" on our Consolidated Statements
of Operations were $9.3 million and $3.2 million, respectively, relating to
conversion features of the 5.125% convertible senior notes and gains of $5.1
million and $2.3 million, respectively, relating to the conversion features of
the 6.75% convertible senior notes. The fair values 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. Based on an increase in available shares
primarily due to the exercise of our Series A warrants during the first quarter
of fiscal 2008 and the increase in authorized shares during the second quarter
of fiscal 2008, the fair values of the conversion features of the 5.125% and
6.75% convertible senior notes of $13.8 million and $14.7 million as of June 26,
2008, respectively, were reclassified to "Additional paid-in-capital" on our
Consolidated Statements of Stockholder's Equity and Comprehensive (Loss) Income.
Thus, the fair values of the conversion features for the 5.125% and 6.75%
convertible notes are no longer classified as a liability as of February 28,
2009. The following assumptions and estimates were used in the Black-Scholes
model:
As of
June 26, 2008 Fiscal 2007
------------------ ------------------
Expected life 3.0 years 3.3 years - 4.8 years
Volatility 33.4% 33.0% - 35.4%
Dividend yield range 0% 0%
Risk-free interest rate range 3.11% 2.24% - 2.81%
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 Series A warrants were
exercisable at $18.36 and expired on June 9, 2008 and the Series B warrants are
exercisable at $32.40 and expire on June 9, 2015. 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.
On May 7, 2008, the 4,657,378 Series A warrants were exercised by
Yucaipa Corporate Initiatives Fund I, L.P., Yucaipa American Alliance Fund I,
L.P. and Yucaipa American Alliance (Parallel) Fund I, L.P. We opted to settle
the Series A warrants in cash totaling $45.7 million, rather than issuing
additional common shares. Included in "Nonoperating income" on our Consolidated
Statements of Operations for fiscal 2008 is a loss of $1.2 million for the
Series A warrants through the settlement date of May 7, 2008 and a gain of
$101.3 million relating to market value adjustments for Series B warrants.
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
29
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
Series B warrants, respectively. The value of the Series B warrants as of
February 28, 2009 is $4.8 million and is included in "Other financial
liabilities" on our Consolidated Balance Sheets. The values of Series A and
Series B warrants as of February 23, 2008 were $44.5 million and $106.1 million,
respectively, and were 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
----------- ---------------------------
Fiscal 2007 Fiscal 2008 Fiscal 2007
----------- ----------- -----------
Expected life 0.29 years 6.28 years 7.29 years
Volatility 29.4% 61.3% 53.3%
Dividend yield range 0% 0% 0%
Risk-free interest rate range 2.20% 2.69% 3.26%
SHARE LENDING AGREEMENTS
- ------------------------
We entered into share lending agreements, dated December 12, 2007, with
certain financial institutions, under which we 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. On June 26,
2008, our shareholders approved to loan up to an additional 1,577,569 shares of
our Company's common stock pursuant to the share lending agreement.
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 are considered issued and outstanding. Investors
that purchase borrowed shares are 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, except as described below, 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, with the exception of the
below.
On September 15, 2008, Lehman and certain of its subsidiaries,
including, Lehman Europe filed a petition under Chapter 11 of the U.S.
Bankruptcy Code with the United States Bankruptcy Court and/or commenced
equivalent proceedings in jurisdictions outside of the United States
(collectively, the "Lehman Bankruptcy"). Lehman Europe is party to a 3,206,058
share lending agreement with our Company. Due to the circumstances of the Lehman
Bankruptcy, we have recorded these loaned shares as issued and outstanding
effective September 15, 2008, for purposes of computing and reporting our
Company's basic and diluted weighted average shares and earnings per share.
30
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
CALL OPTION AND FINANCING WARRANT
- ---------------------------------
Concurrent with the issuance of the convertible senior notes, our
Company issued financing warrants in conjunction with the call options recorded
as equity in the Consolidated Balance Sheet (Refer to Note 17 - Capital Stock)
to effectively 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, we did not have sufficient
authorized shares to provide all potential issuances of common stock. Therefore,
the financing warrants were accounted for as freestanding derivatives, required
to be settled in cash until sufficient shares were available and were recorded
as a long-term liability in the Consolidated Balance Sheet. The financing
warrants were marked to market each reporting period utilizing the Black-Scholes
option pricing model and were valued at $31.2 million as of February 23, 2008.
On June 26, 2008, at a special meeting of shareholders, the number of shares of
common stock we have the authority to issue was increased to 160,000,000 based
on a majority vote by our shareholders. Thus, the financing warrants were marked
to market through June 26, 2008 utilizing the Black-Scholes option pricing model
and $28.9 million was reclassified to "Additional paid-in-capital" on our
Consolidated Statements of Stockholder's Equity and Comprehensive (Loss) Income
as of June 26, 2008. These financing warrants are no longer classified as a
liability as of February 28, 2009. During fiscal 2008 and 2007, we recorded
gains of $2.3 million and $5.6 million, respectively, relating to these
warrants, which is included in "Nonoperating income" on our Consolidated
Statements of Operations.
The following assumptions and estimates were used in the Black-Scholes
model:
As of
June 26, 2008 Fiscal 2007
--------------------- ---------------------
Expected life 3.3 years - 4.8 years 3.6 years - 5.1 years
Volatility 33.4% 27.2% - 29.6%
Dividend yield range 0% 0%
Risk-free interest rate range 3.11% - 3.54% 2.24% - 2.81%
We understand that on or about October 3, 2008, LBOTC who accounts for
50% of the call option and financing warrant transactions filed for bankruptcy
protection, which is an event of default under such transactions. We are
carefully monitoring the developments affecting LBOTC. In the event we terminate
these transactions, or they are cancelled in bankruptcy, or LBOTC otherwise
fails to perform its obligations under such transactions, we would have the
right to monetary damages in the form of an unsecured claim against LBOTC in an
amount equal to the present value of our cost to replace these transactions with
another party for the same period and on the same terms.
OTHER
- -----
During fiscal 2007, we acquired four sale leaseback 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. 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 have
maturities between 14 and 17 years and three of these properties are recorded
within "Long-term real estate liabilities" on our Consolidated Balance Sheets at
February 28, 2009 and February 23, 2008. During fiscal 2008, one of these
locations was assigned to a third party. Since we remain secondarily liable in
the event the assignee
31
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
defaults on the related rent payments, we continue to record our obligation
relating to this property. However, since we are no longer servicing this
obligation, the related current and long-term liabilities have been reclassified
to "Deferred real estate income" on our Consolidated Balance Sheets as of
February 28, 2009.
"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. Since 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 to qualify for sale-leaseback treatment. Thus, these landlord
allowances have been recorded as long-term real estate liabilities on our
Consolidated Balance Sheets and are being amortized over the related lease term
based on rent payments designated in the lease agreements. These leases have
terms ranging between 13 and 25 years and effective annual percentage rates
between 4.74% and 71.14%. The effective annual percentage rates were implicitly
calculated based upon technical accounting guidance.
During fiscal 2008 and fiscal 2006, we sold one property in each year
and simultaneously leased it back from the purchaser. We received net proceeds
of $3.1 million for the property sold during fiscal 2008, which had a carrying
value of $0.1 million, resulting in a gain of $3.0 million. However, due to our
continuing involvement, the sale did not qualify for sale-leaseback accounting.
Therefore, the carrying value of this property remained on our Consolidated
Balance Sheet as of February 28, 2009. In addition, the proceeds received were
recorded within our "Deferred real estate income". The related lease payments
are being recorded as "Interest expense" in our Consolidated Statements of
Operations. For the property sold during fiscal 2006, we received net proceeds
of $9.2 million, which had a carrying value of $2.5 million, resulting in a gain
of $6.7 million. This gain was recognized as follows: (i) a gain of $1.3 million
was immediately recognized, since we are leasing back more than a minor part but
less than substantially all of the property sold and (ii) a $5.4 million
deferred gain, after deducting expenses, will be recognized as an offset to rent
expense over the remaining life of the lease.
In addition, during fiscal 2008, fiscal 2007, and fiscal 2006, we
recognized gains related to our qualified sale-leaseback transactions of $2.6
million; $27.6 million, of which $24.1 million related to the reversal of gains
on terminated or assigned properties; and $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, respectively. The remaining deferred gains
at February 28, 2009 and February 23, 2008 amounted to $34.6 million and $37.2
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.
32
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
As of February 28, 2009, 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) $ 981.8 $ 5.3 $ 188.2 $ 587.2 $ 201.1
Capital Leases (2) 291.2 29.0 55.5 48.8 157.9
Operating Leases (2) 1,734.2 195.3 365.7 314.5 858.7
Long-term Real Estate
Liabilities (2) 561.0 36.5 73.2 73.9 377.4
Pension Obligations (3) 184.4 7.0 13.9 13.4 150.1
Postretirement
Obligations (4) 97.8 1.8 4.1 4.8 87.1
Occupancy Payments (5) 554.3 68.8 116.5 102.5 266.5
Severance Payments (6) 7.6 6.7 0.7 0.2 --
Pension Withdrawal
Payments (7) 183.8 9.0 35.6 19.7 119.5
Interest (8) 659.0 45.7 85.2 51.3 476.8
Postemployment
Obligations (9) 15.6 4.8 3.1 2.1 5.6
Defined Contribution
Plans (10) 12.0 12.0 -- -- --
Multi-employer Pension
Plans (10) 48.2 48.2 -- -- --
Other Service Contracts (11) 241.4 5.9 13.4 14.8 207.3
Purchase Commitments (12)
- -------------------------
Equipment Purchases 1.8 1.8 -- -- --
Equipment Rentals 1.0 0.1 0.8 0.1
Suppliers 2,108.4 519.2 575.9 688.9 324.4
Manufacturers/Vendors 74.1 18.0 28.7 16.3 11.1
Service Contracts 28.9 16.3 12.6 -- --
Transportation Services 230.4 46.9 93.7 89.8 --
Consulting 3.3 1.4 1.9 -- --
---------- ---------- ----------- ----------- ----------
Total(13) $ 8,020.2 $ 1,079.7 $ 1,668.7 $ 2,028.3 $ 3,243.5
========== ========== =========== =========== ==========
(1) Amounts represent contractual amounts due. Refer to Note 10 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 11 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 non-qualified defined benefit
pension plans. Refer to Note 15 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 15 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 8 of our Consolidated
Financial Statements), discontinued operations (refer to Note 7 of our
Consolidated Financial Statements) and store closures made during the
normal course of business.
(6) Amounts represent our severance obligations primarily relating to Pathmark.
(7) Amount represents our pension withdrawal payments from multiemployer plans.
(8) Amounts represent contractual amounts due. Refer to Note 10 of our
Consolidated Financial Statements for information regarding our interest
payments. Note that amounts presented exclude estimates on current and
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.
33
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
(9) Amounts represent our future benefit payments that were actuarially
determined for our short and long term disability programs. Refer to Note
15 of our Consolidated Financial Statements for information regarding our
postemployment obligations.
(10) Amounts represent our best estimate of our immediate funding requirements
of our defined contribution and multiemployer plans in which we
participate. Refer to Note 15 of our Consolidated Financial Statements for
information regarding these obligations.
(11) The amount represents our unfavorable service contract with GHI in
connection with the purchase of Pathmark.
(12) 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.
(13) The above table detailing our contractual obligations excludes our FIN 48
liability relating to our uncertain tax positions due to the fact that it
will be settled with our net operating loss carryforwards and will not
require the use of cash.
Expiration of Commitments (in millions)
-----------------------------------------------------------------------------------
Other Less than
Commitments Total 1 Year 1 - 3 Years 4 - 5 Years Thereafter
------------- -------------- ------------- ------------- -------------
Guarantees $ 1.1 $ 0.3 $ 0.8 $ -- $ --
============= ============== ============= ============= =============
We are the guarantor of a loan of $1.1 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") for
which we generally remained secondarily liable. As such, if any of the assignees
were to become unable to make payments under the Assigned Leases, we could be
required to assume the lease obligation. As of February 28, 2009, 217 Assigned
Leases remain in place. Assuming that each respective assignee became unable 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 $686.1 million, which could be partially or totally offset by
reassigning or subletting these leases.
Our existing senior debt rating was Caa1 with stable outlook with
Moody's Investors Service ("Moody's") as of February 28, 2009. Our existing
senior debt rating was B with positive outlook with Standard & Poor's Ratings
Group ("S&P") as of February 28, 2009. 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 28, 2009. Our
recovery rating was 5 with S&P as of February 28, 2009 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.
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 interest rate
risk. From time to time, we may enter hedging agreements in order to manage
risks incurred in the normal course of business.
34
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
Interest Rates
- --------------
Our exposure to market risk for changes in interest rates relates
primarily to our debt obligations. As of February 28, 2009, we do not have cash
flow exposure due to rate changes on any of our Notes with an aggregate value of
$611.0 million, because they are at fixed interest rates ranging from 2.0% to
9.375%. However, we do have cash flow exposure on our committed bank lines of
credit of $336.8 million due to our variable floating rate pricing. Accordingly,
during fiscal 2008 and fiscal 2007, a presumed 1% change in the variable
floating rate would have impacted interest expense by $3.0 million and $0.6
million, respectively.
Foreign Exchange Risk
- ---------------------
As of February 28, 2008, we did not have exposure to foreign exchange
risk as we did not hold any assets denominated in foreign currency.
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 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 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). The total current and non-current
liability for self-insurance reserves recorded at February 28, 2009 and February
23, 2008 was $231.4 million and $220.4 million, respectively. The discount rate
used at February 28, 2009 and 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 $7
million and $6 million as of February 28, 2009 and February 23, 2008,
respectively. Conversely, a 1% decrease in the discount rate would increase the
required liability for the same periods by $8 million and $6 million,
respectively.
During fiscal 2008, the increase in our worker's compensation and
general liability reserves was primarily related to a $24.7 million adjustment
for Pathmark's opening balance sheet liabilities for self-
35
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
insurance reserves based on information we obtained regarding facts and
circumstances that existed as of the acquisition date that, if known, would have
affected the measurement of the amounts recognized on that date, partially
offset by payments made during fiscal 2008. 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
by $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. 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 and Finite-Lived Intangibles
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. If our review indicates that impairment exists, we measure
such impairment on a discounted basis using a probability weighted approach and
a U.S. Treasury risk-free rate, which is based on the life of the primary asset
within the asset group. Any impairment amounts are included in "Store operating,
general and administrative expenses" 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.
Goodwill and Other Indefinite-Lived Intangible Assets
Our Company tests goodwill and other indefinite-lived intangibles for
impairment in the fourth quarter of each fiscal year, unless events or changes
in circumstances indicate that impairment may have occurred in an interim
period. A significant amount of judgment is involved in determining if an
indicator of impairment has occurred. Possible indicators of impairment include,
but are not limited to: sustained operating losses or poor operating performance
trends, a significant decline in our expected future cash flows for a reporting
unit, a decrease in our market capitalization below our book value for a
sustained period of time, and an expectation that a reporting unit will be
disposed of or sold.
A two-step impairment test is performed for goodwill. The first step of
the impairment analysis is performed by comparing the estimated fair value of
each reporting unit to the related carrying value. The estimated fair value of a
reporting unit is determined by using discounted cash flow analyses or by using
market multiples, as appropriate. In determining fair value, we make various
assumptions, including management's expectations of future cash flows based on
projections or forecasts derived from its analysis of business prospects,
economic or market trends and any regulatory changes that may occur. Our cash
flow projections for each reporting unit are based on a five-year financial
forecast developed by management to manage the business. Our forecast assumes
that the current recessionary environment will continue through fiscal 2009,
stabilize during fiscal 2010 and resume normalized long-term growth rates in
2011. Significant assumptions, which contemplate our existing plans for new
store openings and conversions, include revenue growth rates, operating expense
growth rates, capital expenditures and future working capital requirements. The
future cash flows used to perform the impairment analysis were tax effected at
42%, which represents our blended federal and state rate. Terminal values for
all reporting units were calculated using a Gordon growth methodology using a
discount rate of 11% with a long-term growth rate of 1.5%. We also compared
36
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
the sum of the estimated fair values of our reporting units to our overall
estimated market capitalization plus a reasonable control premium, estimated as
an amount that would be received if the Company was sold to a market participant
in an orderly transaction. As a result, we determined that the fair value of our
reporting units in excess of the carrying value of our reporting units and no
impairment was required for fiscal 2008.
If the carrying value exceeded the fair market value, the second step
of the impairment test would be performed to determine the amount of impairment,
if any. The second step of the goodwill impairment test compares the fair value
of the reporting unit's goodwill with the carrying value of goodwill. If the
carrying amount of a reporting unit's goodwill exceeds the fair value of that
goodwill, an impairment loss is recognized for the difference. During fiscal
2008, we were not required to perform step two and we concluded that our
goodwill balance was not impaired.
Our computation of impairment utilized quantitative and qualitative
information, any changes in which can impact the valuation of an intangible
asset in a short period of time. We will continue to monitor the expected future
cash flows of reporting units and the long-term trends of our market
capitalization to assess the carrying value of our goodwill and intangible
assets. If our stock price is below our net book value per share for an extended
period, or other negative business factors exist, we may be required to perform
another impairment analysis, which could result in an impairment of our goodwill
during the first quarter of fiscal 2009.
Our only other indefinite-lived intangible asset is the Pathmark
Trademark. We estimate the fair value of this intangible asset using the
relief-from-royalty method, which uses assumptions related to projected revenues
from our annual long-range plan; assumed royalty rates that could be payable if
we did not own the trademarks; and a discount rate of 11 percent. We completed
our annual impairment test of our indefinite-lived intangible and concluded
there was no impairment as of February 28, 2009. We would recognize an
impairment loss when the estimated fair value of the indefinite-lived intangible
asset is less than its carrying value.
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 (i) interest
accretion, (ii) settlements on leases or sold properties, and (iii) 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 1% from the date of inception.
Total adjustments for settlements on leases or sold properties and changes in
estimates resulted in expenses of $26.4 million for continuing operations and
$29.6 million for discontinued operations in fiscal 2008, expense of $4.1
million for continuing operations and income of $1.9 million for discontinued
operations in fiscal 2007, and expense of $7.8 million for continuing operations
and income of $1.7 million for discontinued operations in fiscal 2006.
Adjustments are predominantly due to fluctuations in the real estate market from
the time the original charges are incurred until the properties are actually
settled.
As of February 28, 2009, we had recorded liabilities for estimated
probable obligations of $206 million. Of this amount, $27 million relates to
stores closed in the normal course of business, $29 million relates to stores
and warehouses closed as part of the asset disposition initiatives (refer to
Note 8 of our Consolidated Financial Statements), and $150 million relates to
stores closed as part of our discontinued operations (refer to Note 7 of our
Consolidated Financial Statements).
37
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.
Warrant Liability
We have issued warrants, 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, volatility, the remaining time until
maturity, and the current interest rate.
Pension, Other Benefit Plans and GHI Contractual Obligation
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 plan 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. 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. For fiscal 2008, 2007 and 2006, we
assumed return rates of 6.75%. Our pension plan's average return was -27% during
fiscal 2008, net of all investment management fees and expenses, primarily due
to the poor performance of the financial markets in 2008. In evaluating our
expected return rate, we considered historical 20-year compounded returns on our
qualified defined benefit plans' assets, which exceeded 7.5% and are comparable
to the overall market returns over the same period. As such, we believe that our
6.75% pension return assumption is appropriate due to the fact that we expect
that future returns will be consistent with the long-term historical average
annual returns for our plan's investments. We will continue to examine our
portfolio allocations to increase the likelihood of achieving our expected rate
of return.
