Exhibit 13
The Great Atlantic & Pacific Tea Company, Inc.
Fiscal 2009
Annual Report to Stockholders
[The Great Atlantic & Pacific Tea Company, Inc. Logo]
1
Table of Contents
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............................................. 48
Consolidated Statements of Stockholders' Equity (Deficit)
and Comprehensive Loss..................................................... 49
Consolidated Balance Sheets....................................................... 51
Consolidated Statements of Cash Flows............................................. 52
Notes to Consolidated Financial Statements........................................ 54
Management's Annual Report on Internal Control over Financial Reporting........... 117
Report of Independent Registered Public Accounting Firm........................... 118
Five Year Summary of Selected Financial Data...................................... 119
Executive Officers................................................................ 121
Board of Directors................................................................ 121
Stockholder Information........................................................... 122
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),
SuperFresh(R), Waldbaum's(R), Super Foodmart(R), Food Basics(R) , The Food
Emporium(R), Best Cellars(R), Best Cellars at A&P(R), Pathmark(R) and Pathmark
Sav-A-Center(R) trade names.
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EXECUTIVE CHAIRMAN LETTER TO STOCKHOLDERS
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Dear Fellow Shareholders:
The last fiscal year has been very difficult for our Company as everyone
has been affected by the worsening economic environment. We recognized early in
2009 that there would not be a quick recovery and the Company needed to change
to adapt to the new market conditions. With rising unemployment, declining
credit availability and increasing uncertainty about the economic recovery,
consumers changed their spending behavior drastically and in a much more
permanent way, which in turn severely impacted our business. Adding to this
challenging environment has been the precipitous decline in retail prices due to
a severe decline in producer prices and a heightened competitive atmosphere.
Thus, considering this extremely challenging backdrop, the Company took
proactive steps to meet the external challenges, address its performance issues
and capture available opportunities to improve its strategic position.
Key Strategic Initiatives
New Equity and Debt Financings:
Most importantly, we secured vital new financing during last summer to
ensure we had the financial resources we needed to manage through this
recession. The Company's long-time shareholder, Tengelmann, invested an
additional $60 million and remains the single largest shareholder with ownership
interest close to 40% while Yucaipa, who has been an investor in the Company
since the Pathmark merger, invested an additional $115 million and increased its
ownership interest to close to 30%. This new investment agreement included the
addition of two Board of Director seats nominated by Yucaipa. The investment was
particularly significant in that it enabled A&P to strengthen its balance sheet,
reduce its refinancing risks and provide liquidity enabling the Company to
pursue its ongoing business strategy. By partnering with Yucaipa, one of North
America's premier investors in our industry, the Company is now better
positioned to withstand the effects of the challenging economic environment and
realize strategic opportunities in the future.
New Leadership:
In addition to the economic environment not being favorable, our business
performance and trends necessitated a reevaluation of our leadership. It is
never an easy decision to make a senior executive change, however, the Company's
performance, in particular that of Pathmark, led to significant concerns amongst
the Board and our two largest shareholders, and after careful consideration, it
became necessary to recruit a new Chief Executive Officer to lead the Company
going forward.
In the months prior to appointing our new CEO, I personally assumed the
role and responsibilities in addition to my duties as Executive Chairman. At the
time I took over as interim CEO, I knew that the Company needed significant
support and guidance and I reached out to Ron Burkle at Yucaipa for his
assistance. Very quickly, he assembled and dispatched a highly qualified team of
professionals that helped enact many performance improvement initiatives
including stabilizing our deteriorating business trends, enhancing our retail
pricing and promotion approach, lowering our overall expenses and making sure we
became more relevant to our customers again.
The appointment of Ron Marshall, as our new President and Chief Executive
Officer in late January, was an exciting step forward for the Company. The
extensive search process had presented a number of outstanding candidates and
Ron emerged as the clear front runner and we are very pleased to have secured
his services for our Company. Ron's superior skills and proven track record of
successful turn-arounds as well as his extensive experience in the retail
industry and specifically in food retail where he spent more
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than 12 years of his career in the highest levels of management fulfilled all
our major search criteria. His leadership will be key in our turn-around and his
appointment is putting the Company on the right trajectory for fiscal 2010 and
beyond.
Last year, has undoubtedly been one of the most challenging economic
environments we have experienced in many years and simply put, it is the passion
of our associates which continues to allow this Company to make it through these
hard times. In our over 150 years in business, A&P has had the pleasure of
employing millions of hard working individuals who have always risen to any
challenge thrown in their way and will do so again.
In closing, I would like to thank our Board of Directors, Tengelmann, Ron
Burkle, Yucaipa and the Company's management and associates whose collective
hard work and dedication over the last year has been critical. I am looking
forward to realizing the full potential of our great Company and working
together with Ron Marshall and his management team to reengage with our
workforce collaboratively, including with our labor unions, to create
significant shareholder value in the next several years.
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 Shareholders:
The past year was certainly a challenge, not just for our Company, but
for the entire industry. However, upon joining The Great Atlantic & Pacific Tea
Company, I conducted an in-depth review of the Company's overall condition and
determined that the economy was not the only reason for our disappointing
results. There are critical issues, which must, and will be addressed before we
can achieve the success that our shareholders and associates deserve. Among
these issues was the lack of clear brand identity in our principal banners,
incomplete integration of the Pathmark acquisition, and additional opportunities
for significant cost improvements, particularly in our supply chain.
While fixing these challenges will be neither quick nor easy, the fixes
are attainable and the initiatives are in place today to provide us the path
forward. The core elements of the path forward are:
o Understanding that it's all about the customer,
o Developing the skills critical for success in today's competitive
world,
o Making prudent reinvestments in our business,
o Reducing cost through a process of continuous improvement, and
o Transforming the culture of our Company.
Our family of A&P brands covers the full spectrum of customer needs,
from an aspirational brand like The Food Emporium to an extreme value format in
Food Basics. To become a truly customer-centric grocer, we must do a much better
job of crisply defining and communicating the value proposition that each banner
represents. In addition to providing the outstanding service that our customers
demand and ensuring the flawless execution that they deserve, we must also
address the unique personalities of the communities that our stores serve. To
that end, we are developing store clusters around consumer attributes, allowing
us to better engage our customers.
As an organization, and as individuals, we must ensure that we have all
of the skills necessary for success. Clearly, we must have the expertise needed
for our tasks. We must also have the process skills critical to ensure that when
we begin a job, we finish it. But most importantly, we must have the
experiential skills like maturity, perspective, resiliency and grit, that will
see us through this journey.
A core element of value creation will be our ability to drive costs
from our system. We must remain focused on our core businesses until we are
assured that our turn-around is complete. It is critical we respect our
Company's resources by ensuring all capital is spent wisely. Finally, we are
committed to driving down operating and product costs though passionate
commitment to continuous improvement. An example is the extensive review of best
practices in our retail stores being completed as I write this letter. Once
completed, these efficiencies will be embedded throughout our Company.
Perhaps my favorite advice is Peter Drucker's observation that "Culture
eats strategy for breakfast." The greatest strategy poorly executed always
fails. A good strategy flawlessly executed generally succeeds. To execute at
levels that will assure our success, we clearly require each of the
aforementioned skills. More is required, however. Individually, and as an
organization, we must embody the most fundamental values of integrity,
responsibility and mutual respect. We must each take personal responsibility for
our own success and foster an environment that provides individual
accountability for achievement. Finally, we must exhibit daily the managerial
courage necessary to overcome the challenges inherent to our task.
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There is much to do in the coming months, but with focus and commitment
we will achieve our goals. I would like to take this opportunity to thank
Christian and the Board of Directors for this exciting opportunity to return to
my passion - grocery retail. I would also like to recognize the hard work and
dedication of our associates, who, despite our disappointing results overall,
have had several wins during the last year, including growing our private label
portfolio -- and who, in these early days of transition, have recognized and
embraced the need for change and improvement. I know that 2010 will be a
challenging year as well, but together we can restore this Company to the
position of leadership and strength that is the heritage of The Great Atlantic &
Pacific Tea Company.