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
38
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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 our pension expense are as follows:
Fiscal Fiscal Fiscal
2008 2007 2006
---------- ---------- ----------
Weighted average discount rate 5.75% 5.75% 5.75%
Weighted average rate of compensation increase 2.75% 2.75% 2.75%
Expected long-term rate of return on plan assets 6.75% 6.75% 6.75%
To determine our benefit obligation as of February 28, 2009, we used a
weighted average discount rate of 7.25% and a weighted average rate of
compensation increase of 3%.
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 fiscal year ending February 28, 2009:
Combined (Decrease)
Weighted Average Expected Return Increase in Pension
Discount Rate on Plan Assets Expense
------------------ ------------------ -----------------
100 basis point increase $(0.6) $(4.5) $(5.1)
100 basis point decrease -- 4.5 4.5
The following illustrates the annual impact on benefit obligation of a
100 basis point increase or decrease from the discount rate used to determine
the benefit obligation at February 28, 2009:
Weighted Average
Discount Rate
-------------
100 basis point increase $ (39.3)
100 basis point decrease 46.3
The following illustrates the annual impact on postretirement benefit
expense of a 100 basis point increase or decrease from the healthcare trend used
to determine the net cost for the year ending February 28, 2009:
Weighted Average
Discount Rate
-------------
100 basis point increase $ 0.3
100 basis point decrease (0.3)
The following illustrates the annual impact on the accumulated
postretirement benefit obligation of a 100 basis point increase or decrease from
the healthcare trend used to determine the accumulated benefit obligation at
February 28, 2009:
39
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
Weighted Average
Discount Rate
-------------
100 basis point increase $ 2.2
100 basis point decrease (1.9)
Our obligation to fund pension benefits for certain employees of
Grocery Haulers, Inc. ("GHI") who handle transportation and logistics services
for our Pathmark stores is accounted for as a contractual obligation at fair
value. The discount rate is derived from published zero-coupon AA corporate bond
yields. It is determined by considering the actual pattern of maturity of the
benefit obligations of approximately fifteen years. We utilized a 7% discount
rate to value this obligation as of February 28, 2009. Due to their long-term
nature, other assumptions used to value this contractual obligation, such as
compensation levels, trends in health care costs, and certain related factors,
such as turnover, retirement age and mortality, are reevaluated on an annual
basis and are consistent with those used to determine the Projected Benefit
Obligation for our pension plans. We use independent actuaries to assist us in
determining the discount rate assumptions and measuring this obligation.
A 100 basis point increase or decrease from the discount rate used to
determine net cost for GHI for the fiscal year ended February 28, 2009, would
increase or decrease our interest expense by $0.1 million.
The following illustrates the annual impact of a 100 basis point
increase or decrease in the discount rate on our GHI Contractual Obligation
balance for the fiscal year ended February 28, 2009:
Discount Rate
---------------
100 basis point increase $ (8.1)
100 basis point decrease $ 9.6
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 for supplies. The average shrinkage rate resulting from
the physical inventory counts is applied to the ending inventory balance in each
store as of the balance sheet date to provide for estimated shrinkage from the
date of the last physical inventory count for that location. Total inventory
stock loss reserves amounted to approximately $24.2 million and $15.7 million,
as of February 28, 2009 and February 23, 2008, respectively. Adjustments to the
stock loss reserve based on physical inventories were approximately 3% of our
ending inventory balance as of February 28, 2009.
Income Taxes
As discussed in Note 14 of the Consolidated Financial Statements, we
record a valuation allowance for the entire U.S. net deferred tax asset since it
is more likely than not that the net deferred tax asset would not be utilized
based on historical cumulative losses. This valuation allowance could be
reversed in future periods if we experience improvement in our U.S. operations.
40
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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. 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 our Company's
fiscal 2005 federal income tax return. Despite our Company's belief that its tax
return position is supportable, we believe 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 our 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 our Company's earnings. At February 28, 2009 and February 23, 2008, we
had unrecognized tax benefits of $162.8 million and $164.3 million,
respectively, that, if recognized would affect the effective tax rate. However,
they would be offset by an increase in our valuation allowance. It is reasonably
possible that the amount of unrecognized tax benefit with respect to certain of
our unrecognized tax positions will significantly decrease within the next 12
months. At this time, we estimate that the amount of our gross unrecognized tax
positions may decrease by up to approximately $154 million within the next 12
months, primarily due to the settlement of ongoing audits and lapses of statutes
of limitations in certain jurisdictions. Any decrease in our Company's gross
unrecognized tax positions would require a re-evaluation of our Company's
valuation allowance maintained on our net deferred tax asset and, therefore, is
not expected to effect our effective tax rate.
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. 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. Our Company makes estimates of the potential
liability based on our 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.
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.
41
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
Fiscal 2008 Fiscal 2007 Fiscal 2006
------------ ------------ ------------
Sales $ 9,516,186 $ 6,401,130 $ 5,369,203
Cost of merchandise sold (6,613,150) (4,431,299) (3,702,883)
------------ ------------ ------------
Gross margin 2,903,036 1,969,831 1,666,320
Store operating, general and
administrative expense (2,949,822) (2,009,071) (1,693,490)
------------ ------------ ------------
Loss from operations (46,786) (39,240) (27,170)
Loss on sale of Canadian operations -- (436) (1,299)
Gain on sale of Metro, Inc. -- 184,451 --
Nonoperating income 116,864 37,394 --
Interest expense (154,137) (111,816) (65,884)
Interest and dividend income 591 14,350 9,020
Equity in earnings of Metro, Inc. -- 7,869 40,003
------------ ------------ ------------
(Loss) income from continuing operations
before income taxes (83,468) 92,572 (45,330)
(Provision for) benefit from income taxes (2,683) (5,592) 58,081
------------ ------------ ------------
(Loss) income from continuing operations (86,151) 86,980 12,751
Discontinued operations:
(Loss) income from operations of
discontinued businesses, net of tax benefit
of nil, nil and $1,781 for fiscal 2008, 2007,
and 2006, respectively (58,383) (196,848) 7,088
Gain (loss) on disposal of discontinued
operations, net of tax benefit of nil,
nil and $1,952 for fiscal 2008, 2007
and 2006, respectively 4,653 (50,812) 7,054
------------ ------------ ------------
(Loss) income from discontinued
operations (53,730) (247,660) 14,142
------------ ------------ ------------
Net (loss) income $ (139,881) $ (160,680) $ 26,893
============ ============ ============
Net (loss) income per share - basic:
Continuing operations $ (1.69) $ 2.00 $ 0.31
Discontinued operations (1.05) (5.69) 0.34
------------ ------------ ------------
Net (loss) income per share - basic $ (2.74) $ (3.69) $ 0.65
============ ============ ============
Net (loss) income per share - diluted:
Continuing operations $ (4.28) $ 1.37 $ 0.30
Discontinued operations (1.13) (5.59) 0.34
------------ ------------ ------------
Net (loss) income per share - diluted $ (5.41) $ (4.22) $ 0.64
============ ============ ============
Weighted average common shares outstanding:
Basic 50,948,194 43,551,459 41,430,600
============ ============ ============
Diluted 47,691,002 44,295,214 41,902,358
============ ============ ============
See Notes to Consolidated Financial Statements.
42
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Stockholders' Equity and Comprehensive (Loss) Income
(Dollars in thousands, except share and per share amounts)
Accumulated Retained
Common Stock Additional Other Earnings Total
----------------------------- Paid-in Comprehensive (Accumulated Stockholders'
Shares Amount Capital Income (Loss) Deficit) Equity
------------- ----------- ----------- ------------- ------------ -------------
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 585,087 585 9,992 10,577
Other share based awards 11,604 12 9,027 9,039
Tax benefit of stock options 2,640 2,640
Call options (73,509) (73,509)
Stock, options and warrants relating to
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 57,101 373,594 (28,975) 16,423 418,143
Net loss
(139,881) (139,881)
Stock options exercised 107,891 108 2,105 2,213
Other share based awards 465,953 466 5,228 5,694
Financing warrants and conversion
features relating to convertible debt 57,373 57,373
Other comprehensive loss (76,172) (76,172)
---------- ----------- ----------- ---------- --------- -------------
Balance at 2/28/09 57,674,799 $ 57,675 $ 438,300 $ (105,147) $(123,458) $ 267,370
========== =========== =========== ========== ========= =============
See Notes to Consolidated Financial Statements.
43
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Stockholders' Equity and Comprehensive (Loss) Income
(Continued)
(Dollars in thousands)
Comprehensive (Loss) Income Fiscal 2008 Fiscal 2007 Fiscal 2006
- --------------------------- ------------ ------------ ------------
Net (loss) income $ (139,881) $ (160,680) $ 26,893
----------- ----------- ----------
Foreign currency translation adjustment, net of tax -- (9,710) (3,164)
Net unrealized gain on marketable securities, net of tax -- 22 993
Pension and other postretirement benefits, net of tax (76,172) (42,175) --
Minimum pension liability adjustment, prior to adoption of
SFAS 158, net of tax -- -- (1,090)
----------- ----------- ----------
Other comprehensive loss, net of tax (76,172) (51,863) (3,261)
----------- ----------- ----------
Total comprehensive (loss) income $ (216,053) $ (212,543) $ 23,632
=========== =========== ==========
Accumulated Other Comprehensive (Loss) Income Balances
- ------------------------------------------------------
Net Unrealized Pension and Accumulated
Foreign (Loss) / Gain Other Post- Other
Currency on Marketable retirement Comprehensive
Translation Securities Benefits Income (Loss)
-------------- --------------- --------------- ---------------
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 -- -- (28,975) (28,975)
February 23, 2008
Current period change -- -- (76,172) (76,172)
------------ ------------ ------------- ------------
Balance at
February 28, 2009 $ -- $ -- $ (105,147) $ (105,147)
============ ============ ============= ============
See Notes to Consolidated Financial Statements.
44
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share and per share amounts)
February 28, 2009 February 23, 2008
------------------- -------------------
Assets
Current assets:
Cash and cash equivalents $ 175,375 $ 100,733
Restricted cash 2,214 3,713
Restricted marketable securities 2,929 6,796
Accounts receivable, net of allowance for doubtful
accounts of $8,463 and $5,864 at February 28, 2009
and February 23, 2008, respectively 196,537 173,203
Inventories 474,002 505,012
Prepaid expenses and other current assets 66,190 94,969
----------- -----------
Total current assets 917,247 884,426
----------- -----------
Non-current assets:
Property:
Land 112,257 120,966
Buildings 381,779 380,974
Equipment 1,220,283 1,254,827
Leasehold improvements 1,358,515 1,337,858
----------- -----------
Total - at cost 3,072,834 3,094,625
Less accumulated depreciation and amortization (1,481,584) (1,343,185)
----------- -----------
Property owned, net 1,591,250 1,751,440
Property under capital leases, net 132,960 149,363
----------- -----------
Property, net 1,724,210 1,900,803
Goodwill 483,560 387,546
Intangible assets 224,838 234,086
Other assets 195,856 236,995
----------- -----------
Total assets $ 3,545,711 $ 3,643,856
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 5,283 $ 11,875
Current portion of obligations under capital leases 12,290 11,344
Current portion of other financial liabilities -- 44,539
Accounts payable 221,073 216,703
Book overdrafts 60,835 36,435
Accrued salaries, wages and benefits 161,054 177,814
Accrued taxes 39,404 46,156
Other accruals 246,596 226,949
----------- -----------
Total current liabilities 746,535 771,815
----------- -----------
Non-current liabilities
Long-term debt 942,514 758,886
Long-term obligations under capital leases 147,921 157,430
Long-term real estate liabilities 330,196 346,110
Deferred real estate income 95,000 81,110
Other financial liabilities 4,766 180,250
Other non-current liabilities 1,011,409 930,112
----------- -----------
Total liabilities 3,278,341 3,225,713
----------- -----------
Commitments and contingencies (Refer to Note 21)
Stockholders' equity:
Preferred stock - no par value; authorized - 3,000,000
shares; issued - none -- --
Common stock - $1 par value; authorized - 160,000,000
shares; issued and outstanding - 57,674,799 and
57,100,955 shares at February 28, 2009 and
February 23, 2008, respectively 57,675 57,101
Additional paid-in capital 438,300 373,594
Accumulated other comprehensive loss (105,147) (28,975)
(Accumulated deficit) retained earnings (123,458) 16,423
----------- -----------
Total stockholders' equity 267,370 418,143
----------- -----------
Total liabilities and stockholders' equity $ 3,545,711 $ 3,643,856
=========== ===========
See Notes to Consolidated Financial Statements.
45
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Fiscal 2008 Fiscal 2007 Fiscal 2006
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (139,881) $ (160,680) $ 26,893
Adjustments to reconcile net (loss) income to net cash (used in) provided
by operating activities:
Asset disposition initiatives 38,217 123,951 2,139
Depreciation and amortization 260,991 186,789 177,754
Income tax benefit -- -- (66,435)
Gains on disposal of owned property and write-down of property, net 1,086 (13,743) (22,502)
Other property impairments 14,069 11,657 4,294
(Gain) loss on disposal of discontinued operations (4,653) 50,812 (7,054)
Loss on sale of Canadian operations -- 436 1,299
Nonoperating income (116,864) (37,394) --
Interest accretion on convertible notes 12,027 2,313 --
Other share based awards 5,694 9,039 8,134
Equity in earnings of Metro, Inc. -- (7,869) (40,003)
Proceeds from dividends from Metro, Inc -- -- 6,858
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:
(Increase) decrease in receivables (28,625) 37,098 62,741
Decrease (increase) in inventories 29,706 115,985 (1,264)
(Increase) decrease in prepaid expenses and other current assets 1,633 9,904 3,062
(Increase) decrease in other assets (18,182) 16,949 3,044
Increase (decrease) in accounts payable 5,850 (72,714) (19,199)
Decrease in accrued salaries, wages and benefits, and taxes (21,177) (42,345) (9,425)
Increase (decrease) in other accruals 12,637 (47,590) (61,172)
Decrease in other non-current liabilities (52,741) (65,426) (37,641)
Other operating activities, net (2,233) (686) 1,669
----------- ----------- -----------
Net cash (used in) provided by operating activities (2,446) (42,544) 33,192
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (115,994) (122,850) (208,159)
Proceeds from disposal of property 37,616 153,591 41,880
Purchase of businesses, net of cash acquired -- (985,521) (24,619)
Disposal related expenditures for sale of Canadian operations -- (1,040) (1,299)
Proceeds from derivatives -- 2,442 --
Decrease in restricted cash 1,499 47,463 95,133
Net proceeds from the sale of shares of Metro, Inc. -- 548,796 --
Purchases of marketable securities -- (32,700) (148,700)
Proceeds from maturities of marketable securities 12,349 33,242 294,519
----------- ----------- -----------
Net cash (used in) provided by investing activities (64,530) (356,577) 48,755
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds under revolving lines of credit 1,683,823 1,027,335 1,757,100
Principal payments on revolving lines of credit (1,521,940) (1,060,336) (1,687,100)
Proceeds under line of credit 54,973 -- --
Principal payments on line of credit (61,573) -- --
Proceeds from promissory note 10,000 -- --
Proceeds from long-term borrowings -- 1,018,300 --
Payments on long-term borrowings (274) (485,830) (80)
Settlement of Series A warrants (45,735) -- --
Long-term real estate liabilities 3,150 6,229 3,379
Principal payments on capital leases (9,015) (2,187) (1,748)
Proceeds from the financing warrants -- 36,771 --
Payments for the call options -- (73,509) --
Increase (decrease) in book overdrafts 24,400 (4,562) (3,614)
Financing fees 1,674 (61,782) (249)
Dividends paid -- -- (299,089)
Tax benefit on stock options -- 2,640 --
Proceeds from exercises of stock options 2,213 10,577 5,994
----------- ----------- -----------
Net cash provided by (used in) financing activities 141,696 413,646 (225,407)
----------- ----------- -----------
Effect of exchange rate changes on cash and
cash equivalents (78) 14 65
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 74,642 14,539 (143,395)
Cash and cash equivalents at beginning of year 100,733 86,194 229,589
----------- ----------- -----------
Cash and cash equivalents at end of year $ 175,375 $ 100,733 $ 86,194
=========== =========== ===========
See Notes to Consolidated Financial Statements.
46
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.
At February 28, 2009, 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 39.0% of our common stock as of February 28, 2009.
As discussed in Note 7 - Discontinued Operations, the criteria
necessary to classify the operations for the Midwest and the Greater New Orleans
area as discontinued were satisfied during fiscal 2007 and as such, have been
reclassified in our Consolidated Statements of Operations for all periods
presented.
Certain reclassifications have been made to prior year amounts to
conform to current year presentation.
Fiscal Year
- -----------
Our fiscal year ends on the last Saturday in February. Fiscal 2008 is
comprised of 53 weeks, consisting of 12 four-week periods and one five-week
period. Fiscal 2007 and 2006 were each comprised of 52 weeks, consisting of 13
four-week periods.
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. and Grocery Haulers, Inc. In addition, vendor
allowance income is recorded within cost of merchandise sold.
47
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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 $92.0 million for
fiscal 2008, $77.7 million for fiscal 2007 ($73.3 million for continuing
operations and $4.4 million for discontinued operations) and $76.2 million for
fiscal 2006 ($59.5 million for continuing operations and $16.7 million for
discontinued operations).
Pre-opening Costs
- -----------------
Non-capital expenditures incurred in opening new stores or remodeling
existing stores are expensed as incurred. Rental costs incurred during the
construction period are expensed.
Software Costs
- --------------
We capitalize externally purchased software and amortize it over five
years. Amortization expense related to software costs for fiscal 2008, 2007 and
2006 was $10.6 million, $4.8 million and $7.6 million, respectively.
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 2008, 2007 and 2006, we capitalized $1.8 million, $3.6 million and $1.4
million, respectively, of such software costs. These costs are amortized over
five years. For fiscal 2008, 2007 and 2006, we recorded related amortization
expense for continuing operations of $3.5 million, $8.9 million and $14.6
million, respectively. Also during fiscal 2008, we capitalized $16.2 million of
externally purchased software costs relating to Pathmark acquisition. These
costs are being amortized over five years.
Externally purchased and internally developed software are classified
in "Property - Equipment" on our Consolidated Balance Sheets.
48
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Loss) Income Per Share
- -----------------------
Basic (loss) income per share is computed by dividing net (loss) income
by the weighted average shares outstanding for the reporting period. Diluted
(loss) earnings per share reflects the potential dilution, using the "treasury
stock" and "if-converted" methods, 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.