Sincerely,
/s/ Ron Marshall
Ron Marshall
President and Chief Executive Officer
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The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis
INTRODUCTION
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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 description of our Company's fiscal years.
o Overview -- a general description of our business.
o Operating Results -- a summary discussion of operating results during
fiscal 2009, addressing the value drivers of our business;
measurements; opportunities; challenges and risks; and initiatives.
o 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 2009, fiscal 2008 and fiscal 2007, significant
business initiatives, current and expected future liquidity.
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
- ---------------------
Our fiscal year ends on the last Saturday in February. Fiscal 2009 and
fiscal 2007 were each comprised of 52 weeks, consisting of 13 four-week periods.
Fiscal 2008 was comprised of 53 weeks, consisting of 12 four-week periods and
one five-week period. 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
429 stores as of February 27, 2010.
We have four reportable segments: Fresh, Pathmark, Gourmet and Other.
Our Other segment includes our Food Basics and Wine, Beer & Spirits businesses.
During fiscal 2007, we had a fifth reportable segment representing our former
investment 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 2009, fiscal 2008 and fiscal 2007.
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The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
OPERATING RESULTS
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This fiscal year has been very difficult for our Company as customers
and suppliers have been affected by the worsening economic environment. With
rising unemployment, declining credit availability and increasing uncertainty
about the economic recovery, consumers changed their spending behavior which in
turn severely impacted our business. Industry research has confirmed a
fundamental shift in the way the American consumer expects to spend and to save
in the coming years. Customers continued to trade down to less expensive
products and search for promotional programs while eschewing regularly priced
goods.
Through the first half of the year in all of our banners, we reacted to
increased promotional activity at our competitors by increasing our own
promotional spending and decreasing prices, which led to increasingly
significant retail deflation throughout our stores and the grocery retail
industry as a whole. Over the course of the remainder of the year, we
discontinued promotional spending programs that were not considered valuable to
the consumer.
We also improved our private label penetration which generally provides
increased margins; however, results were not sufficient to offset the
promotional spending and decreased prices overall. As a result of the collective
issues our Company faced, our operating results for Pathmark were negatively
impacted beginning in our first quarter; however, the impact was not
fully experienced by our Fresh and Discount formats until our third quarter.
To combat downward margin pressure, we instituted several business
optimization initiatives through reduced costs. During fiscal 2009, we realized
a reduction in utility expenses that was partially attributable to energy
conservation investments that will continue to yield benefits in fiscal 2010. We
also saw improving trends in our stock loss rate to sales from the beginning of
the year due to several business improvement initiatives that were implemented
throughout the year. Labor rationalization initiatives were implemented as well,
including a program in the fourth quarter designed to reduce in excess of 15% of
our administrative labor costs. However, neither the stock loss improvements nor
the labor initiatives realized their full potential as a rate to sales partially
due to the significantly declining sales during fiscal 2009. We anticipate that
these successful initiatives will bring increasing benefits to our Company as
sales grow.
We are engaged with Yucaipa, one of our significant investors, who has
been working with our senior management team to develop strategies to drive
sustainable success in the future by developing a number of activities and
initiatives to improve the performance of the Company.
Our Gourmet stores located in Manhattan continue to perform well. We
attribute this to the premium locations of our Gourmet stores and product
offering selective to the neighborhood.
Our Best Cellars and our Wine, Beer & Spirits businesses continued to
perform well with a year-over-year increase in segment income and product
offerings that appeal to consumers even during recessionary times.
Our business performance and trends necessitated a reevaluation of our
leadership. In late January 2010, the Company appointed Ron Marshall, President
and Chief Executive Officer. Mr. Marshall possesses a proven track record of
successful turnarounds as well as extensive experience in the retail industry
and specifically in food retail where he spent more than 12 years of his career
in the highest levels of management. He will be the key leader in our turnaround
and his appointment is putting the Company on the right trajectory for fiscal
2010.
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The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
OUTLOOK
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Many top analysts predict that the economic environment will continue
to be difficult. The decline in consumer credit availability, combined with the
increase in the rate of savings and the high rate of unemployment, which is
expected to continue through 2011, make for a challenging economic environment.
Our comprehensive assessment of the Company following the change in
leadership clearly indicated the need for repositioning our go-to-market
approach in response to the consumers' dramatic shift in shopping behavior. In
addition to building a new, more comprehensive, customer based approach to our
merchandising plans and our promotional programs; we have also implemented
changes in our price management processes and strategy. We are redirecting our
investment into new programs, which are more consistent with what consumers want
in terms of product offerings, promotions and prices.
We also continue to pursue improvements and efficiencies in our supply
chain and store operations. We are collaborating with our business partners,
such as C&S Wholesale Grocers, Inc. ("C&S"), as well as the labor unions to
identify and implement efficiencies on an on-going basis. With these
efficiencies, we are going to reinvest in improving customer services. We have
two open labor union contracts and five labor union contracts that expire in
fiscal 2010 and, therefore, are subject to negotiation. It is uncertain whether
the results of such negotiations will be favorable or unfavorable to our
Company.
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 Various operating factors and general economic conditions affecting the
food industry may affect our business and may adversely affect our
operating results.
The retail food and food distribution industries and the operation of
our business, 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 additional impairment charges on goodwill, intangible
assets and/or long-lived assets.
Changes in the general business and economic conditions in our markets,
including the rate of inflation, population growth, the fluctuating
prices of oil and gas, the nature and extent of continued consolidation
in the food industry and the unemployment rate in the markets in which
we operate, may negatively affect earnings and sales growth. General
economic changes may also affect the shopping habits and buying
patterns of our customers, which could affect sales and earnings.
Our ability to achieve profitability will be affected by, among other
things: (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
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The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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 We face a high level of competition, including the threat of further
consolidation in the food industry, which could adversely affect our
sales and future profits.
The retail food business is extremely competitive and is characterized
by high inventory turnover and narrow profit margins. The retail food
business is subject to competitive practices that may affect the prices
at which we are able to sell products at our retail locations, sales
volume, and our ability to attract and retain customers. In addition,
the nature and extent of consolidation in the retail food industry
could affect our competitive position in the markets we serve.
Our retail food business and the grocery retailing industry continue 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. The recent
deflation in food prices and increasingly competitive markets have made
it difficult generally for grocery store operators to achieve
comparable store sales gains. Because sales growth has been difficult
to attain, our competitors have attempted to maintain market share
through increased levels of promotional activities and discount
pricing, creating a more difficult environment in which to consistently
increase year-over-year sales. 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 such as selling inventory below costs to drive
overall increased sales. Our continued success is dependent upon our
ability to effectively compete in this industry and to reduce operating
expenses, including managing health care and pension costs contained in
our collective bargaining agreements. The competitive practices and
pricing in the food industry generally and particularly in our
principal markets may cause us to reduce our prices in order to gain or
maintain our market share of sales, thus reducing margins.
Our in-store pharmacy business is also subject to intense competition.
In particular, an adverse trend for drug retailing has been the
significant growth in mail-order and Internet-based prescription
processors, including importation from Canada and other countries. Due
to the rapid rise in drug costs experienced in recent years, mail-order
prescription distribution methods are perceived by employers and
insurers as being less costly than traditional distribution methods and
are being mandated by an increasing number of third party pharmacy
benefit managers, many of which also own and manage mail-order
distribution operations. As a result, some labor unions and employers
are requiring, and others may encourage, that their members or
employees obtain medications from mail-order pharmacies which offer
drug prescriptions at prices that are lower than we are able to offer.