The following table contains common share equivalents, which were not
included in the historical (loss) income per share calculations as their effect
would be antidilutive:
Fiscal 2008 Fiscal 2007 Fiscal 2006
------------- ------------- -------------
Convertible debt 6,746,025 2,107,064 --
Stock options 1,785,583 486,375 186,218
Warrants 686,277 156,486 --
Restricted stock units 514,031 30,183 --
Financing warrant 11,278,988 -- --
We have 8,134,002 loaned shares under our share lending agreements,
which are considered issued and outstanding. However, 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 diluted earnings per share, unless the
borrower defaults on returning the related shares. On September 15, 2008, Lehman
Europe, who is a party to a 3,206,058 share lending agreement with the Company
filed under Chapter 11 of the U.S. Bankruptcy Code with the United States
Bankruptcy Court and/or commenced equivalent proceedings in jurisdictions
outside of the United States (collectively, the "Lehman Bankruptcy"). As such,
we have included these loaned shares as issued and outstanding effective
September 15, 2008 for purposes of computing our basic and diluted weighted
average shares and (loss) income per share. (Refer to Note 17 - Capital Stock)
The following table sets forth the (loss) income from continuing
operations and common shares outstanding that are used in the calculation of
basic and diluted earnings per share:
Fiscal 2008 Fiscal 2007 Fiscal 2006
------------ ------------ ------------
(Loss) income from continuing operations $ (86,151) $ 86,980 $ 12,751
Adjustments for Convertible Debt (16,588) -- --
Adjustments on Convertible Warrants (101,336) (26,352) --
------------ ------------ -----------
(Loss) income from continuing operations-
diluted $ (204,075) $ 60,628 $ 12,751
============ ============ ===========
Weighted average common shares outstanding 57,647,679 45,007,214 41,430,600
Restricted stock options -- 63,784 --
Share lending agreement (6,699,485) (1,519,539) --
------------ ------------ -----------
Common shares outstanding-basic 50,948,194 43,551,459 41,430,600
Effect of dilutive securities:
Options to purchase common stock -- 348,357 471,758
Convertible debt 4,532,963 -- --
Convertible warrants (7,790,155) 395,398 --
------------ ------------ -----------
Common shares outstanding-diluted 47,691,002 44,295,214 41,902,358
============ ============ ===========
49
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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 28, 2009 and
February 23, 2008, because we sold all of our shares of Metro, Inc., assets and
liabilities denominated in Canadian currency are nil and $1.0 million,
respectively.
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 $46.7 million and $46.0 million at February
28, 2009 and February 23, 2008, respectively, are included in "Cash and cash
equivalents" on our Consolidated Balance Sheets.
Restricted Cash
- ---------------
Our restricted cash balances represent monies 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
- --------------------------------
Investments with maturities greater than ninety days when purchased are
considered marketable 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. Our restricted marketable securities are 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 3 - Cash, Cash
Equivalents, Restricted Cash and Restricted Marketable Securities for further
discussion of the Columbia Fund.
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 28, 2009 and February 23, 2008, the cost
of 61.0% and 61.1% of our inventories, respectively, was determined using the
first-in, first out ("FIFO") method and the cost of 39.0% and 38.9% of our
inventories, respectively, was determined using the last-in, first-out ("LIFO")
method. At February 28, 2009 and February 23, 2008, the excess of estimated
current costs over LIFO carrying values, or LIFO reserves, were approximately
$10.1 million and $2.3 million, respectively.
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.
50
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Long-Lived Assets and Finite-Lived Intangible Assets
- ----------------------------------------------------
We review the carrying values of our long-lived assets and finite-lived
intangible 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 of
long-lived intangible assets on a discounted basis using a probability weighted
approach and a U.S. Treasury risk-free rate, which is based on the life of the
primary asset within the asset group. We measure the value of finite-lived
intangible assets based on the weighted average cost of capital.
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 shorter. During fiscal 2008, 2007 and 2006, in addition to the
impairment losses discussed at Note 6 - Valuation of Long-lived Assets, we
disposed of certain assets, which resulted in a pretax loss from continuing
operations of $1.1 million and pretax net gains from continuing operations of
$13.7 million and $22.5 million, respectively.
Goodwill and Other Indefinite-Lived Intangible Assets
- -----------------------------------------------------
Goodwill and other intangibles with indefinite useful lives that are
not subject to amortization are tested for impairment in the fourth quarter of
each fiscal year, or more frequently whenever events or changes in circumstances
indicate that impairment may have occurred. Possible indicators of impairment
include, but are not limited to sustained operating losses or poor operating
performance trends, a significant decline in our expected future cash flows for
a reporting unit, a decrease in our market capitalization below our book value
for a sustained period of time, and an expectation that a reporting unit will be
disposed of or sold. When indicated, we perform an evaluation to determine if
impairment has occurred. If impairment is identified, we measure and record the
amount of the impairment loss.
For goodwill, the first step of the impairment analysis is performed by
comparing the estimated fair value of each reporting unit to the related
carrying value of the net assets of that reporting unit. If the fair value of
the reporting unit exceeds the carrying value of the net asset of that reporting
unit, goodwill is not deemed to be impaired and no further testing is performed.
If the carrying value of the net assets for a reporting unit exceeds the related
fair value, the second step of the impairment test is performed to measure any
potential impairment. The second step of the goodwill impairment test compares
the fair value of the reporting unit's goodwill with the carrying value of
goodwill. To determine the fair value of goodwill, the fair value of the
reporting unit is allocated to all of its assets and liabilities, with the
excess allocated to goodwill. If the carrying amount of a reporting unit's
goodwill exceeds the fair value of that goodwill, an impairment loss is
recognized for the difference. During fiscal 2008, we concluded that our
goodwill balance was not impaired.
Our only other indefinite-lived intangible asset is the Pathmark
Trademark. We estimate the fair value of this intangible asset using the
relief-from-royalty method, which uses assumptions related to projected revenues
from our annual long-range plan; assumed royalty rates that could be payable if
we did not own the trademarks; and a discount rate. We recognize an impairment
loss when the estimated fair
51
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
value of the indefinite-lived intangible asset is less than its carrying value.
We completed our impairment test of our indefinite-lived intangible and
concluded there was no impairment as of February 28, 2009.
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 $475.9 million which is included in
"Goodwill" on our Consolidated Balance Sheets. Also in connection with this
acquisition, we recorded indefinite lived intangible assets of $127.3 million,
which are included in "Intangible assets" in our Consolidated Balance Sheets.
During fiscal 2007, we completed the purchase of Best Cellars and
recorded goodwill in the amount of $1.8 million within our Other segment. During
fiscal 2006, we completed the purchase of six Clemens Markets stores from C&S
Wholesale Grocers, Inc. and recorded goodwill in the amount of $5.8 million
within our Fresh segment.
Changes in the carrying amount of goodwill by reportable segment during
fiscal 2007 and fiscal 2008 are as follows:
Price
Fresh Impact Gourmet Other Unallocated Total
--------- ----------- ----------- ----------- ----------- -------------
Goodwill at February 24, 2007 $ 5,810 $ -- $ -- $ -- $ -- $ 5,810
Goodwill acquired during the year -- -- -- 1,746 379,990* 381,736
--------- ----------- ----------- ----------- ----------- -------------
Goodwill at February 23, 2008 5,810 -- -- 1,746 379,990 387,546
Allocation of goodwill 97,175 269,181 10,156 3,478 (379,990) -
Other** 24,533 67,958 2,564 959 -- 96,014
Transfer of goodwill between
reportable segments (909) 909 -- -- -- --
--------- ----------- ----------- ----------- ----------- -------------
Goodwill at February 28, 2009 $ 126,609 $ 338,048 $ 12,720 $ 6,183 $ -- $ 483,560
========= =========== =========== =========== =========== =============
- -------------------------------
* At February 23, 2008, we were in the process of determining the allocation of
goodwill related to the Pathmark acquisition to our reporting segments.
** Includes purchase accounting adjustments recorded in connection with our
Pathmark acquisition.
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 $60.3 million and $63.0 million
at February 28, 2009 and February 23, 2008, 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.
The proceeds received are recorded as long-term real estate liabilities on our
Consolidated Balance Sheets with a maturity of 20 years, and will not be
recognized until our continuing involvement ceases.
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. Because we had paid
52
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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
accounting requirements 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 13 and 25 years and effective annual percentage rates
between 4.74% and 71.14%. 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 $77.6 million and $153.9
million, respectively, at February 28, 2009 and $68.3 million and $152.1
million, respectively, at February 23, 2008. 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 2008, the increase in our worker's compensation and
general liability reserves of $11.1 million was primarily related to a $24.7
million adjustment for Pathmark's opening balance sheet liabilities for
self-insurance reserves based on information we obtained regarding facts and
circumstances that existed as of the acquisition date that, if known, would have
affected the measurement of the amounts recognized on that date, partially
offset by payments made during fiscal 2008. 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
by $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.
Closed Store and Warehouse Reserves
- -----------------------------------
For closed stores and warehouses 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. 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 marketable securities available for sale.
53
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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).
New Accounting Pronouncements
- -----------------------------
On April 9, 2009, the Financial Accounting Standards Board ("FASB")
issued FASB Staff Position ("FSP") Financial Accounting Standard ("FAS") 115-2
and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary
Impairments" ("FSP FAS 115-2 and FAS 124-2"), which applies to debt securities
classified as available-for-sale and held-to-maturity. This FSP provides
guidance on when the impairment should be considered to be other-than-temporary,
the determination of the amount of the other-than-temporary impairment to be
recognized in earnings and other comprehensive income, the accounting for debt
securities after an other-than-temporary impairment, and the related disclosure
requirements. FSP FAS 115-2 and FAS 124-2 is effective for our first fiscal
quarter ended June 20, 2009. Earlier adoption is not permitted. Our Company is
currently assessing the impact of FSP FAS 115-2 and FAS 124-2 on our financial
statements.
On April 9, 2009, the FASB issued FSP No. FAS 107-1 and Accounting
Principles Board ("APB") Opinion No. 28-1 ("FSP FAS 107-1 and APB 28-1"). This
FSP amends Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosures about Fair Value of Financial Instruments," and APB Opinion No. 28,
"Interim Financial Reporting," to require interim and annual disclosures of the
fair value of financial instruments, together with the related carrying amount
and how each amount relates to what is reported in the statement of financial
position. This FSP also requires disclosure of the methods and significant
assumptions used to estimate the fair value of financial instruments. FSP FAS
107-1 and APB 28-1 is effective for our second fiscal quarter ended September
12, 2009, with earlier application permitted, beginning with our first fiscal
quarter ended June 20, 2009. We are currently evaluating the impact of FSP FAS
107-1 and APB 28-1, which may require additional disclosure.
On March 19, 2009, the FASB Emerging Issues Task Force ("EITF") issued
EITF Issue No. 09-1, "Accounting for Own-Share Lending Arrangements in
Contemplation of Convertible Debt Issuance" ("EITF Issue No. 09-1"). The EITF
reached a consensus-for-exposure that a share-lending arrangement entered into
on an entity's own shares in contemplation of a convertible debt offering or
other financing is required to be measured at fair value and recognized as a
debt issuance cost in the Company's financial statements. The debt issuance
costs should be amortized using the effective interest method over the life of
the financing arrangement as interest cost. In addition, the loaned shares
should be excluded from the computations of basic and diluted earnings per
share, unless default of the share-lending arrangement occurs, at which time the
loaned shares would be included in the common and diluted earnings per share
calculation. The EITF also expanded the disclosure requirements for
share-lending arrangements. This issue will be effective during our first fiscal
quarter ended June 20, 2009. Retrospective application is required for all
arrangements outstanding in the beginning of the fiscal year in which this Issue
is initially applied. Our Company is currently assessing the impact of EITF
Issue No. 09-1 on our financial statements.
In December 2008, the FASB issued FSP FAS 132(R)-1, "Employer's
Disclosures about Postretirement Benefit Plan Assets" ("FSP FAS 132(R)-1"). FSP
FAS 132(R)-1 amends SFAS No. 132 (Revised 2003), "Employers' Disclosures about
Pensions and Other Postretirement Benefits", to provide guidance on an
employer's disclosures about plan assets of a defined benefit pension or other
postretirement
54
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
plan. The expanded disclosure requirements include: (i) investment policies and
strategies, (ii) the major categories of plan assets, (iii) the inputs and
valuation techniques used to measure plan assets, (iv) the effect of fair value
measurements using significant unobservable inputs (Level 3) on changes in plan
assets for the period, and (v) significant concentrations of risk within plan
assets. These disclosure requirements are effective for our fiscal year ended
February 27, 2010.
In May 2008, the FASB issued FSP APB Opinion No. 14-1, Accounting for
Convertible Debt Instruments that May be Settled in Cash Upon Conversion ("FSP
APB 14-1"). FSP APB 14-1 requires that the liability and equity components of
convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) be separately accounted for in a manner that
reflects an issuer's nonconvertible debt borrowing rate. FSP APB 14-1 is
effective for our first fiscal quarter ended June 20, 2009. Retrospective
application to all periods presented is required, except for instruments that
were not outstanding during any of the periods that will be presented in the
annual financial statements for the period of adoption but were outstanding
during an earlier period. Once adopted, we expect an increase in our non-cash
interest expense associated with our $255 million 6.75% Convertible Senior Notes
that were issued in December 2007, including non-cash interest expense for prior
periods as a result of its retrospective application. We believe the additional
annual non-cash interest expense under FSP APB 14-1 would have increased
interest expense classified in our consolidated statements of operations for the
year ended February 28, 2009 by approximately $3.9 million, as our estimated
nonconvertible debt borrowing rate of 12.0% is higher than the current
contractual rate of 6.75% on our $255 million convertible senior notes. The
adoption of FSP APB 14-1 will also increase our non-cash interest expense in
fiscal 2009 by $4.4 million, and will increase non-cash interest expense in
subsequent periods during which our convertible notes remain outstanding by
approximately $18.8 million in total.
In April 2008, the FASB issued FSP FAS 142-3, "Determining the Useful
Life of Intangible Assets" ("FSP FAS 142-3"). FSP FAS 142-3 amends the factors
to be considered in determining the useful life of intangible assets. Its intent
is to improve the consistency between the useful life of an intangible asset and
the period of expected cash flows used to measure its fair value. FSP FAS 142-3
is effective for our fiscal year ended February 27, 2010. Our Company is
currently assessing the impact of FSP FAS 142-3 on our consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
("SFAS No. 157"), which defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements. In February
2008, the FASB also issued FSP No. 157-1, "Application of FASB Statement No. 157
to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13" ("FSP No. 157-1"). FSP No. 157-1 excludes SFAS No. 13, "Accounting
for Leases", as well as other accounting pronouncements that address fair value
measurements on lease classification or measurement under SFAS No. 13, from the
scope of SFAS No. 157. FSP No. 157-1 is effective upon the initial adoption of
SFAS No. 157. Refer to Note 4 - Fair Value Measurements for related disclosure.
In February 2008, the FASB issued FSP No. 157-2, "Effective Date of FASB
Statement No. 157" ("FSP No. 157-2"). FSP No. 157-2 delays the effective date of
SFAS No. 157 for all nonrecurring fair value measurements of nonfinancial assets
and nonfinancial liabilities until our first fiscal quarter ended June 20, 2009.
FSP No. 157-2 is effective upon issuance. Our Company adopted SFAS No. 157 and
FSP No. 157-1 as of February 24, 2008, with the exception of the application of
the statement to nonrecurring
55
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
nonfinancial assets and nonfinancial liabilities. Refer to Note 4 - Fair Value
Measurements for related disclosure. We are currently evaluating the impact of
FSP No. 157-2, which may require additional disclosure.
In April 2009, the FASB issued FSP No. 157-4, "Determining Fair Value
when the Volume Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly" ("FSP No. 157-4").
This FSP provides guidance for determining the fair value of assets and
liabilities that have experienced a significant decrease in the volume and level
of activity in relation to their normal market activity and the related
transactions or quoted prices may not be indicative of fair value, or not
orderly. This FSP does not apply to assets or liabilities for which quoted
prices may be obtained in an active market, or Level 1 inputs. FSP No. 157-4
also expands the disclosure requirements of SFAS No. 157 to include a discussion
of the inputs and valuation techniques used to measure fair value and to provide
disclosure for all equity and debt securities that are measured at fair value by
each major security type. FSP 157-4 is effective for our second fiscal quarter
ended September 12, 2009, with early application permitted beginning with our
first fiscal quarter ended June 20, 2008. We are currently evaluating the impact
of FSP No. 157-4 on our financial statements and disclosures.
In December 2007, the FASB issued SFAS No. 141R, "Business
Combinations" ("SFAS No. 141R"). SFAS No. 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 No. 141R is
effective for our fiscal year ended February 27, 2010. In addition, in April
2009, the FASB issued FSP No. FAS 141(R) - 1, "Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from Contingencies"
("FSP FAS 141(R)"), which clarifies SFAS No. 141R on issues relating to initial
recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination. This FSP is effective for assets or liabilities arising from
contingencies in business combinations with the acquisition date during or after
our fiscal 2009. Our acquisition of Pathmark was not impacted by the provisions
of SFAS No. 141R and FSP No. FAS 141(R) - 1, as there is no retroactive
application.
Recently Adopted Accounting Pronouncements
- ------------------------------------------
Our adoption of 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, 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 14 - Income Taxes for further discussion.
In October 2008, the FASB issued FSP No. 157-3, "Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active," ("FSP
No. 157-3") with an immediate effective date, including prior periods for which
financial statements have not been issued. FSP No. 157-3 amends SFAS No. 157 to
clarify the application of fair value in inactive markets and allows for the use
of management's internal assumptions about future cash flows with appropriately
risk-adjusted discount rates when relevant observable market data does not
exist. The objective of SFAS No. 157 has not changed and continues to be
56
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
the determination of the price that would be received in an orderly transaction
that is not a forced liquidation or distressed sale at the measurement date. We
have evaluated the provisions of FSP No. 157-3 and the guidance did not have an
impact on our Company's financial condition or results of operations.
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 No. 159"). SFAS No. 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 No.159 are effective for our fiscal year ending February 28,
2009. The adoption of the provisions of SFAS No. 159 did not have an impact on
our Company's consolidated financial statements as we did not elect to report
any additional instruments at fair value.
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 No. 158") 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. Additionally,
SFAS No. 158 no longer allows companies to measure their plans as of any date
other than the end of their fiscal year. We adopted these requirements as of
February 24, 2007. We used the second approach as described in paragraph 19 of
SFAS No. 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. Refer to Note 15 - Retirement Plans and
Benefits for further discussion.
NOTE 2 -- Acquisition of Pathmark Stores, Inc.
On December 3, 2007, our Company completed the 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." 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.
Included in the Consolidated Statements of Operations for the fiscal
year ended February 23, 2008 and February 24, 2007 are the sales and operating
results of the five A&P stores that were required to be divested in conjunction
with the acquisition. 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:
57
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Fiscal 2007 Fiscal 2006
------------- -------------
Sales $ 100,514 $109,706
========= ========
(Loss) income from operations $ (116) $ 596
========= ========
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
$380.0 million. During the fiscal year ended February 28, 2009, we increased our
amount of goodwill to $475.9 million. This increase primarily related to an
adjustments of approximately $63.3 million relating to a Pathmark transportation
agreement, which is unfavorable to market based upon information which existed
as of the acquisition and a $24.7 million adjustment to Pathmark's opening
balance sheet liabilities for self-insurance reserves based on information we
obtained regarding facts and circumstances that existed as of the acquisition
date that, if known, would have affected the measurement of the amounts
recognized as of that date.
The following table summarizes the fair values of the Pathmark assets
acquired and liabilities assumed at the date of acquisition:
Current assets $ 347,376
Goodwill 475,923
Intangible assets 236,220
Property, net* 1,195,524
Other assets 150,575
------------
Total assets acquired $ 2,405,618
Current liabilities (339,856)
Long-term debt (1,194)
Long-term obligations under capital leases (130,488)
Long-term financing liabilities (64,138)
Deferred taxes** (58,594)
Other non-current liabilities (398,849)
------------
Total liabilities assumed $ (993,119)
------------
Net assets acquired $ 1,412,499
============
* In connection with our acquisition of Pathmark in December 2007, we
acquired net favorable lease rights of $444.6 million, which had a
balance of $440.5 million as of February 28, 2009, which was recorded
in Property, net and other non-current liabilities in our Consolidated
Balance Sheet at February 28, 2009. 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 28, 2009 is
18.5 years. Amortization expense related to the net favorable lease
rights was $20.5 million and $4.8 million for the fiscal years ended
February 28, 2009 and February 23, 2008, respectively. Estimated annual
amortization expense for the next five years is as follows: fiscal 2009
- $20.5 million, fiscal 2010 - $20.5 million, fiscal 2011 - $19.7
million, fiscal 2012 - $19.6 million, and fiscal 2013 - $19.4 million.
** The 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 amount of goodwill and other intangibles are $475.9 million and
$236.2 million, respectively, resulting from the Pathmark acquisition. The
goodwill is not deductible for tax purposes. We allocate goodwill to reporting
units based on the relative fair values of the reporting units expected to
benefit from our acquisition of Pathmark. We evaluate our reporting units on an
annual basis and, if necessary, reassign goodwill using a fair value allocation
approach. Refer to Note 1 - Summary of Significant Accounting Policies for
allocation of goodwill to our reportable segments.
58
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Other intangible assets acquired resulting from the Pathmark
acquisition consisted of the following:
Weighted
Average Gross Accumulated Accumulated
Amortization Carrying Amortization Amortization
Period (years) Amount At Feb. 28, 2009 At Feb. 23, 2008
-------------- ------------- ---------------- ----------------
Loyalty card customer relationships 7 $ 19,200 $ 3,376 $ 633
In-store advertiser relationships 20 14,720 906 170
Pharmacy payor relationships 13 75,000 7,100 1,331
Pathmark trademark Indefinite 127,300 -- --
-------- ------- ------
Total $236,220 $11,382 $2,134
======== ======= ======
Amortization of these Pathmark intangible assets for the fiscal years
ended February 28, 2009 and February 23, 2008 was approximately $9.2 million and
$2.1 million, respectively.
The following table summarizes the estimated future amortization
expense for other intangible assets:
2009 10,725
2010 10,725
2011 10,725
2012 9,670
2013 6,505
Thereafter 49,188
The recorded and projected amortization expense for the favorable lease
rights is separately disclosed above. We have determined that the Pathmark
trademark has an indefinite life and, accordingly, is not subject to
amortization.
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 estimates of fair value and increased debt
to fund the acquisition.
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.
59
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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 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
60
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
8,134,002 as it reasonably approximates the merger effect on weighted average
shares outstanding for fiscal 2007 and fiscal 2006.
Note 3 - Cash, Cash Equivalents, Restricted Cash and Restricted Marketable
Securities
At February 28, 2009 and February 23, 2008, we had $2.2 million and
$3.7 million, respectively, in restricted cash held in escrow for services our
Company is required to perform in connection with the sale of our real estate
properties.
At February 28, 2009 and February 23, 2008, our restricted marketable
securities of $4.9 million and $19.4 million, respectively, 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 fiscal years ended February 28, 2009 and February 23,
2008, we received distributions from the Columbia Fund in the amount of $12.3
million and $12.8 million, respectively, at an amount less than 100% of the net
asset value of the fund, resulting in realized losses on these distributions of
$0.9 million and $0.2 million, respectively. In addition, during fiscal 2008 and
2007, we recorded losses of $1.3 million and $0.3 million, respectively, based
on the ending net asset value of the Columbia Fund as the decline in net asset
value was considered other than temporary at February 28, 2009 and February 23,
2008, respectively, and will not be recovered from future distributions from the
fund.
The following is a summary of cash, cash equivalents, restricted cash,
and restricted marketable securities as of February 28, 2009 and February 23,
2008:
Fair Value/ Fair Value/
Amortized Amortized
Cost at Cost at
February 28, February 23,
2009 2008
------------- -------------
Classified as:
- --------------
Cash $ 173,299 $ 98,382
Cash equivalents:
Money market funds 2,076 2,351
----------- -----------
Total cash and cash equivalents 175,375 100,733
----------- -----------
Restricted cash 2,214 3,713
Restricted marketable securities 2,929 6,796
Restricted marketable securities
included in other assets 1,928 12,622
----------- -----------
Total cash, cash equivalents, restricted cash and
restricted marketable securities $ 182,446 $ 123,864
=========== ===========
Securities available-for-sale:
- ------------------------------
Maturing within one year $ 2,929 $ 6,796
=========== ===========
Maturing greater than one year $ 1,928 $ 12,622
=========== ===========
At February 28, 2009 and February 23, 2008 there were no investments
with unrealized gains or losses. Gross realized losses on sales of investments
were $0.9 million, $0.5 million and $0.4 million during fiscal 2008, fiscal 2007
and fiscal 2006, respectively.
61
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Note 4 - Fair Value Measurements
SFAS 157 defines and establishes a framework for measuring fair value
and expands related disclosures. This Statement applies to all assets and
liabilities that are being measured and reported on a fair value basis. Our
Company adopted SFAS 157 for our financial assets and financial liabilities
beginning in fiscal 2008. As discussed in Note 1 - Impact of New Accounting
Pronouncements, SFAS 157-2 deferred the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities recorded at fair value on a
nonrecurring basis to fiscal years beginning after November 15, 2008 (our fiscal
year ended February 27, 2010).
SFAS 157 establishes a three-tier fair value hierarchy, which
classifies the inputs used in measuring fair value. These tiers include:
Level 1 - Quoted prices in active markets for identical assets or
liabilities. Our Company's Level 1 assets include cash equivalents that are
traded in an active exchange market.
Level 2 - Observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities; or other inputs that are observable or
can be corroborated by observable market data for substantially the full term of
the assets or liabilities. Our Company's Level 2 liabilities include borrowings
under our line of credit, credit agreement, related party promissory note, our
debt securities and warrants. The fair value of our debt securities are based on
quoted market prices for such notes in non-active markets. Our warrants are
valued using the Black Scholes pricing model with inputs that are observable in
the market or can be derived principally from or corroborated by observable
market data. Amounts included in other represent mortgages and bonds on various
properties.
Level 3 - Unobservable inputs that are supported by little or no market
activity and that are financial instruments whose value is determined using
pricing models, discounted cash flows, or similar methodologies, as well as
instruments for which the determination of fair value requires significant
judgment or estimation. Our Company's Level 3 assets include restricted
marketable securities for which there is limited market activity.
A financial asset or liability's classification within the hierarchy is
determined based on the lowest level input that is significant to the fair value
measurement.
62
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
The following table provides the assets and liabilities carried at fair
value measured on a recurring basis as of February 28, 2009:
Fair Value Measurements at Feb. 28, 2009 Using
----------------------------------------------
Quoted Prices Significant Other Significant
Total Carrying in Active Observable Unobservable
Value at Markets Inputs Inputs
Feb. 28, 2009 (Level 1) (Level 2) (Level 3)
-------------- ------------ ----------------- -----------
Assets:
- ------
Cash equivalents $ 2,076 $ 2,076 $ -- $ --
Restricted marketable securities 4,857 -- -- 4,857
-------- ------- -------- ------
Total $ 6,933 $ 2,076 $ -- $4,857
======== ======= ======== ======
Liabilities:
- -----------
Line of Credit $ 5,000 $ -- $ 5,000 $ --
Borrowings under Credit Agreement 331,783 -- 331,783 --
Related Party Promissory Note - due Aug. 2, 2011 10,000 -- 10,000 --
9.125% Senior Notes, due Dec. 15, 2011 12,840 -- 12,399 --
5.125% Convertible Senior Notes,
due June 15, 2011 147,717 -- 89,100 --
6.750% Convertible Senior Notes,
due December 15, 2012 238,203 -- 140,250 --
9.375% Notes, due August 1, 2039 200,000 -- 90,400 --
Warrant Series B 4,766 -- 4,766 --
Other 2,253 -- 2,253 --
-------- ------- -------- ------
Total $952,562 $ -- $685,951 $ --
======== ======= ======== ======
Fair Value Measurements at Feb. 23, 2008 Using
----------------------------------------------
Quoted Prices Significant Other Significant
Total Carrying in Active Observable Unobservable
Value at Markets Inputs Inputs
Feb. 23, 2008 (Level 1) (Level 2) (Level 3)
-------------- ------------ ----------------- -----------
Assets:
- ------
Cash equivalents $ 2,351 $2,351 $ -- $ --
Restricted marketable securities 19,418 -- -- 19,418
-------- ------ ---------- -------
Total $ 21,769 $2,351 $ -- $19,418
======== ====== ========== =======
Liabilities:
- ----------
Line of Credit $ 11,600 $ -- $ 11,600 $ --
Borrowings under Credit Agreement 169,900 -- 169,900 --
9.125% Senior Notes, due Dec. 15, 2011 12,840 -- 13,209 --
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 --
6.750% 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 --
9.375% Notes, due August 1, 2039 200,000 -- 205,200 --
Warrant Series A 44,539 -- 44,539 --
Warrant Series B 106,102 -- 106,102 --
Other 2,528 -- 2,528 --
-------- ------ ---------- -------
Total $995,551 $ -- $1,011,284 $ --
======== ====== ========== =======
63
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Level 3 Valuation Techniques:
- ----------------------------
Financial assets are considered Level 3 when their fair values are
determined using pricing models, discounted cash flows or similar techniques and
at least one significant model assumption or input is unobservable. Level 3
financial assets include our restricted marketable securities for which there is
limited market activity such that the determination of fair value requires
significant judgment or estimation. At February 28, 2009, these securities were
valued primarily using broker pricing models that incorporate transaction
details such as contractual terms, maturity, timing and amount of future cash
inflows, as well as assumptions about liquidity.
The table below provides a summary of the changes in fair value,
including net transfers in and/or out, of all financial assets measured at fair
value on a recurring basis using significant unobservable inputs (Level 3) for
the period February 24, 2008 to February 28, 2009:
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
-----------------------------------
Restricted
Marketable
Securities
-------------
Beginning Balance $ 19,418
Total realized and unrealized losses included in:
Losses (1) (2,160)
Comprehensive income -
Settlements (12,401)
Transfers in and/or out of Level 3 -
-------------
Ending Balance $ 4,857
=============
Losses recorded in Earnings attributable to the change in unrealized losses
relating to Level 3 assets still held at February 28, 2009 $ (1,270)
=============
(1) Amounts are recorded in Store operating, general and administrative expense
in the Consolidated Statements of Operations.
As discussed in Note 3 - Cash, Cash Equivalents, Restricted Cash and
Restricted Marketable Securities, on February 28, 2009, we had $4.9 million
invested in a short-term fixed income fund held by Bank of America (the
"Columbia Fund"). Due to market liquidity conditions, cash redemptions from the
Columbia Fund were restricted. As a result of this restriction on cash
redemptions, we did not consider the Columbia Fund to be traded in an active
market with observable pricing on February 28, 2009 and these amounts were
categorized as Level 3.
Note 5 - 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.
Prior 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 decisions made by Metro,
64
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Inc. through our membership on Metro, Inc.'s Board of Directors and its
committees and through an information technology services agreement. We recorded
our pro-rata equity earnings relating to our equity investment in Metro, Inc. on
approximately a three-month lag period. During fiscal 2007 and 2006, we recorded
$7.9 million and $40.0 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.
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. as an
available-for-sale security because we were no longer able to exert significant
influence over substantive operating decisions made by Metro, Inc. Accordingly,
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, as dividends received were recorded as a reduction of the
investment balance under the equity method of accounting.
On November 26, 2007, 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. As a result of these sales, our
Company no longer holds Class A subordinate shares of Metro, Inc.
The following table summarizes the status and results of our Company's
investment in Metro, Inc.
Investment In
Metro, Inc.
---------------
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 $ -
===============
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. 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.
These gains and losses were recorded in "Gain on sale of Metro, Inc." in our
Consolidated Statements of Operations for fiscal 2007.
65
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Metro, Inc.'s summarized financial information, derived from its
audited year ended September 29, 2007 and 12 month period ended December 23,
2006, is as follows (in millions):
Year 12-Month
Ended Period Ended
Sept. 29, Dec. 23,
2007 2006
----------- ---------
Balance sheet:
Current assets $ 1,048.8 $ 955.3
Noncurrent assets 3,201.2 2,800.1
----------- ----------
Total assets $ 4,250.0 $ 3,755.4
=========== ==========
Current liabilities $ 1,063.1 $ 971.0
Noncurrent liabilities* 1,265.4 1,260.8
----------- ----------
Total liabilities $ 2,328.5 $ 2,231.8
=========== ==========
Income statement:
Net sales $ 10,183.7 $ 9,624.9
=========== ==========
Cost of sales and operating expenses $ 9,580.3 $ 9,019.5
----------- ----------
Net income $ 264.6 $ 251.8
=========== ==========
* Includes minority interests of $6.0 million for the year ended September 29,
2007 and $11.1 million for the 12-month period ended December 23, 2006.
Note 6 - Valuation of 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 U.S. Treasury risk-free rate, which is based on the life of the
primary asset within the asset group.
During fiscal 2008, 2007 and 2006, we recorded property impairment
losses as follows:
Fiscal 2008 Fiscal 2007 Fiscal 2006
----------------------------- ----------------------------- -----------------------------
US(4) DO(4) Total US(4) DO(4) Total US(4) DO(4) Total
------- -------- -------- ------- -------- -------- ------- -------- --------
Impairments due to
closure or conversion
in the normal course
of business $14,069 $ -- $14,069 $11,657 $ -- $11,657 $4,294 $ -- $ 4,294
Impairments related to
our Asset Disposition
Initiatives(1) -- -- -- -- -- -- 1,049 -- 1,049
Impairments related to our
Discontinued
Operations(2) (3) -- -- 53,995 53,995 -- 542 542
------- ------ ------- ------- ------- ------- ------ ----- -------
Total $14,069 $ -- $14,069 $11,657 $53,995 $65,652 $5,343 $ 542 $ 5,885
======= ====== ======= ======= ======= ======= ====== ===== =======
(1)Refer to Note 8 - Asset Disposition Initiatives.
(2)Refer to Note 7 - Discontinued Operations.
(3)Refer to Note 19 - Hurricane Katrina and Impact on Business.
66
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(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 2008, 2007 and 2006, we recorded impairment
losses on property and equipment of $14.1 million, $11.7 million and $4.3
million, respectively, related to stores that were or will be closed or
converted 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 related to our asset disposition initiatives
- --------------------------------------------------------
During fiscal 2006, we recorded impairment losses of $1.1 million
related to property write-downs as a result of our asset disposition initiatives
as discussed in Note 8 - Asset Disposition Initiatives. This amount was included
in "Store operating, general and administrative expense" in our Consolidated
Statements of Operations.
Impairments related to our discontinued operations
- --------------------------------------------------
During fiscal 2007 and 2006, we recorded impairment of $54.0 million
and $0.5 million, respectively, related to stores closed in the Greater New
Orleans and Midwest markets. These amounts were included in our Consolidated
Statements of Operations in "Gain (loss) on disposal of discontinued operations,
net of tax" as discussed in Note 7 - Discontinued Operations.
The effects of changes in estimates of useful lives were not material
to our ongoing depreciation expense.
Note 7 -- 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 during fiscal 2007.
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 during fiscal 2007.
67
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.
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.
Summarized below are the operating results for these discontinued
businesses, which are included in our Consolidated Statements of Operations,
under the captions "(Loss) income from operations of discontinued businesses,
net of tax" and "Gain (loss) on disposal of discontinued businesses, net of tax"
for fiscal years ended 2008, 2007 and 2006.
Fiscal 2008 Fiscal 2007 Fiscal 2006
----------- ----------- -----------
(Loss) income from operations of
discontinued businesses
Sales $ -- $ 562,654 $ 1,481,065
======== ========= ===========
(Loss) income from operations of
discontinued businesses, before tax (58,383) (196,848) 5,307
Tax benefit -- -- 1,781
-------- --------- -----------
(Loss) income from operations of
discontinued businesses, net of tax $(58,383) $(196,848) $ 7,088
======== ========= ===========
Gain (loss) on disposal of
discontinued businesses
Property impairments $ -- $ (53,995) $ (542)
Gain on sale of fixed assets 4,653 3,183 5,644
-------- --------- -----------
Gain (loss) on disposal of
discontinued operations, before tax 4,653 (50,812) 5,102
Tax benefit -- -- 1,952
-------- --------- -----------
Gain (loss) on disposal of
discontinued businesses, net of tax $ 4,653 $ (50,812) $ 7,054
======== ========= ===========
68
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.
Fiscal 2008
---------------------------------------------------------------------------------------------------
Balance at Interest Balance at
2/23/2008 Accretion (1) Adjustments(2) Utilization(3) 2/28/2009
----------------- ----------------- ----------------- ----------------- -----------------
2007 Events
Occupancy $ 62,873 $ 9,382 $ 28,959 $ (30,631) $ 70,583
Severance 58,520 2,019 3,730 (5,030) 59,239
----------------- ----------------- ----------------- ----------------- -----------------
2007 events total 121,393 11,401 32,689 (35,661) 129,822
2005 Event
Occupancy 66,882 3,324 600 (10,479) 60,327
2003 Events
Occupancy 21,579 1,230 (902) (3,195) 18,712
----------------- ----------------- ---------------- ---------------- -----------------
Fiscal 2008 total $ 209,854 $ 15,955 $ 32,387 $ (49,335) $ 208,861
================= ================= ================= ================ =================
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
================= ================= ================= ================ =================
(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 present value at the time of the original charge. Interest accretion
is recorded as a component of "(Loss) income from operations of
discontinued businesses" 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
69
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
result of changes in circumstances and/or estimates. Adjustments are
recorded as a component of "(Loss) income from operations of
discontinued businesses" on the Consolidated Statements of Operations.
Fiscal 2008
-----------
The charge to occupancy for the 2007 and 2005 events represents
adjustments for additional occupancy related costs for our properties
of $29.0 million and $0.6 million, respectively, due to changes in our
estimation of such future costs due to continuing deteriorating
conditions in the Midwest real estate market. The charge to severance
for the 2007 events represents an adjustment of $3.7 million for future
obligations for early withdrawal from multi-employer union pension
plans. We also recorded an adjustment of $0.9 million to reduce
occupancy related costs for the 2003 events due to changes in our
estimation of such future costs.
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 for the 2003
events of $3.4 million 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.
(3) Occupancy utilization represents payments made during those periods for
rent. Severance 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:
2007 2005 2003
Events Event Events
-------- -------- -------
Total severance payments made to date $ 28,152 $ 2,650 $22,528
Expected future severance payments 59,239 -- --
-------- -------- -------
Total severance payments expected to be incurred 87,391 2,650 $22,528
-------- -------- -------
Total occupancy payments made to date 51,857 46,651 29,521
Expected future occupancy payments,
excluding interest accretion 70,583 60,327 18,712
-------- -------- -------
Total occupancy payments expected to be incurred,
excluding interest accretion 122,440 106,978 48,233
-------- -------- -------
Total severance and occupancy payments made to date 80,009 49,301 52,049
Expected future severance and occupancy payments,
excluding interest accretion 129,822 60,327 18,712
-------- -------- -------
Total severance and occupancy payments
expected to be incurred, excluding interest accretion $209,831 $109,628 $70,761
======== ======== =======
70
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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 2028, 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 28, 2009
-----------------------------------------------------------------
2007 2005 2003
Events Event Events Total
--------------- --------------- --------------- ---------------
Accrued salaries, wages and benefits $ 43 $ -- $ -- $ 43
Other accruals $ 31,890 $ 11,016 $ 3,249 $ 46,155
Other non-current liabilities $ 97,889 $ 49,311 $ 15,463 $ 162,663
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
We evaluated the reserve balances as of February 28, 2009 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 - Asset Disposition Initiatives
In addition to the events described in Note 7 - Discontinued
Operations, there were restructuring transactions which were not primarily
related to our discontinued operations 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.