In addition to these forms of mail-order distribution, there has also
been increasing competition from a number of Internet-based
prescription distributors, which specialize in offering certain high
demand lifestyle drugs at deeply discounted prices, and importers from
Canada and other foreign countries. These alternate distribution
channels have acted to restrain the rate of sales growth for
traditional chain drug retailers in the last few years. There can be no
assurance that our
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The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
efforts to offset the effects of alternate distribution channels and
eligibility changes will be successful.
o We are concentrated in the New York, New Jersey and Philadelphia
metropolitan areas and, as a result, our business is significantly
influenced by the economic conditions and other characteristics of
these areas.
We are vulnerable to economic downturns in the New York, New Jersey and
Philadelphia metropolitan areas, in addition to those that may affect
the country as a whole, as well as other factors that may impact that
region, such as the regulatory environment, the cost of real estate,
insurance, taxes and rent, reliance on the financial industry,
increasing unemployment, weather and natural catastrophes,
demographics, the availability of labor, and geopolitical factors.
We cannot predict economic conditions in this region, and factors such
as interest rates, energy costs and unemployment rates may adversely
affect our sales which may lead to higher losses. Any unforeseen events
or circumstances that affect the area could also materially adversely
affect our revenues and profitability. Further, since we are
concentrated in densely populated metropolitan areas, opportunities for
future store expansion may be limited, which may adversely affect our
business and results of operations.
o Our vendors may shorten our payment terms, which would impair our
ability to effectively manage our cash flow.
We have negotiated payment terms with most of our vendors. However,
there can be no assurance that we will be able to maintain such terms
in the future.
o We rely on C&S for a substantial amount of our products.
Pursuant to the terms of a long-term supply agreement, which our
Company entered into in conjunction with the sale of its distribution
business and certain of its assets to C&S, we currently acquire most of
our saleable inventory, including groceries and perishables, from one
supplier, C&S. During the twelve months ended February 27, 2010,
products supplied from C&S accounted for approximately 73% of our
Company's supermarket inventory purchases. Our agreement with C&S,
during which we expect to acquire a substantial portion of our saleable
inventory from C&S, expires on September 29, 2018. Although we have not
experienced difficulty in the supply of these products to date, supply
interruptions by C&S could occur in the future. Any significant
interruption in this supply stream, either as a result of disruptions
at C&S or if our supply agreement with C&S were terminated for any
reason, could have a material adverse effect on our business and
results of operations. We are therefore subject to the risks of C&S's
business, including potential labor disruptions at C&S facilities,
increased regulatory obligations and distribution problems which may
affect C&S's ability to obtain products. While we believe that other
suppliers could provide similar products on reasonable terms, they are
limited in number. In addition, a change in suppliers could cause a
delay in distribution and a possible loss of sales, which would affect
operating results adversely.
o Our renovation and expansion plans may not be successful, and though we
plan to convert many of our conventional stores to a different format,
we may not have the funds to do so.
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The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
A key to our business strategy has been, and will continue to be, the
renovation and expansion of total selling square footage, including the
continued transition of our existing conventional stores into different
formats. Our planned capital expenditures for fiscal 2010 relate
primarily to improving conditions in our existing stores. Our capital
expenditures for fiscal 2010 could differ from our
estimates if development and remodel costs vary from those budgeted, if
performance varies significantly from expectations or if we are
unsuccessful in acquiring suitable sites for new stores. We expect that
cash flows from operations, supplemented by borrowing capacity under
our credit facility and the availability of capital lease financing
will be sufficient to fund our capital renovation and expansion
programs; however, in the event that cash flows from operations
decrease we may decide to limit our future capital expenditure program.
In addition, the greater financial resources of some of our competitors
for acquiring real estate sites could adversely affect our ability to
open new stores. The inability to renovate our existing stores, add new
stores or increase the selling area of existing stores could adversely
affect our business, our results of operations and our ability to
compete successfully.
o We may be adversely affected by unexpected changes in the insurance
market or changes in factors affecting our self-insurance reserve
estimates.