71
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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.
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.
Summarized below is a reconciliation of the liabilities related to
restructuring obligations resulting from these activities.
Fiscal 2008
-------------------------------------------------------------------------------------------
Balance at Interest Balance at
2/23/2008 Accretion(1) Adjustments(2) Utilization(3) 2/28/2009
------------- ------------- -------------- -------------- ---------------
2005 Event
- ----------
Continuing Operations
Occupancy $ 1,231 $ 48 $ (91) $ (74) $ 1,114
Severance 1,686 -- -- (782) 904
----------- ---------- ----------- ----------- ------------
2005 event total 2,917 48 (91) (856) 2,018
2001 Event
- ----------
Continuing Operations
Occupancy 6,755 385 1,794 (1,854) 7,080
Discontinued Operations
Occupancy 12,281 688 (166) (1,496) 11,307
----------- ---------- ----------- ----------- ------------
2001 event total 19,036 1,073 1,628 (3,350) 18,387
1998 Event
- ----------
Continuing Operations
Occupancy 6,958 316 4,111 (2,689) 8,696
Severance 1,000 -- -- (176) 824
Discontinued Operations
Occupancy 1,093 49 (8) (591) 543
----------- ---------- ----------- ----------- ------------
1998 event total 9,051 365 4,103 (3,456) 10,063
----------- ---------- ----------- ----------- ------------
Fiscal 2008 total $ 31,004 $ 1,486 $ 5,640 $ (7,662) $ 30,468
=========== ========== =========== =========== ============
72
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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
=========== ========== =========== =========== ============
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
=========== ========== =========== =========== ============
73
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(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 businesses" for discontinued businesses
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
businesses" as noted for discontinued operations on our Consolidated
Statements of Operations.
Fiscal 2008
-----------
During fiscal 2008, we recorded an adjustment reducing occupancy
related costs by $0.1 million for the 2005 event due to changes in our
estimation of such future costs. We also recorded adjustments for
additional occupancy related costs of $1.6 million and $4.1 million,
respectively, for the 2001 and 1998 events due to changes in our
estimation of such future costs.
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 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.
(3) Occupancy utilization represents payments made during those periods for
rent. Severance and benefits utilization represents payments made to
terminated employees during the period.
74
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:
2005 2001 1998
Event Event Event Total
------- -------- -------- --------
Total severance payments made to date $48,715 $ 28,205 $ 30,640 $107,560
Expected future severance payments 904 -- 824 1,728
------- -------- -------- --------
Total severance payments expected
to be incurred 49,619 28,205 31,464 109,288
------- -------- -------- --------
Total occupancy payments made to date 13,851 62,370 115,225 191,446
Expected future occupancy payments,
excluding interest accretion 1,114 18,387 9,239 28,740
------- -------- -------- --------
Total occupancy payments expected
to be incurred, excluding interest
accretion 14,965 80,757 124,464 220,186
------- -------- -------- --------
Total severance and occupancy
payments made to date $62,566 $ 90,575 $145,865 $299,006
Expected future severance and
occupancy payments, excluding
interest accretion 2,018 18,387 10,063 30,468
------- -------- -------- --------
Total severance and occupancy payments
expected to be incurred, excluding
interest accretion $64,584 $108,962 $155,928 $329,474
======= ======== ======== ========
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.
Summarized below are the amounts included in our balance sheet captions
on our Company's Consolidated Balance Sheets related to these events:
February 28, 2009
---------------------------------------------------------------------
2005 2001 1998
Event Event Event Total
--------------- --------------- --------------- ----------------
Other accruals $ 384 $ 2,965 $ 4,142 $ 7,491
Other non-current liabilities $ 1,634 $ 15,422 $ 5,921 $ 22,977
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
We evaluated the reserve balances as of February 28, 2009 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.
75
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Note 9 - Other Accruals
Other accruals are comprised of the following:
At At
Feb. 28, 2009 Feb. 23, 2008
------------- -------------
Self-insurance Reserves $ 77,560 $ 68,314
Closed Store and Warehouse Reserves 64,508 58,576
Pension Withdrawal Liabilities 5,393 519
GHI Contract Liability 5,742 --
Accrued Occupancy Related Costs for Open Stores 27,439 31,614
Deferred Income 33,558 22,784
Deferred Real Estate Income 2,558 2,553
Accrued Audit, Legal and Other 11,719 24,466
Accrued Interest 9,000 9,580
Other Postretirement and Postemployment Benefits 4,153 2,881
Accrued Advertising 1,493 3,307
Other 3,473 2,355
-------- --------
Total $246,596 $226,949
======== ========
Note 10 - Indebtedness and Other Financial Liabilities
Our debt consists of the following:
February 28, February 23,
2009 2008
------------- -------------
Line of Credit $ 5,000 $ 11,600
Borrowings under Credit Agreement 331,783 169,900
Related Party Promissory Note, due August 2, 2011 10,000 --
9.125% Senior Notes, due December 15, 2011 12,840 12,840
5.125% Convertible Senior Notes, due June 15, 2011 147,717 140,101
6.750% Convertible Senior Notes, due December 15, 2012 238,203 233,792
9.375% Notes, due August 1, 2039 200,000 200,000
Other 2,254 2,528
--------- ---------
947,797 770,761
Less current portion of long-term debt (5,283) (11,875)
--------- ---------
Long-term debt $ 942,514 $ 758,886
========= =========
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, or up to the value of the investment
in the Columbia Cash Fund. Each borrowing bears interest at a rate per annum
equal to the BBA Libor Daily Floating Rate plus 0.10%. Our weighted-average
interest rates on this line of credit were 2.5% and 3.3% for fiscal 2008 and
fiscal 2009, respectively. At February 28, 2009 and February 23, 2008, we had
borrowings outstanding under this line of credit agreement of $5.0 million and
$11.6 million, respectively. This agreement had an original expiration of
December 31, 2008. However, on November 26, 2008, this agreement was extended to
expire on December 31, 2009. These loans are collateralized by a first priority
perfected security interest in our ownership interest in the Columbia Fund.
Refer to Note 3 - Cash, Cash Equivalents, Restricted Cash and Restricted
Marketable Securities, for further discussion on the Columbia Fund.
76
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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 and Bank of America,
N.A. as the co-lead arranger. 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 provides us with the ability to increase
commitments from $675 million to $775 million, subject to agreement of new and
existing lenders. Our obligations under the Credit Agreement are secured by some
of the assets of the Company, including, but not limited to, inventory, certain
accounts receivable, pharmacy scripts, owned real estate and certain Pathmark
leaseholds. The Pathmark leaseholds are removed as eligible collateral
throughout fiscal 2009, resulting in a reduction in borrowing availability of
$25.0 million on March 1, 2009, an additional $25.0 million on June 1, 2009 and
approximately $23.0 million on December 1, 2009 for a total reduced borrowing
availability of approximately $73.0 million. 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. As of February 28, 2009, there
were $331.8 million of loans and $206.3 million in letters of credit outstanding
under this agreement. As of February 28, 2009, after reducing availability for
borrowing base requirements, we had $96.2 million available under the Credit
Agreement. In addition, we have invested cash available to reduce borrowings
under this Credit Agreement or to use for future operations of $67.0 million as
of February 28, 2009.
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 $50.0 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 $20.4 million and the net amortized amounts are included in
"Other assets" on our Consolidated Balance Sheet at February 28, 2009 and
February 23, 2008.
RELATED PARTY PROMISSORY NOTE
- -----------------------------
On September 2, 2008, our Company issued a three year, unsecured
promissory note in the amount of $10 million to Erivan Karl Haub. Erivan Haub is
the father of Christian W. E. Haub, our Executive Chairman, and is a limited
partner of Tengelmann which owns an interest in our Company's stock. The
principal is due in a lump sum payment on August 18, 2011 and bears interest at
a rate of 6% per year, payable in twelve equal quarterly payments of $0.15
million over the term of the note. During fiscal 2008, $0.15 million of interest
was paid on this note and we recorded interest expense of $0.3 million.
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. At maturity, subject to the satisfaction of certain conditions, the
loans outstanding under the Bridge Loan Facility would either remain outstanding
or be exchanged for exchange notes, in each case having a maturity of December
3, 2015. On December 18, 2007, the Bridge Loan Facility was refinanced with the
convertible notes discussed below. During fiscal 2007, fees and interest paid in
77
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
connection with the Bridge Loan Facility was $27.3 million and were 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.
PUBLIC DEBT OBLIGATIONS
- -----------------------
As of February 28, 2009 and February 23, 2008, we had outstanding notes
of $598.8 million and $586.7 million, respectively. Our public debt obligations
are comprised of 9.125% Senior Notes due December 15, 2011, 5.125% Convertible
Senior Notes due June 15, 2011, 6.75% Convertible Senior Notes due December 15,
2012 and 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.
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 a 65% premium and
$49.00 or a 75% premium for the 2011 and 2012 notes, respectively. We understand
that on or about October 3, 2008, Lehman Brothers OTC Derivatives, Inc. or
"LBOTC" who accounts for 50% of the call option and financing warrant
transactions filed for bankruptcy protection, which is an event of default under
such transactions. We are carefully monitoring the developments affecting LBOTC,
noting the impact of the LBOTC bankruptcy effectively reduced conversion prices
for 50% of our Notes to their stated prices of $36.40 for the 2011 notes and
$37.80 for the 2012 notes.
As of December 18, 2007, our Company did not have sufficient authorized
shares to provide for all potential issuances of common stock. Therefore, our
Company accounted for the conversion features as freestanding instruments. The
notes were recorded with a discount 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.
78
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
The value of the conversion features were determined utilizing the Black-Scholes
option pricing model and recorded as a long-term liability. The portion of the
conversion features for which there was not shares available for settlement of
conversions were marked to market each balance sheet date. On June 26, 2008, at
a special meeting of shareholders, the number of shares of common stock we have
the authority to issue was increased to 160,000,000, based on a majority vote by
our shareholders. During fiscal 2008 and 2007, gains recorded in "Nonoperating
income" on our Consolidated Statements of Operations were $9.3 million and $3.2
million, respectively, relating to conversion features of the 5.125% convertible
senior notes and gains of $5.1 million and $2.3 million, respectively, relating
to the conversion features of the 6.75% convertible senior notes. The fair
values 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. Based on
an increase in available shares primarily due to the exercise of our Series A
warrants during the first quarter of fiscal 2008 and the increase in authorized
shares during the second quarter of fiscal 2008, the fair values of the
conversion features of the 5.125% and 6.75% convertible senior notes of $13.8
million and $14.7 million as of June 26, 2008, respectively, were reclassified
to "Additional paid-in-capital" on our Consolidated Statements of Stockholder's
Equity and Comprehensive (Loss) Income. Thus, the fair values of the conversion
features for the 5.125% and 6.75% convertible notes are no longer classified as
a liability as of February 28, 2009. The following assumptions and estimates
were used in the Black-Scholes model:
As of
June 26, 2008 Fiscal 2007
--------------- ---------------------
Expected life 3.0 years 3.3 years - 4.8 years
Volatility 33.4% 33.0% - 35.4%
Dividend yield range 0% 0%
Risk-free interest rate range 3.11% 2.24% - 2.81%
DEBT MATURITIES
- ---------------
Maturities on indebtedness for the next five fiscal years and
thereafter are:
Fiscal 2009 $ 5.3 million
Fiscal 2010 0.2 million
Fiscal 2011 188.0 million
Fiscal 2012 587.0 million
Fiscal 2013 0.2 million
Fiscal 2014 and thereafter 201.1 million
Interest payments on indebtedness were approximately $131.3 million for
fiscal 2008, $100.8 million for fiscal 2007 and $65.6 million for fiscal 2006.
SERIES A AND 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 Series A warrants were
exercisable at $18.36 and expired on June 9, 2008 and the Series B warrants are
exercisable at $32.40 and expire on June 9, 2015. 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.
79
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Therefore, these warrants are recorded as liabilities and
marked-to-market each reporting period based on A&P's current stock price.
On May 7, 2008, the 4,657,378 Series A warrants were exercised by
Yucaipa Corporate Initiatives Fund I, L.P., Yucaipa American Alliance Fund I,
L.P. and Yucaipa American Alliance (Parallel) Fund I, L.P. We opted to settle
the Series A warrants in cash totaling $45.7 million, rather than issuing
additional common shares. Included in "Nonoperating income" on our Consolidated
Statements of Operations for fiscal 2008 is a loss of $1.2 million for the
Series A warrants through the settlement date of May 7, 2008 and a gain of
$101.3 million relating to market value adjustments for Series B warrants.
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. The value of the Series B warrants as of February 28,
2009 is $4.8 million and is included in "Other financial liabilities" on our
Consolidated Balance Sheets. The values of Series A and Series B warrants as of
February 23, 2008 were $44.5 million and $106.1 million, respectively, and were
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
----------- -----------------------------
Fiscal 2007 Fiscal 2008 Fiscal 2007
----------- ----------- -----------
Expected life 0.29 years 6.28 years 7.29 years
Volatility 29.4% 61.3% 53.3%
Dividend yield range 0% 0% 0%
Risk-free interest rate range 2.20% 2.69% 3.26%
CALL OPTION AND FINANCING WARRANTS
- ----------------------------------
Concurrent with the issuance of the convertible senior notes, our
Company issued financing warrants in conjunction with the call options recorded
as equity in the Consolidated Balance Sheet (Refer to Note 17 - Capital Stock)
to effectively 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, we did not have sufficient
authorized shares to provide all potential issuances of common stock. Therefore,
the financing warrants were accounted for as freestanding derivatives, required
to be settled in cash until sufficient shares were available and were recorded
as a long-term liability in the Consolidated Balance Sheet. The financing
warrants were marked to market each reporting period utilizing the Black-Scholes
option pricing model and were valued at $31.2 million as of February 23, 2008.
On June 26, 2008, at a special meeting of shareholders, the number of shares of
common stock we have the authority to issue was increased to 160,000,000 based
on a majority vote by our shareholders. Thus, the financing warrants were marked
to market through June 26, 2008 utilizing the Black-Scholes option pricing model
and $28.9 million was reclassified to "Additional paid-in-capital" on our
Consolidated Statements of Stockholder's Equity and Comprehensive (Loss) Income
as of June 26, 2008. These financing warrants are no longer classified as a
liability as of February 28, 2009. During fiscal 2008 and 2007, we recorded
gains of $2.3 million and $5.6 million, respectively, relating to these
warrants, which is included in "Nonoperating income" on our Consolidated
Statements of Operations.
80
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
The following assumptions and estimates were used in the Black-Scholes model:
As of
June 26, 2008 Fiscal 2007
-------------------- ------------------------
Expected life 3.3 years - 4.8 years 3.6 years - 5.1 years
Volatility 33.4% 27.2% - 29.6%
Dividend yield range 0% 0%
Risk-free interest rate range 3.11% - 3.54% 2.24% - 2.81%
We understand that on or about October 3, 2008, LBOTC who accounts for
50% of the call option and financing warrant transactions filed for bankruptcy
protection, which is an event of default under such transactions. We are
carefully monitoring the developments affecting LBOTC. In the event we terminate
these transactions, or they are canceled in bankruptcy, or LBOTC otherwise
fails to perform its obligations under such transactions, we would have the
right to monetary damages in the form of an unsecured claim against LBOTC in an
amount equal to the present value of our cost to replace these transactions with
another party for the same period and on the same terms.
Note 11 - Lease Obligations
We operate primarily in leased facilities with lease terms generally
ranging up to twenty-five years for store leases, with options to renew for
additional periods. In addition, we lease certain store equipment and trucks. We
recognize rent expense for operating leases with rent escalation clauses on a
straight-line basis over the applicable lease term. 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. Our lease obligations consist of capital leases, operating leases and
long-term real estate liabilities.
Our capital lease obligations as of February 28, 2009 and February 23,
2008 were as follows:
February 28, February 23,
2009 2008
----------- -----------
Real property under capital leases $ 150,958 $ 151,382
Equipment under capital leases 14,676 14,676
----------- -----------
165,634 166,058
Accumulated amortization (32,673) (16,695)
------------ -----------
Net property under capital leases $ 132,961 $ 149,363
=========== ===========
We did not enter into any new capital leases during fiscal 2008, fiscal
2007 or fiscal 2006. During fiscal 2007, in connection with our acquisition of
Pathmark, we acquired 38 capital leases totaling $126.7 million relating to
buildings and several capital leases relating to equipment totaling $15.1
million. Interest paid in connection with our capital lease obligations during
fiscal 2008, fiscal 2007 and fiscal 2006 was approximately $18.6 million, $7.2
million and $3.5 million, respectively.
81
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Rent expense recorded for our operating leases during the last three
fiscal years consisted of the following:
Minimum Rentals Fiscal 2008 Fiscal 2007 Fiscal 2006
--------------- ---------------- ----------------- -----------------
Continuing operations $ 174,232 $ 145,682 $ 125,704
Discontinued operations -- 20,452 44,629
---------------- ----------------- ----------------
174,232 166,134 170,333
---------------- ----------------- ----------------
Contingent Rentals
------------------
Continuing operations 2,753 2,136 2,394
Discontinued operations -- 64 92
---------------- ----------------- ----------------
2,753 2,200 2,486
---------------- ----------------- ----------------
Total rent expense $ 176,985 $ 168,334 $ 172,819
================ ================= ================
Future minimum annual lease payments for capital leases and
noncancelable operating leases in effect at February 28, 2009 are as follows:
Operating Leases
--------------------------------------------------------------------------
Future Minimum Rental Payments Future Net Future
------------------------------------------- Minimum Minimum
Capital Open Closed Sublease Rental
Fiscal Leases Stores Sites Total Rentals Payments
- ------ ----------- ------------ ----------- ------------ ----------- ----------
2009 $ 29,000 $ 195,285 $ 68,790 $ 264,075 $ 33,263 $ 230,812
2010 28,631 188,963 60,949 249,912 30,116 219,796
2011 26,901 176,729 55,522 232,251 26,552 205,699
2012 26,113 166,289 52,265 218,554 21,657 196,897
2013 22,711 148,212 50,214 198,426 17,752 180,674
2014 and thereafter 157,846 858,744 266,524 1,125,268 61,780 1,063,488
----------- ------------ ----------- ------------ ----------- ------------
Net minimum rentals 291,202 $ 1,734,222 $ 554,264 $ 2,288,486 $ 191,120 $ 2,097,366
============ =========== ============ =========== ============
Less interest portion (130,991)
-----------
Present value of future
minimum rentals $ 160,211
===========
Included in the future minimum rental payments of closed sites of
$554.3 million are amounts that are classified as current and non-current
liabilities on our Consolidated Balance Sheets. These amounts represent
estimated net cash flows based on our experience and knowledge of the market in
which each closed store is located. Refer to our discussion of Closed Store and
Warehouse Reserves in Note 1 - Summary of Significant Accounting Policies.
During fiscal 2007, we acquired four sale leaseback 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. 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 have
maturities between 14 and 17 years and three of these properties are recorded
within "Long-term real estate liabilities" on our Consolidated Balance Sheets at
February 28, 2009 and February 23, 2008. During fiscal 2008, one of these
locations was assigned to a third party. Since we remain secondarily liable in
the event the assignee defaults on the related rent payments, we continue to
record our obligation relating to this property. However, since we are no longer
servicing this obligation, the related current and long-term liabilities have
been reclassified to "Deferred real estate income" on our Consolidated Balance
Sheets as of February 28, 2009.
82
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
"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. Since 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 to qualify for sale-leaseback treatment. Thus, these landlord
allowances have been recorded as long-term real estate liabilities on our
Consolidated Balance Sheets and are being amortized over the related lease term
based on rent payments designated in the lease agreements. These leases have
terms ranging between 13 and 25 years and effective annual percentage rates
between 4.74% and 71.14%. 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 the 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
- ------
2009 $ 36,518 $ 5,206 $ 31,312
2010 36,528 4,372 32,156
2011 36,688 3,245 33,443
2012 36,875 2,524 34,351
2013 37,044 1,472 35,572
2014 and thereafter 377,405 5,440 371,965
----------- ----------- -----------
$ 561,058 $ 22,259 $ 538,799
=========== =========== ===========
During fiscal 2008 and fiscal 2006, we sold one property in each year
and simultaneously leased it back from the purchaser. We received net proceeds
of $3.1 million for the property sold during fiscal 2008, which had a carrying
value of $0.1 million, resulting in a gain of $3.0 million. However, due to our
continuing involvement, the sale did not qualify for sale-leaseback accounting.
Therefore, the carrying value of this property remained on our Consolidated
Balance Sheet as of February 28, 2009. In addition, the proceeds received were
recorded within our "Deferred real estate income". The related lease payments
are being recorded as "Interest expense" in our Consolidated Statements of
Operations. For the property sold during fiscal 2006, we received net proceeds
of $9.2 million, which had a carrying value of $2.5 million, resulting in a gain
of $6.7 million. This gain was recognized as follows: (i) a gain of $1.3 million
was immediately recognized, since we are leasing back more than a minor part but
less than substantially all of the property sold and (ii) a $5.4 million
deferred gain, after deducting expenses, will be recognized as an offset to rent
expense over the remaining life of the lease.
In addition, during fiscal 2008, fiscal 2007, and fiscal 2006, we
recognized gains related to our qualified sale-leaseback transactions of $2.6
million; $27.6 million, of which $24.1 million related to the reversal of gains
on terminated or assigned properties; and $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, respectively. The remaining deferred
83
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
gains at February 28, 2009 and February 23, 2008 amounted to $34.6 million and
$37.2 million, respectively.
Note 12 - Interest Expense
Interest expense is comprised of the following:
Fiscal 2008 Fiscal 2007 Fiscal 2006
-------------- ------------ ----------------
$675 million Credit Agreement $ 14,776 $ 4,657 $ 5,356
Related Party Promissory Note, due August 2, 2011 300 -- --
7.75% Notes, due April 15, 2007 -- 342 2,466
9.125% Senior Notes, due December 15, 2011 1,188 1,168 1,168
5.125% Convertible Senior Notes,
due June 15, 2011 8,553 1,575 --
6.750% Convertible Senior Notes,
due December 15, 2012 17,409 3,207 --
9.375% Notes, due August 1, 2039 19,011 18,699 18,699
Bridge Loan Facility -- 27,285 --
Capital Lease Obligations and
Real Estate Liabilities 53,970 39,134 31,676
Amortization of Deferred Financing Fees
and Discounts 19,575 4,790 812
Self insurance interest accretion 8,613 10,117 6,289
Other 10,742 842 (582)
------------ ------------ -------------
Total $ 154,137 $ 111,816 $ 65,884
============ ============ =============
Note 13 - Other Non-Current Liabilities
Other non-current liabilities are comprised of the following:
At At
Feb. 28, 2009 Feb. 23, 2008
----------------- -----------------
Unrecognized Tax Benefits $ 156,267 $ 156,267
Self-insurance Reserves 153,870 152,083
Closed Store and Warehouse Reserves 140,593 141,000
Pension Withdrawal Liabilities 109,714 82,309
GHI Contract Liability for Employee Benefits 85,690 76,569
Pension Plan Benefits 89,842 66,863
Other Postretirement and Postemployment Benefits 34,295 48,281
Corporate Owned Life Insurance Liability 59,529 54,640
Deferred Rent Liabilities 54,047 52,512
Deferred Income 80,488 44,874
Unfavorable Lease Liabilities 30,708 34,421
Other 16,366 20,293
----------- -----------
Total $ 1,011,409 $ 930,112
=========== ===========
Note 14 - Income Taxes
A reconciliation of income taxes from continuing operations at the 35%
federal statutory income tax rate for fiscal 2008, 2007 and 2006 to income taxes
as reported is as follows:
84
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Fiscal 2008 Fiscal 2007 Fiscal 2006
---------------- --------------- ---------------
Income tax benefit from (provision for) continuing
operations computed at federal statutory
income tax rate $ 29,212 $ (32,401) $ 15,880
State and local income taxes, net of federal tax
benefit (2,924) (1,792) 781
Permanent difference relating to the sale of
Canadian assets -- (5,590) 55,868
Permanent differences relating to Pathmark financing 40,902 13,088 --
Valuation allowance (68,168) 21,357 (14,030)
Other (1,705) (254) (418)
-------------- ------------ ------------
Income tax (provision) benefit, as reported $ (2,683) $ (5,592) $ 58,081
============== ============ ============
The effective tax rate on continuing operations of 3.2% for fiscal 2008
varied from the statutory rate of 35%, primarily due to the recording of state
and local income taxes, the recording of additional valuation allowance and the
impact of the Pathmark financing.
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 increase
to our valuation allowance as a result of losses not benefited because of a lack
of history of earnings.
The (provision for) benefit from income taxes from continuing
operations consisted of the following:
Fiscal 2008 Fiscal 2007 Fiscal 2006
----------- ----------- -----------
Current:
Federal $ 2,397 $ -- $ 56,727
State and local (4,498) (2,757) 1,202
Canadian tax on dividends (582) (195) 152
----------- ------------ -----------
(2,683) (2,952) 58,081
----------- ------------ -----------
Deferred:
Federal -- (2,640) --
----------- ------------ -----------
(Provision for) benefit from income taxes $ (2,683) $ (5,592) $ 58,081
=========== ============ ===========
A deferred tax asset is recognized for temporary differences that will
result in deductible amounts in future years and for carryforwards. In addition,
a valuation allowance is recognized 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. Based upon our continued assessment of
the realization of our net deferred tax asset and our historic cumulative
losses, we concluded that it was appropriate to record a valuation allowance in
an amount that would reduce our net deferred tax asset to zero. Our valuation
allowance increased by $161.4 million during fiscal 2008, to reflect the
increase in deferred income tax assets recorded relating to the purchase price
allocation adjustments discussed in Note 2 - Acquisition of Pathmark Stores,
Inc., as well as generation of additional net operating losses and pension and
postretirement related amounts recorded in
85
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
"Other comprehensive loss". During fiscal 2007, the U.S. valuation allowance
decreased by $19.5 million, primarily as a result of a decrease of $97.9 million
relating to several reclassifications to various balance sheet items on 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." This decrease in the valuation allowance for fiscal
2007 was partially offset by an increase of $78.4 million that was recorded
through the fiscal 2007 tax provision in our Consolidated Statement of
Operations. In future periods, we will continue to record a valuation allowance
against net deferred tax assets that are created by losses until such time as
the certainty of future tax benefits can be reasonably assured.
The components of net deferred tax assets (liabilities) are as follows:
February 28, February 23,
2009 2008
----------- -----------
Current assets:
Insurance reserves $ 33,689 $ 28,356
Other reserves and accrued benefits 56,968 45,766
Accrued postretirement and postemployment benefits 1,780 1,005
Pension obligations 6,250 19,276
Other 7,507 21,637
----------- -----------
106,194 116,040
----------- -----------
Current liabilities:
Inventories (37,097) (37,588)
Health and welfare (1,902) (1,804)
Other (3,273) (2,970)
----------- -----------
(42,272) (42,362)
----------- -----------
Valuation allowance (28,249) (8,892)
----------- -----------
Net current deferred income taxes included in prepaid expenses
and other current assets $ 35,673 $ 64,786
=========== ===========
Non-current assets:
Net Operating Losses $ 214,376 $ 190,152
Foreign Tax Credits 69,261 69,261
Alternative minimum tax credits and general business credits 53,433 52,584
Other reserves including asset disposition charges 130,084 96,203
Lease obligations 7,748 7,743
Insurance reserves 64,626 63,875
Accrued postretirement and postemployment benefits 10,731 13,949
Pension obligations 83,752 31,579
Step rents 22,700 21,921
State tax credits 29,852 29,940
Pathmark Financing 9,571 10,381
Other 10,709 12,389
----------- -----------
706,843 599,977
----------- -----------
Non-current liabilities:
Depreciation (339,542) (400,093)
Pension obligations (1,068) (3,324)
Intangibles (94,432) (98,316)
Other (16,645) (14,255)
----------- -----------
(451,687) (515,988)
----------- -----------
Valuation allowance (188,028) (45,974)
----------- -----------
Net non-current deferred income tax asset
included in other assets $ 67,128 $ 38,015
=========== ===========
86
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
At February 28, 2009, our Company had federal NOL carryforwards of
$475.4 million, which will expire between fiscal 2023 and 2028. The federal NOL
carryforwards include $7.4 million related to the excess tax deductions relating
to stock option plans that have yet to reduce income taxes payable. Upon
utilization of these carryforwards, the associated tax benefits of approximately
$2.6 million will be recorded in "Additional paid-in capital". In addition, our
Company had state loss carryforwards of $1.0 billion that will expire between
fiscal 2009 and fiscal 2028. Our Company's general business credits consist of
federal and state work incentive credits, which expire between fiscal 2010 and
fiscal 2028, 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.
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:
o an increase to the opening balance in retained earnings of $24.4 million;
o 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
o 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
Increases related to current period
tax positions 53 74 127
--------- --------- ---------
Balance at February 23, 2008 163,238 1,046 164,284
Decrease related to prior period
tax positions -- (82) (82)
Settlements (297) -- (297)
Lapse of statute of limitations (1,127) -- (1,127)
--------- --------- ---------
Balance at February 28, 2009 $ 161,814 $ 964 $ 162,778
========= ========= =========
At February 28, 2009 and February 23, 2008, we had unrecognized tax
benefits of $162.8 million and $164.3 million, respectively, which, 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
87
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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 unrecognized tax benefit with respect to
certain of our unrecognized tax positions will significantly decrease within the
next 12 months. At this time, we estimate that the amount of our gross
unrecognized tax positions may decrease by up to approximately $154 million
within the next 12 months, primarily due to the settlement of ongoing audits and
lapses of statutes of limitations in certain jurisdictions. Any decrease in our
Company's gross unrecognized tax positions would require a re-evaluation of our
Company's valuation allowance maintained on our net deferred tax asset and,
therefore, is not expected to effect our effective tax rate.
Income tax payments, net of income tax refunds, for fiscal 2008, 2007
and 2006 were approximately $3.9 million, $2.2 million and $4.4 million,
respectively.
On July 30, 2008, The Housing Assistance Act of 2008 ("the Act") was
signed into law. The Act contained a provision allowing corporate taxpayers to
make an election to treat certain unused research and AMT credit carryforwards
as refundable in lieu of claiming bonus and accelerated depreciation for
"eligible qualified property" placed in service through the end of fiscal 2008.
In addition, the American Reinvestment and Recovery Tax Act, which was enacted
on February 17, 2009, extended this election through 2009. We have calculated
this amount to be $2.4 million and anticipate receiving the refund during fiscal
2009.
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.
Note 15 - 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 are no longer
recognized. 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 early adopted 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 recorded an adjustment to opening retained earnings in the amount
of $0.6 million to decrease the February 25, 2007 balance of retained earnings.
Further, our assumptions used to measure our annual expenses are determined as
of our fiscal year-end and all plan assets and liabilities are reported as of
that date.
88
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Defined Benefit Pension Plans and Postretirement 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 also 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.
The following tables set forth the change in benefit obligations, the
change in plan assets, the funded
status, and the accumulated benefit obligation as of February 28, 2009 and
February 23, 2008 for our defined benefit plans and postretirement plans:
Pension Postretirement
---------------------------- ------------------------------
Fiscal Fiscal Fiscal Fiscal
2008 2007 2008 2007
------------- ------------- ------------- --------------
Change in Benefit Obligation
Benefit obligation - beginning of year $ 460,601 $ 218,021 $ 41,089 $ 18,814
Benefit obligation - acquisition at December 3, 2007 -- 238,941 -- 14,488
Service cost 7,428 5,320 1,013 409
Interest cost 25,868 15,609 2,291 1,265
Actuarial loss (gain) (60,156) 8,393 (14,119) 7,480
Benefits paid (26,748) (15,459) (2,632) (1,564)
Impact of the adoption of change in measurement date -- 2,843 -- 56
Amendments 346 -- -- --
Settlement payments -- (12,854) -- --
Curtailment payments -- (213) -- --
Special termination benefits 800 -- -- --
Retiree drug subsidy received -- -- 123 141
------------ ----------- ----------- -------------
Benefit obligation - end of year (1) $ 408,139 $ 460,601 $ 27,765 $ 41,089
============ =========== =========== =============
Pension Postretirement
---------------------------- ------------------------------
Fiscal Fiscal Fiscal Fiscal
2008 2007 2008 2007
------------- ------------- ------------- --------------
Change in Plan Assets
Fair value of plan assets - beginning of year $ 466,971 $ 202,185 $ -- $ --
Fair value of plan assets - acquisition at December 3, 2007 -- 291,314 -- --
Fair value of plan assets - GHI asset transfer (1) 13,624 -- -- --
Actual return on plan assets (118,938) (3,318) -- --
Company contributions 7,074 5,103 2,632 1,564
Settlements -- (12,854) -- --
Benefits paid to GHI employees (1) (2,433) -- -- --
Benefits paid to our employees (26,748) (15,459) (2,632) (1,564)
---------- ------------ ------------ -------------
Fair value of plan assets - end of year (1) $ 339,550 $ 466,971 $ -- $ --
---------- ------------ ------------ -------------
Funded status at end of year (1) $ (68,589) $ 6,370 $ (27,765) $ (41,089)
========== ============ ============ =============
Noncurrent assets $ 26,276 $ 78,230 $ -- $ --
Current liabilities (5,023) (4,997) (1,785) (2,481)
Non-current liabilities (89,842) (66,863) (25,980) (38,608)
---------- ------------ ------------ -------------
Net (liability) asset recognized (1) $ (68,589) $ 6,370 $ (27,765) $ (41,089)
========== ============ ============ =============
89
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
- -----------------------------
(1) Refer to the GHI Contractual Obligation discussion below.
The noncurrent assets are included in "Other assets" on the
Consolidated Balance Sheets, while the pension and postretirement liabilities
are included in "Accrued salaries, wages and benefits", "Other accruals," and
"Other non-current liabilities".
Pension and postretirement benefits related amounts recorded in
accumulated other comprehensive (loss) income as of February 28, 2009 and
February 23, 2008 were as follows:
Pension Postretirement
-------------------------- ---------------------
Fiscal Fiscal Fiscal Fiscal
2008 2007 2008 2007
--------- -------- ------- ------
Net actuarial (loss) gain $(119,260) $(30,388) $14,597 $ 477
Prior service (cost) credit (2,689) (2,615) 2,205 3,551
--------- -------- ------- ------
Total $(121,949) $(33,003) $16,802 $4,028
========= ======== ======= ======
Plans with accumulated benefit obligation in excess of plan assets
consisted of the following:
Fiscal Fiscal
2008 2007
-------- --------
Accumulated benefit obligation $206,408 $135,033
Projected benefit obligation $212,690 $136,019
Fair value of plan assets $117,824 $ 64,160
The Company's accumulated benefit obligation for defined benefit plans
was $401,857 and $454,028 as of February 28, 2009 and February 23, 2008,
respectively.
90
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
The components of our net periodic pension and postretirement benefit
expense and related assumptions and amounts recognized in other comprehensive
income were as follows:
Pension Postretirement
------------------------------------- -------------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
2008 2007 2006 2008 2007 2006
-------- -------- -------- -------- ------- --------
Net Periodic Benefit Cost:
- --------------------------
Service cost $ 7,428 $ 5,320 $ 5,609 $ 1,013 $ 409 $ 375
Interest cost 25,868 15,609 11,368 2,291 1,265 1,172
Expected return on plan
assets (31,307) (18,114) (12,350) -- -- --
Amortization of:
Prior service cost (credit) 274 255 (128) (1,347) (1,347) (1,347)
Actuarial loss (gain) 117 98 162 -- (455) (222)
Special termination benefits 800 -- -- -- -- --
Curtailment gain(2) -- (166) -- -- -- --
Settlement gain(2) -- (1,037) -- -- -- --
-------- -------- -------- -------- ------- --------
Net periodic benefit
cost (income) $ 3,180 $ 1,965 $ 4,661 $ 1,957 $ (128) $ (22)
-------- -------- -------- -------- ------- --------
Other Changes in Plan Assets and
- --------------------------------
Benefit Obligations Recognized in
- ---------------------------------
Other Comprehensive Loss (Income):
- ----------------------------------
Net actuarial loss (gain) $ 88,990 $ 30,331 (2,548) $(14,120) $ 7,780 (8,488)
Prior service cost (credit) 346 2,615 2,959 -- -- (5,123)
Amortization of prior
service cost (274) (255) -- 1,347 1,347 --
Amortization of net loss (117) (98) -- -- 455 --
Minimum pension liability -- -- (5,996) -- -- --
Total recognized in
other comprehensive
loss (income) $ 88,945 $ 32,593 $ (5,585) $(12,773) $ 9,582 $(13,611)
-------- -------- -------- -------- ------- --------
Total recognized in net
periodic benefit cost and
other comprehensive
loss (income) $ 92,125 $ 34,558 $ (924) $(10,816) $ 9,454 $(13,633)
======== ======== ======== ======== ======= ========
Discount rate 5.75% 5.75% 5.75% 5.75% 5.75% 5.50%
Compensation increase 2.75% 2.75% 2.75% N/A N/A N/A
Expected long-term rate of
return on plan assets 6.75% 6.75% 6.75% N/A N/A N/A
- ----------------
(2) 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.
Our Company expects approximately $4.7 million of the net actuarial
loss and $0.3 million of the prior service cost to be recognized into net
periodic benefit cost in fiscal 2009 for defined benefit pension plans. For
postretirement plans, approximately $0.8 million of prior service credit and
$1.3 million of actuarial gains is expected to be recognized during fiscal 2009.