We use a combination of self-insurance and insurance coverage to
provide for the potential liabilities for general liability, property
losses, fleet liability, workers' compensation, employee benefits and
directors and officers. There is no assurance that we will be able to
continue to maintain our insurance coverage or obtain comparable
coverage at a reasonable cost. Self-insurance reserves are determined
based on actual claims experience and actuarially estimated claims
incurred but not reported. Actuarial projections are subject to a high
degree of variability, due to fluctuations in future interest and
inflation rates, future economic conditions, litigation trends, benefit
level changes, changes in state regulations, and changes in other
factors. An increase in the frequency of claims, cost of claims or
changes in actuarial assumptions could adversely affect our results of
operations and financial condition.
o We may be adversely affected by rising utility and fuel costs.
Rising 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. 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 Current economic conditions have been, and may continue to be volatile.
Many financial institutions have in the past reduced and, in some
cases, ceased to provide funding to borrowers. Based on information
available to us, we have no indication that the financial institutions
acting as lenders under our credit facility 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.
12
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
o We have certain substantial equity holders that may support strategies
that are opposed to your interests or with which you disagree.
Tengelmann, our Company's former majority stockholder, owns
beneficially and of record a substantial percentage of our common stock
on a fully diluted basis, which further increased upon its
purchase of convertible preferred stock in fiscal 2009. As a result of
this equity ownership and our stockholder agreement with Tengelmann,
Tengelmann has the power to significantly influence the results of
stockholder votes and the election of our board of directors, as well
as transactions involving a potential change of control of our Company.
Tengelmann may support strategies and directions for our Company which
are in its best interests but which are opposed to other stakeholders.
So long as Tengelmann retains sufficient ownership of our Company's
voting power, Tengelmann has rights to board representation, as well as
consent rights in connection with certain major Company actions
including changes to Company policies and organizational documents,
dispositions and financing activity.
Upon completion of the convertible preferred stock issuance, Yucaipa
became a significant holder of our common stock on a fully diluted
basis. According to the stockholder's agreement with Yucaipa, as long
as Yucaipa retains sufficient ownership of our Company's voting power,
Yucaipa has rights to board representation, as well as consent rights
in connection with certain major Company actions including changes to
Company policies and organizational documents, dispositions and
financing activity. Yucaipa may support strategies and directions for
our Company which are in its best interests but which are opposed to
other stakeholders.
o We could be affected if consumers lose confidence in the food supply
chain or the quality and safety of our products.
We could be adversely affected if consumers lose confidence in the
safety and quality of the food supply chain. Adverse publicity about
these concerns, whether or not ultimately based on fact, and whether or
not involving products sold at our stores, could discourage consumers
from buying our products. 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.
To the extent that we are unable to maintain appropriate sanitation and
quality standards in our stores, food safety and quality issues could
involve expense and damage to our various brand names. Additionally,
concerns about the safety or effectiveness of certain drugs or negative
publicity surrounding certain categories of drugs may have a negative
impact on our pharmacy sales.
o Threats or potential threats to security of food and drug safety may
adversely affect our business.
Acts or threats of war or terror or other criminal activity directed at
the grocery or drug store industry, the transportation industry, or
computer or communications systems, whether or not directly involving
our stores, could increase our security costs, adversely affect our
operations, or impact general consumer behavior and spending as well as
customer orders and our supply chain. Other events that give rise to
actual or potential food contamination, drug contamination, or
food-borne illnesses could have an adverse effect on our operating
results.
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The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
o Various aspects of our business are subject to federal, state and local
laws and regulations. Our compliance with these regulations may require
additional expenditures and could adversely affect our ability to
conduct our business as planned. Changes in these laws and regulations
could increase our compliance costs.
We are subject to federal, state and local laws and regulations
relating to zoning, land use, environmental protection, work place
safety, public health, community right-to-know, beer and wine
sales, pharmaceutical sales and gasoline station operations. A number
of states and local jurisdictions regulate the licensing of
supermarkets, including beer and wine license grants. In addition,
under certain local regulations, we are prohibited from selling beer
and wine in certain of our stores. Employers are also subject to laws
governing their relationship with employees, including minimum wage
requirements, overtime, working conditions, disabled access and work
permit requirements. Compliance with these laws could reduce the
revenue and profitability of our supermarkets and could otherwise
adversely affect our business, financial condition or results of
operations. In addition, any changes in these laws or regulations could
significantly increase our compliance costs and adversely affect our
results of operations, financial condition and liquidity.