91
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Pension and postretirement benefit expenses are recorded within "Store
operating, general and administrative expense" in our Consolidated Statements of
Operations. The weighted average assumptions in the following table were used to
develop our benefit obligations at the end of each fiscal year:
Pension Postretirement
--------------------------- ----------------------------
Fiscal Fiscal Fiscal Fiscal
2008 2007 2008 007
--------- ---------- --------- ----------
Discount rate 7.25% 5.75% 7.25% 5.75%
Compensation increase 3.00% 2.75% N/A N/A
Healthcare cost rate for next year N/A N/A 9.5% 9.0%-10.0%
Ultimate healthcare cost trend rate N/A N/A 5% 4.5%-5.0%
Year ultimate trend is reached N/A N/A 2018 2018
The expected long-term rate of return on plan assets 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.
For postretirement benefits, assumed healthcare cost trend rates have a
significant effect on the recorded expense and liability amounts. The effect of
a one percentage point 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 $0.3 million, while the accumulated postretirement
benefit obligation would either increase by $2.2 million or decrease by $1.9
million.
Our defined benefit pension plan weighted average asset allocations by
asset category were as follows:
Target February 28, February 23,
Allocation 2009 2008
---------- ------------ -------------
Equities 45 - 60% 48% 63%
Bonds 30 - 40% 38% 35%
Other 5 - 25% 14% 2%
----------- -------------
Total 100% 100%
=========== =============
Our defined benefit pension plan's assets are held in trust funds and
are actively managed by 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.
The following table details our expected benefit payments for the years
2009 through 2018.
Pension Postretirement
----------- ------------------
2009 $ 24,354 $ 1,848
2010 25,080 1,946
2011 25,361 2,123
2012 26,912 2,272
2013 28,006 2,487
Years 2014 - 2018 157,566 13,229
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The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
We also expect to contribute $7.0 million in cash to our defined
benefit pension plans in fiscal 2009. Please refer to the GHI Contractual
Obligation discussion below for information relating to expected benefit
payments relating to GHI's employees, which are not included above.
GHI Contractual Obligation
We have a contractual obligation to fund pension benefits for certain
employees of Grocery Haulers, Inc. ("GHI") who handle transportation and
logistics services for our Pathmark stores. Upon our acquisition of Pathmark in
December 2007, this obligation was accounted for as an unfavorable contract
based on liabilities allocable to GHI, net of related assets, which were held by
the Multiemployer Pension Plan ("the Fund") jointly sponsored by the Local 863
Union and various other employers. As of February 23, 2008, we recorded $76.6
million within "Other non-current liabilities", net of related pension assets of
$20.9 million.
As we believe the Fund is likely to have funding challenges and would
present a risk of higher future contribution requirements, effective August 29,
2008, GHI, the Fund, and our Company entered into a series of agreements which
collectively provided that: (i) GHI withdrew from the Fund; (ii) our Pathmark
Pension Plan would be amended to become a multiple employer plan to provide for
the participation in the plan by certain GHI employees; and (iii) the Fund
liabilities allocable to GHI and a portion of the Fund assets would be
transferred to the Pathmark Pension Plan. As a result, pension assets
attributable to GHI's employees of $13.6 million were transferred from the Fund
in January 2009 and combined with the existing Pathmark Pension Plan's assets.
We believe that our cash-flow and earnings will benefit from gaining a better
control over the future costs and by limiting our obligations to fund pension
benefits solely to GHI's employees, compared to having remained in the Fund.
Since the assets in the plan are available to pay pension benefits of both the
Company's employees and GHI's employees servicing our Pathmark stores, the
transferred assets are treated as plan assets under SFAS No. 87, "Employer's
Accounting for Pensions". The related return on plan assets is recorded within
"Store operating, general and administrative expense" in our Consolidated
Statements of Operations. However, since GHI's employees covered by this plan
are not employees of the Company, our obligation to fund their pension benefits
is accounted for as a contractual obligation, outside the scope of SFAS 87.
Accordingly, although our contractual obligations related to GHI's employees are
excluded from the above tabular disclosures of our defined benefit pension
plans, we believe that they should be evaluated in conjunction with our other
pension benefit obligations to fully understand our pension related financial
obligations. We calculated the fair value of our contractual obligation to GHI's
employees to be $91.4 million, using a discount rate of 7.0%, which was derived
from the published zero-coupon AA corporate bond yields.
Our contractual obligation relating to pension benefits for GHI's
employees is included within "Other accruals" and "Other non-current
liabilities" in our Consolidated Balance Sheet as of February 28, 2009.
Additions to our GHI contractual obligation for current service costs and
actuarial gains and losses are recorded within "Cost of merchandise sold" in our
Consolidated Statements of Operations at their current value. Accretion of the
obligation to present value is recorded within "Interest expense" in our
Consolidated Statements of Operations. Benefit payments relating to GHI retirees
transferred to our Pathmark Pension Plan are projected to be approximately $5.9
million for fiscal 2009 and will be paid from the Pathmark Pension Plan assets.
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
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The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
eligible salary. We contribute to the savings plans based on specified
percentages of the participants' eligible contributions. Effective January 1,
2008, participants vest in our contributions after 2 years of service. For
contributions made prior to January 1, 2008, participants become vested after 5
years of service. Our contributions charged to operations for all plans were
approximately $12.0 million, $8.3 million and $9.0 million in fiscal years 2008,
2007 and 2006, respectively.
Multi-employer Union Pension Plans
We participate in various multi-employer union pension plans which are
administered jointly by management and union representatives. These plans
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
$81.2 million (of which $4.1 million related to discontinued operations), $97.3
million (of which $62.2 million related to discontinued operations) and $32.1
million (of which $6.6 million related to discontinued operations) in fiscal
2008, 2007 and 2006, respectively. Certain multi-employer plans have reached an
unfunded status below current regulatory requirements. 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.
The above fiscal 2008 and fiscal 2007 pension expense amounts for the
multi-employer plans include $33.0 million (of which $4.1 million relates to
discontinued operations) and $62.9 million (of which $57.0 million relates to
discontinued operations), respectively, for costs related to our Company's
withdrawals from multi-employer union pension plans during each respective year.
We made withdrawals from certain multi-employer pension plans, as we believe
that the related plans are likely to have funding challenges, and would present
a risk of higher future contribution requirements. We also believe that our
cash-flow and earnings will benefit from gaining a better control over the
future costs and by limiting our obligations to fund pension benefits solely to
our employees, compared to having remained in the multi-employer plans.
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 fiscal 2008, fiscal
2007 and fiscal 2006. As of February 28, 2009 and February 23, 2008, we had
liabilities reflected on the Consolidated Balance Sheets of $19.2 million and
$38.9 million, respectively, related to such benefits.
Note 16 - Stock Based Compensation
During fiscal 2008, fiscal 2007 and fiscal 2006, compensation expense
related to our share-based incentive plans was $5.7 million, $9.0 million and
$8.2 million, after tax, respectively. Share-based compensation expense for
fiscal 2008, fiscal 2007 and fiscal 2006 included expenses of $1.3 million, $0.6
million, and $1.1 million, respectively, associated with stock options, expenses
of $3.8 million, $6.0 million and $6.0 million, respectively, relating to
restricted stock, and expenses of $0.6 million, $0.5 million and $1.1 million,
respectively, relating to common stock granted to our Board of Directors at the
Annual Meeting of Stockholders. In addition, during fiscal 2007, we recorded
additional stock compensation expense of $1.9 million related to roll-over stock
options that were exchanged for Pathmark stock options at the time of
acquisition. We did not capitalize any of our stock based compensation costs
during fiscal 2008, 2007 or 2006.
94
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
At February 28, 2009, we had stock awards outstanding under two
stock-based compensation plans, the 2008 Long Term Incentive and Share Award
Plan ("2008 Plan"), which was approved by our shareholders on June 26, 2008, and
the 2004 Non-Employee Director Compensation Plan. The 1998 Long Term Incentive
and Share Award Plan expired on July 14, 2008. The 2008 Plan replaced the 1998
Plan and provides for the same types of awards and is otherwise similar to the
1998 Plan. The general terms of each plan, the method of estimating fair value
for each plan and fiscal 2008, fiscal 2007 and fiscal 2006 activity is reported
below.
I. 2008 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 4,750,000, 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.
These units vested 50% on the first day of fiscal 2008 and the remaining
50% will vest by December 1, 2009, in accordance with and subject to all
other terms, conditions, limitations, restrictions and eligibility
requirements. As 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 $0.4 million and $0.3
million for fiscal 2008 and fiscal 2007, respectively, for an additional
24,777 shares granted.
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
95
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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.
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 is recorded over the vesting period, as these
units are earned upon achievement of the other terms as described above.
During fiscal 2008 and fiscal 2007, additional compensation expenses of
$4.3 million and $1.0 million, respectively, were recorded under these
plans.
Performance restricted stock units issued under this plan during fiscal
2008, are earned based on our Company achieving certain operating targets
in fiscal 2010 and are 100% vested in fiscal 2010 upon achievement of those
targets.
The stock option awards under the 2008 Plan are granted based on the fair
market value of the Company's common stock on the date of grant.
Compensation expense of all awards is calculated at fair value. Fair values
for each grant are estimated using a Black-Scholes valuation model, which
utilizes assumptions detailed in the below 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. The following
assumptions were in place during fiscal 2008, fiscal 2007 and fiscal 2006:
Fiscal 2008 Fiscal 2007 Fiscal 2006
----------- ----------- --------------
Expected life 7 years 7 years 7 years
Volatility 52% 54% - 55% 56%
Risk-free interest rate range 2.96% 4.46% - 4.57% 4.96%
Performance restricted stock units granted under the 2008 Plan were
granted at the fair market value of the Company's common stock at the date
of grant, adjusted by an estimated forfeiture rate. Certain performance
restricted stock units that include a market condition are granted at the
award's fair market value determined on the date of grant.
96
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Stock options
-------------
The following is a summary of the stock option activity during fiscal 2008,
fiscal 2007 and fiscal 2006:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term (years) Value
------------- ------------- ------------ -------------
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
Granted 128,434 27.08
Canceled or expired (296,138) 29.14
Exercised (107,891) 20.46
-------------- ----------
Outstanding at February 28, 2009 1,551,934 $ 23.77 3.3 $ -
============= ========== ========== ===========
Exercisable at:
February 28, 2009 1,325,121 $ 22.94 2.5 $ -
========== ===========
Nonvested at:
February 28, 2009 226,813 $ 28.64 8.4 $ -
========== ===========
The total intrinsic value of options exercised during fiscal 2008, fiscal
2007 and fiscal 2006 was $0.5 million, $7.9 million and $5.9 million,
respectively.
As of February 28, 2009, approximately $2.1 million of total unrecognized
compensation expense related to unvested stock option awards will be
recognized over a weighted average period of 2.2 years.
The weighted average grant date fair value of stock options granted during
fiscal 2008, fiscal 2007 and fiscal 2006 was $1.9 million or $14.64 per
share, $1.7 million or $19.47 per share and $1.5 million or $17.25 per
share, respectively.
The amount of cash received from the exercise of stock options in fiscal
2008 was approximately $2.2 million.
97
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Performance Restricted Stock Units
----------------------------------
The following is a summary of the performance restricted stock units
activity during fiscal 2008, fiscal 2007 and fiscal 2006:
Weighted
Average
Grant Date
Shares Fair Value
---------- ---------
Nonvested at February 25, 2006 1,285,000 $ 14.42
Adjustment for dividend(1) 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
Granted 471,731 26.60
Canceled or expired (121,021) 20.63
Vested (440,600) 12.72
---------- ---------
Nonvested at February 28, 2009 1,815,537 $ 26.17
========== =========
(1) As discussed in Note 17- 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.
During fiscal 2008, fiscal 2007 and fiscal 2006, our Company granted
471,731, 782,723 and 393,162 of performance restricted stock units to
selected employees, respectively, for a total grant date fair value of
$12.5 million, $25.4 million and $10.8 million, respectively. The total
fair value of shares vested during fiscal 2008 and fiscal 2007 was $12.1
million and $0.2 million, respectively. No shares vested during fiscal
2006.
As discussed above, upon the closing of the Pathmark transaction on
December 3, 2007, the applicable performance criteria with respect to
two-thirds of the units granted in fiscal 2005 was deemed to have been met.
One-third of these performance restricted units granted in fiscal 2005,
vested on February 24, 2008 (the first day of our fiscal year) and
one-third will vest by December 1, 2009, in accordance with and subject to
all other terms, conditions, limitations, restrictions and eligibility
requirements. The remaining one-third of our performance restricted units
granted in fiscal 2005 were forfeited during fiscal 2007. Performance
restricted stock units granted during fiscal 2006, fiscal 2007 and fiscal
2008 are earned based on our Company achieving certain operating targets in
fiscal 2008, fiscal 2009 and fiscal 2010, respectively, and are 100% vested
upon achievement of such targets. During fiscal 2008, based on changes in
our current year forecast and three year strategic plan, our Company
determined that the targets as described under the terms of each plan are
not probable of being met. Once this determination is made, compensation
expense is no longer recognized and any recognized compensation expense is
reversed. As a result, during fiscal 2008, we recorded a reversal of
previously recorded compensation expense related to restricted stock of
$5.2 million within "Store operating, general and administrative expense"
in our Consolidated Statements of Operations. Of this amount, approximately
$4.0 million of this reversal should have been recorded in fiscal 2007 as
our performance targets were no longer probable due to dispositions in
advance of our acquisition of Pathmark. Had our Company
98
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
recorded this reversal in the prior year, the current year's reversal for
not meeting performance targets would have been approximately $3.0 million.
No units vested under our 2008, 2007, and 2006 grants during fiscal 2008.
During fiscal 2008, 46,949 performance restricted stock units under our
non-executive Integration Program were considered granted as one of the
performance targets as described in the plan was exceeded based on actual
performance. These performance restricted stock units will vest subject to
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 on December 3, 2007 and other terms, conditions,
limitations, restrictions and eligibility requirements as described in the
Integration Program.
Approximately $6.7 million of unrecognized fair value compensation expense
relating to our performance restricted stock units granted in fiscal 2005
and fiscal 2006, as well as performance restricted stock units granted
under our executive and non-executive Integration Program in fiscal 2007,
are expected to be recognized through fiscal 2011 based on estimates of
attaining vesting criteria.
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 17 - Capital Stock
Share Lending Agreements
- ------------------------
We entered into share lending agreements, dated December 12, 2007, with
certain financial institutions, under which we 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. On June 26,
2008, our shareholders approved to loan up to an additional 1,577,569 shares of
our Company's common stock pursuant to the share lending agreement.
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 are considered issued and outstanding. Investors
that purchase borrowed shares are entitled to the same voting and dividend
rights as any other holders of our common stock; however, the
99
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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, except as described below, 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, with the exception of the
below.
On September 15, 2008, Lehman and certain of its subsidiaries,
including, Lehman Europe filed a petition under Chapter 11 of the U.S.
Bankruptcy Code with the United States Bankruptcy Court and/or commenced
equivalent proceedings in jurisdictions outside of the United States
(collectively, the "Lehman Bankruptcy"). Lehman Europe is party to a 3,206,058
share lending agreement with our Company. Due to the circumstances of the Lehman
Bankruptcy, we have recorded these loaned shares as issued and outstanding
effective September 15, 2008, for purposes of computing and reporting our
Company's basic and diluted weighted average shares and earnings per share.
Call Options
- ------------
Concurrent with the issuance of the senior convertible notes, as
discussed in Note 10 - 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 10 -
Indebtedness and Other Financial Liabilities 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.
We understand that on or about October 3, 2008, LBOTC who accounts for
50% of the call option and financing warrant transactions filed for bankruptcy
protection, which is an event of default under such transactions. We are
carefully monitoring the developments affecting LBOTC, noting the impact of the
LBOTC bankruptcy effectively reduced conversion prices for 50% of our Notes to
their stated prices of $36.40 for the 2011 notes and $37.80 for the 2012 notes.
In the event we terminate these transactions, or they are canceled in
bankruptcy, or LBOTC otherwise fails to perform its obligations under such
transactions, we would have the right to monetary damages in the form of an
unsecured claim against LBOTC in an amount equal to the present value of our
cost to replace the transactions with another party for the same period and on
the same terms.
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. On May 7, 2008, the 4,657,378 Series A warrants, scheduled to
expire on June 9, 2008, were exercised by Yucaipa Corporate Initiatives Fund I,
L.P., Yucaipa American Alliance Fund
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The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
I, L.P. and Yucaipa American Alliance (Parallel) Fund I, L.P. Our Company opted
to settle the Series A warrants in cash totaling $45.7 million, rather than
issuing additional common shares.
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.
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. 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.
Note 18 - Segments
We report segments 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.
Reportable 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.
During the second quarter of fiscal 2008, our chief operating decision
maker changed the manner by which our results are evaluated; therefore, our
reportable segments have been revised to be consistent with the way we currently
manage our business. Accordingly, we have revised our segment reporting to
report in five reportable segments: Fresh, Price Impact, Gourmet, Other and our
investment in Metro, Inc. The Other segment includes our Food Basics and Liquor
businesses. Our investment in Metro, Inc. represents our former economic
interest in Metro, Inc. and is required to be reported as a segment, as our
investment was greater than 10% of our Company's combined assets of all segments
and the investment generated operating income during fiscal 2007. The criteria
necessary to classify the Midwest and Greater New Orleans areas as discontinued
were satisfied in fiscal 2007 and these operations have been presented as such
in our Consolidated Statements of Operations for all periods presented. Refer to
Note 7 - Discontinued Operations for further discussion. Prior year information
has been restated to conform to current year presentation.
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 between segment income (loss) and (loss) from operations include
corporate-level activity not specifically attributed to a segment, which
includes 1) the merchandising department
101
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(including the design and production of private label merchandise sold in our
retail stores), 2) real estate management and 3) information technology, finance
and other corporate administrative personnel, as well as, other reconciling
items primarily attributed to nonrecurring activities.
Assets and capital expenditures are not allocated to segments for
internal reporting presentations.
Certain segment reclassifications have been made to segment information
disclosed previously to conform to how our chief operating decision maker
currently manages our business.
The following is segment information for the years ended February 28,
2009, February 23, 2008, and February 24, 2007:
OPERATING DATA Fiscal 2008 Fiscal 2007 Fiscal 2006
- -------------- ----------------- ------------------ ------------------
Sales by category
Grocery (1) $ 6,663,157 $ 4,364,970 $ 3,623,792
Meat (2) 1,792,311 1,253,847 1,037,651
Produce (3) 1,060,718 776,521 690,088
Other (4) -- 5,792 17,672
--------------- --------------- ----------------
Total Company $ 9,516,186 $ 6,401,130 $ 5,369,203
=============== =============== ================
(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 20 - Related Party Transactions for
further discussion.
Fiscal
--------------------------------------------------
2008 2007 2006
--------------- --------------- ---------------
Sales
Fresh $ 4,818,250 $ 4,840,057 $ 4,745,050
Price Impact** 4,161,234 1,065,894 145,412
Gourmet 281,767 257,551 248,880
Other 254,935 231,836 212,189
Investment in Metro, Inc. -- 5,792 17,672
------------- ------------- ---------------
Total sales $ 9,516,186 $ 6,401,130 $ 5,369,203
============= ============= ===============
Segment income (loss)
Fresh $ 147,109 $ 77,441 $ 84,345
Price Impact** 20,520 20,819 (404)
Gourmet 24,866 16,613 15,141
Other 2,184 (2,931) (9,400)
------------- ------------- ---------------
Total segment income 194,679 111,942 89,682
Corporate (129,683) (130,663) (135,716)
Reconciling items* (111,782) (20,519) 18,864
------------- ------------- ---------------
Loss from operations (46,786) (39,240) (27,170)
(Loss) on sale of Canadian operations -- (436) (1,299)
Gain on sale of Metro, Inc. -- 184,451 --
Nonoperating income 116,864 37,394 --
Interest expense (154,137) (111,816) (65,884)
Interest and dividend income 591 14,350 9,020
Equity earnings in Metro -- 7,869 40,003
------------- ------------- ---------------
(Loss) income from continuing operations before income taxes $ (83,468) $ 92,572 $ (45,330)
=============== ============== ===============
102
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Fiscal
--------------------------------------------------
2008 2007 2006
--------------- --------------- ---------------
Segment depreciation and amortization - continuing operations
Fresh $ 91,664 $ 99,566 $ 93,176
Price Impact** 98,724 18,424 2,877
Gourmet 10,119 9,876 8,490
Other 3,722 4,378 3,387
------------- ------------- ---------------
Total segment depreciation and amortization - continuing operations 204,229 132,244 107,930
Corporate 56,762 45,908 40,832
------------- ------------- ---------------
Total depreciation and amortization - continuing operations 260,991 178,152 148,762
Discontinued operations -- 8,637 28,992
------------- ------------- ---------------
Total company depreciation and amortization $ 260,991 $ 186,789 $ 177,754
============= ============= ===============
* Reconciling items for fiscal 2008, which are not included in segment income
represent: (i) real-estate related activity of $40.2 million, (ii) Pathmark
integration costs of $34.0 million, (iii) pension withdrawal costs of $28.9
million, (iv) LIFO reserve adjustment of $7.8 million and (v) other
nonrecurring adjustments of $0.9 million. Reconciling items for fiscal 2007
include: (i) Pathmark integration costs of $27.7 million, (ii) pension
withdrawal costs of $5.9 million, (iii) net restructuring costs of $4.4
million and (iv) LIFO reserve adjustment of $2.3 million, partially offset
by (v) a benefit related to real estate related activity of $14.1 million
and (vi) a benefit of $5.8 million relating to our IT services agreement
with Metro, Inc. Reconciling items for fiscal 2006 include (i) a benefit of
$17.7 million related to our IT services agreement with Metro, Inc. and
(ii) a benefit of $11.2 million for real estate related activity,
partially offset by (iii) $10.0 million of restructuring costs.
** Includes results from A&P stores that have been subsequently converted to
Pathmark stores.
Note 19 - Hurricane Katrina and Impact on Business
We maintain property insurance coverage, which provides for
reimbursement from losses resulting from property damage, loss of product, as
well as business interruption coverage. During fiscal 2007 and fiscal 2006, we
recorded gains 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 "(Loss) income from operations of discontinued businesses, net of tax".
Note 20 - Related Party Transactions
On September 2, 2008, our Company issued a three year, unsecured
promissory note in the amount of $10 million to Erivan Karl Haub. Erivan Haub is
the father of Christian W. E. Haub, our Executive Chairman, and is a limited
partner of Tengelmann which owns an interest in our Company's stock. The
principal is due in a lump sum payment on August 18, 2011 and will bear interest
at a rate of 6% per year, payable in twelve equal quarterly payments of $0.15
million over the term of the note. During fiscal 2008, we paid $0.15 million of
interest and recorded $0.3 million of interest expense relating to this
promissory note.
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 from January 4, 2008 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. All rent payments under the
lease, as extended, represent income that is taxable to Mr. Guldin; however, Mr.
103
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Guldin's annual income is "grossed up" by the Company in an amount that is
necessary to cover this tax obligation.
Concurrently with the execution of the Pathmark Merger Agreement, on
March 4, 2007, Tengelmann and the Company entered into the Stockholder Agreement
(the "Tengelmann Stockholder Agreement"). Under the terms of the Tengelmann
Stockholder Agreement, the Company has agreed to provide Tengelmann with board
designation and governance rights regarding certain transactions as long as it
holds a specified percentage of the outstanding Company common stock; most of
these rights have also been made via an amendment of the Company's by-laws that
became effective as of the transaction closing. The Tengelmann Stockholder
Agreement also provides Tengelmann with certain demand and piggyback
registration rights and certain preemptive rights.
Concurrently with the execution of the Pathmark Merger Agreement, on
March 4, 2007, the Company and Yucaipa Corporate Initiatives Fund I, LP, Yucaipa
American Alliance Fund I, LP and Yucaipa American Alliance (Parallel) Fund I,
LP, funds affiliated with The Yucaipa Companies LLC (collectively, "Yucaipa"),
entered into a stockholder agreement (the "Yucaipa Stockholder Agreement"), and
a warrant Agreement (the "Yucaipa Warrant Agreement"). Yucaipa has
representation on our Board of Directors. Under the terms of the Yucaipa Warrant
Agreement, the Company issued to Yucaipa warrants to purchase the Company's
common stock in exchange for the cancellation of warrants to purchase Pathmark
common stock. Options and other rights to acquire Pathmark equity have been
converted into the right to receive cash, Company common stock or Company stock
options as set forth in the Merger Agreement. Under the terms of the Yucaipa
Stockholder Agreement, Yucaipa has agreed to certain restrictions on its
ownership, acquisition and disposition of Company common stock and warrants to
purchase Company common stock that it will own and may acquire after the merger.
In addition, Yucaipa, its affiliates and general partners have agreed not to
take certain actions relating to the governance of the Company. The Yucaipa
Stockholder Agreement also provides Yucaipa with certain demand and piggyback
registration rights.
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 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 nil, $5.8 million, and $17.7 million in "Sales" in
our Consolidated Statements of Operations for fiscal 2008, fiscal 2007 and
fiscal 2006, respectively. Although the Agreement expired during fiscal 2007 and
our Company no longer provides any services nor records any revenue in
connection therewith, we continue to provide certain support to Metro in
connection with its audit relating to prior years' services.
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.
104
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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.
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, nil and $0.7 million in fiscal
2008, fiscal 2007 and fiscal 2006, respectively.
We owned a jet aircraft, which Tengelmann leased under a full cost
reimbursement lease. Prior to its sale in February 2009, Tengelmann was
obligated to and has reimbursed us $1.4 million, $4.6 million and $4.1 million
during fiscal 2008, 2007 and 2006, respectively, for their use of the aircraft.
Note 21 - Commitments and Contingencies
Supply Agreement
- ----------------
On March 7, 2008, we 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. The contract provides that we will
purchase virtually all of our warehoused inventory from C&S. 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.
105
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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.
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
review of our historical records as well as estimates provided by the Claims
Administrator, we recorded a pre-tax recovery of $2.2 million as a credit to
"Store operating, general and administrative expense" in our Statements of
Consolidated Operations during fiscal 2008. During fiscal 2009, we will continue
to work with the Claims Administrator to 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.
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. In December 2008, the Court approved the
Form of Notice, which included an "opt-out" provision and in January 2009, the
Plaintiffs mailed the Notice to the potential class members. The opt-out
deadline was in March 2009 and our Company is presently challenging the proposed
class composition. The parties have commenced discovery. The Company intends to
move to decertify the class once certain discovery has been completed.
106
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
As the order granting class certification is currently being appealed,
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.
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 are the guarantor of a loan of $1.1 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") for
which we generally remained secondarily liable. As such, if any of the assignees
were to become unable to make payments under the Assigned Leases, we could be
required to assume the lease obligation. As of February 28, 2009, 217 of
Assigned Leases remain in place. Assuming that each respective assignee became
unable 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 $686.1 million, which could be partially or
totally offset by reassigning or subletting these leases.
107
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Note 22 - Summary of Quarterly Results (Unaudited)
The following table summarizes our results of operations by quarter for
fiscal 2008 and fiscal 2007. The first quarter of each fiscal year contains
sixteen weeks, while the second and third quarters each contain twelve weeks.
The fourth quarter of fiscal 2008 contained thirteen weeks, while the fourth
quarter of fiscal 2007 contained twelve weeks.
First Second Third Fourth Total
Quarter(a) Quarter Quarter(b) Quarter Year
--------------- ---------------- --------------- ---------------- ---------------
2008 (unaudited) (Dollars in thousands, except per share amounts)
- ----------------
Sales $2,922,665 $2,182,636 $2,120,954 $2,289,931 $9,516,186
Gross margin 883,586 651,543 660,385 707,522 2,903,036
Depreciation and amortization (80,027) (60,797) (60,538) (59,629) (260,991)
Income (loss) from operations 2,091 (11,523) 11,909 (49,263) (46,786)
Nonoperating income(c) 48,597 42,895 22,777 2,595 116,864
Interest expense (45,949) (33,945) (36,727) (37,516) (154,137)
Income (loss) from
continuing operations 3,765 (3,554) (2,993) (83,369) (86,151)
Loss from discontinued
operations (1,524) (13,812) (10,635) (27,759) (53,730)
Net income (loss) 2,241 (17,366) (13,628) (111,128) (139,881)
Per share data(d)
Income (loss) from continuing
operations - basic 0.08 (0.07) (0.06) (1.58) (1.69)
(Loss) from discontinued operations -
basic (0.03) (0.28) (0.20) (0.53) (1.05)
Net income (loss) - basic 0.05 (0.35) (0.26) (2.11) (2.74)
(Loss) from continuing operations -
diluted (0.48) (1.50) (1.35) (3.33) (4.28)
(Loss) from discontinued operations -
diluted (0.03) (0.25) (0.26) (0.82) (1.13)
Net (loss) income - diluted (0.51) (1.75) (1.61) (4.15) (5.41)
Market price: (e)
High $28.18 $24.34 $14.00 $8.49
Low $22.41 $12.84 $3.41 $4.02
Number of stores at end of period 446 445 444 436
108
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
First Second Third Fourth Total
Quarter(g) Quarter Quarter Quarter(f)(g) Year
--------------- ---------------- --------------- ---------------- ---------------
2007 (unaudited) (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
Nonoperating 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(d)
Income (loss) from continuing
operations - basic 1.47 (0.07) 1.74 (0.90) 2.00
(Loss) 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) 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: (e)
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
- --------------------------------------------------------------------------------
(a) During first quarter of fiscal 2008, we recorded a $2.3 million reduction
in our operating expense associated with the unfavorable Pathmark
transportation agreement, which related to fiscal 2007.
(b) During the third quarter of fiscal 2008, we recorded a reversal of
previously recorded compensation expense related to restricted stock of
$5.2 million, $4.0 million of which relates to fiscal 2007, as our
performance targets were no longer probable due to dispositions in advance
of our acquisition of Pathmark.
(c) Our nonoperating income reflects the mark-to-market adjustments related to
the conversion features, financing warrants, and Series A and B warrants,
which fluctuate based on our stock price.
(d) 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 changed each quarter.
(e) 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.
(f) On December 3, 2007, our Company completed the acquisition of Pathmark
Stores, Inc.
(g) 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.
109
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. Based on the evaluation, management has concluded our Company's
internal control over financial reporting was effective as of February 28, 2009.
The effectiveness of the Company's internal control over financial
reporting as of February 28, 2009, has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their
report, which appears herein.
/s/ Eric Claus /s/ Brenda M. Galgano
Eric Claus Brenda M. Galgano
President and Senior Vice President,
Chief Executive Officer Chief Financial Officer
110
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 28, 2009 and February 23, 2008, and the
results of their operations and their cash flows for each of the three years in
the period ended February 28, 2009 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 28, 2009, 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 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; 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.
111
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.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
May 12, 2009
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Five Year Summary of Selected Financial Data
Fiscal 2008(e) Fiscal 2007(a)(b)(c)(e) Fiscal 2006(e) Fiscal 2005(d)(e) Fiscal 2004
(53 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Operating Results
Sales $9,516,186 $6,401,130 $5,369,203 $7,090,018 $8,923,508
(Loss) income from operations (46,786) (39,240) (27,170) (170,860) 23,300
Depreciation and amortization (260,991) (178,152) (148,762) (174,040) (220,504)
(Loss) gain on sale of Canadian
Operations -- (436) (1,299) 912,129 --
Gain on sale of Metro, Inc. -- 184,451 -- -- --
Interest expense (f) (154,137) (111,816) (65,884) (84,404) (107,397)
(Loss) income from continuing
operations (86,151) 86,980 12,751 518,059 (81,686)
(Loss) income from discontinued
operations (53,730) (247,660) 14,142 (125,429) (106,412)
Net (loss) income (139,881) (160,680) 26,893 392,630 (188,098)
Per Share Data
(Loss) income from continuing
operations - basic (1.69) 2.00 0.31 12.85 (2.12)
(Loss) income from discontinued
operations - basic (1.05) (5.69) 0.34 (3.11) (2.76)
Net (loss) income - basic (2.74) (3.69) 0.65 9.74 (4.88)
(Loss) income from continuing
operations - diluted (4.28) 1.37 0.30 12.72 (2.12)
(Loss) income from discontinued
operations - diluted (1.13) (5.59) 0.34 (3.08) (2.76)
Net (loss) income - diluted (5.41) (4.22) 0.64 9.64 (4.88)
Cash dividends (h) -- -- 7.25 -- --
Book value per share (h) 4.64 7.32 10.36 16.32 6.03
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Five Year Summary of Selected Financial Data - Continued
Fiscal 2008 Fiscal 2007(a)(b)(c) Fiscal 2006 Fiscal 2005(d) Fiscal 2004
(53 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Financial Position
Current assets $917,247 $884,426 $748,908 $1,210,014 $1,164,681
Current liabilities 746,535 771,815 558,391 610,273 1,078,202
Working capital (h) 170,712 112,611 190,517 599,741 86,479
Current ratio (h) 1.23 1.15 1.34 1.98 1.08
Expenditures for property 115,994 122,850 208,159 191,050 216,142
Total assets 3,545,711 3,643,856 2,111,623 2,498,865 2,801,968
Current portion of
long-term debt (i) 5,283 11,875 32,069 569 2,278
Current portion of
capital lease obligations 12,290 11,344 1,554 2,274 8,331
Long-term debt (f) 942,514 758,886 284,214 246,282 634,028
Long-term portion of
capital lease obligations 147,921 157,430 29,938 32,270 52,184
Total debt 1,108,008 939,535 347,775 281,395 696,821
Debt to total capitalization (h) 81% 69% 45% 30% 75%
Equity
Stockholders' equity (j) 267,370 418,143 430,670 671,727 233,802
Weighted average shares
outstanding - basic 50,948,194 43,551,459 41,430,600 40,301,132 38,558,598
Weighted average shares
outstanding - diluted 47,691,002 44,295,214 41,902,358 40,725,942 38,558,598
Number of registered
stockholders (h) 5,677 5,856 4,649 4,916 5,289
Other (h)
Number of employees 48,000 51,000 38,000 38,000 73,000
New store openings 1 10 10 3 24
Total number of stores at year end 436 447 406 405 647
Total store area
(square feet) 18,385,645 18,813,135 16,538,410 16,508,969 25,583,138
Number of franchised
stores served at year end(g) -- -- -- -- 42
Total franchised store
area (square feet) (g) -- -- -- -- 1,375,611
- ----------------------------------------------------------------------------------------------------------------------------
(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, our Company completely disposed of our 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. We recorded share-based compensation expense
of $5.7 million, $9.0 million, $8.2 million and $9.0 million in fiscal
2008, 2007, 2006 and fiscal 2005, respectively. During fiscal 2008, we
recorded a reversal of previously recorded compensation expense related
to restricted stock of $5.2 million, $4.0 million of which relates to
fiscal 2007, as our performance targets were no longer probable due to
dispositions in advance of our acquisition of Pathmark.
(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. In
December 2007, we issued $165 million 5.125% convertible notes due June
15, 2011 and $255 million 6.75% convertible notes due December 15,
2012. In addition, during December 2007, we entered into a new $675
million credit agreement. As of February 28, 2009 and February 23,
2008, there were $331.8 million and $169.9 million, respectively, of
loans outstanding under the credit agreement.
(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 2004.
(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.
- --------------------------------------------------------------------------------
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Executive Officers Board Of Directors
- ------------------ ------------------
Christian W. E. Haub Christian W. E. Haub (c)
Executive Chairman Executive Chairman
Eric Claus John D. Barline, Esq. (c)
President and Williams, Kastner & Gibbs LLP,
Chief Executive Officer Tacoma, Washington
Brenda M. Galgano Jens-Jurgen Bockel
Senior Vice President, Chief Financial Officer and
Chief Financial Officer Member of the Managing Board
Tengelmann Warenhandelsgesellschaft KG
Andreas Guldin Mulheim, Germany
Executive Managing Director,
Strategy & Development Bobbie A. Gaunt (a)(b)(c)(d)
Former President and CEO,
Jennifer Mac Leod Ford Motor Company of Canada
Senior Vice President,
Marketing and Communications Andreas Guldin (c)
Executive Managing Director,
Allan Richards Strategy & Development
Senior Vice President,
Human Resources, Labor Relations, Dan P. Kourkoumelis (a)(c)(d)
Legal Services & Secretary Former President and CEO,
Quality Food Centers, Inc.
Rebecca Philbert
Senior Vice President, Edward Lewis (a)(b)(d)
Merchandising & Supply and Logistics Chairman and Founder,
Essence Communications Inc.
Paul Wiseman
Senior Vice President, Gregory Mays (b)(d)
Store Operations Former Chairman and CEO,
Wild Oats Markets
William Moss
Vice President and Treasurer Maureen B. Tart-Bezer (a)(b)(d)
Former Executive Vice President &
Melissa E. Sungela Chief Financial Officer
Vice President and Corporate Controller 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)
115
Stockholder Information
- ----------------------- Form 10-K
Copies of Form 10-K filed with the Securities
Executive Offices and Exchange Commission will be provided to
Box 418 stockholders upon written request to the
2 Paragon Drive Secretary at the Executive Offices in Montvale,
Montvale, NJ 07645 New Jersey. Exhibits to the Form 10-K include
Telephone 201-573-9700 the most recent certifications by A&P's Chief
Executive Officer and Chief Financial Officer.
Independent Registered Public Accountants We have also filed with the New York Stock
PricewaterhouseCoopers LLP Exchange the most recent Annual CEO
400 Campus Drive Certification as required by Section 303A.12(a)
PO Box 988 of the New York Stock Exchange Listed Company
Florham Park, NJ 07932 Manual.
Stockholder Inquiries and Publications Annual Meeting
Stockholders, security analysts, members of the media The Annual Meeting of Stockholders will be held
and others interested in further information about our at 9:00 a.m. (EDT) on
Company are invited to contact the Investor Relations Thursday, July 16, 2009 at
Help Line at 201-571-4537. The Woodcliff Lake Hilton
200 Tice Boulevard
Internet users can access information on A&P at: Woodcliff Lake, New Jersey, USA
www.aptea.com
Common Stock
Correspondence concerning stockholder address changes or Common stock of our Company is listed and traded
other stock account matters should be directed to our on the New York Stock Exchange under the ticker
Company's Transfer Agent & Registrar symbol "GAP" and has unlisted trading privileges
American Stock Transfer and Trust Company on the Boston, Midwest, Philadelphia,
59 Maiden Lane Cincinnati, and Pacific Stock Exchanges. The
New York, NY 10038 stock is generally reported in newspapers and
Telephone 800-937-5449 periodical tables as "GtAtPc".
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, (C) 2009 The Great Atlantic & Pacific Tea Co.,
Legal Services & Secretary, 2 Paragon Drive, Montvale, Inc. All rights reserved.
NJ 07645
116