A number of federal, state and local laws exist that impose burdens or
restrictions on owners with respect to access by disabled persons. Our
compliance with these laws may result in modifications to our
properties, or prevent us from performing certain further renovations.
Our pharmacy business is subject to certain government laws and
regulations, including those administered and enforced by Medicare,
Medicaid, the Drug Enforcement Administration (DEA), Consumer Product
Safety Commission, U.S. Federal Trade Commission and Food and Drug
Administration. For example, the conversion of various prescription
drugs to over-the-counter medications may reduce our pharmacy sales,
and if the rate at which new prescription drugs become available slows
or if new prescription drugs that are introduced into the market fail
to achieve popularity, our pharmacy sales may be adversely affected.
The withdrawal of certain drugs from the market may also adversely
affect our pharmacy business. Changes in third party reimbursement
levels for prescription drugs, including changes in Medicare Part D or
state Medicaid programs, could also reduce our margins and have a
material adverse effect on our business. In order to dispense
controlled substances, we are required to register our pharmacies with
the DEA and to comply with security, recordkeeping, inventory control
and labeling standards.
In addition, our pharmacy business is subject to local regulations in
the states where our pharmacies are located, applicable Medicare and
Medicaid regulations and state and federal prohibitions against certain
payments intended to induce referrals of patients or other health care
business. Failure to properly adhere to these and other applicable
regulations could result in the imposition of civil, administrative and
criminal penalties including suspension of payments from government
programs; loss of required government certifications; loss of
authorizations to participate in, or exclusion from, government
reimbursement programs such as Medicare and Medicaid; loss of licenses;
significant fines or monetary penalties for anti-kickback law
violations, submission of false claims or other failures to meet
reimbursement program requirements and could adversely affect the
continued operation of our business. Our pharmacy business is also
subject to the Health Insurance Portability and Accountability Act,
including its obligations to protect the confidentiality of certain
patient information and other obligations. Failure to properly adhere
to these requirements could result in the imposition of civil as well
as criminal penalties.
14
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
o Certain risks are inherent in providing pharmacy services, and our
insurance may not be adequate to cover any claims against us.
Pharmacies are exposed to risks inherent in the packaging and
distribution of pharmaceuticals and other healthcare products, such as
risks of liability for products which cause harm to consumers. Although
we maintain professional liability insurance and errors and omissions
liability insurance, we cannot assure you that the coverage limits
under our insurance programs will be adequate to protect us against
future claims, or that we will be able to maintain this insurance on
acceptable terms in the future. Our results of operations, financial
condition or cash flows may be adversely affected if in the future our
insurance coverage proves to be inadequate or unavailable, or there is
an increase in liability for which we self-insure, or we suffer harm
to our reputation as a result of an error or omission.
o Litigation, legal or administrative proceedings and other claims could
expose us to significant liabilities and thus negatively affect our
financial results.
We are, from time to time, subject to various claims, administrative
proceedings and litigation, which if determined adversely to us could
negatively affect our financial results. 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 business and our results of operation and
earnings.
o We are affected by increasing labor, benefit and other operating costs
and a competitive labor market and are subject to the risk of unionized
labor disruptions.
Our financial performance is greatly influenced by increasing wage and
benefit costs, including pension and health care costs, a competitive
labor market and the risk of labor disruption of our highly unionized
workforce.
We have approximately 45,000 employees, of which approximately 69% are
employed on a part-time basis. Over the last few years, increased
benefit costs have caused our Company's labor costs to increase. We
cannot assure you that our labor costs will not continue to increase,
or that such increases can be recovered through increased prices
charged to customers. Any significant failure to attract and retain
qualified employees, to control our labor costs or to recover any
increased labor costs through increased prices charged to customers
could have a material adverse effect on our results of operations.
As of February 27, 2010, approximately 92% of our employees were
represented by unions and covered by collective bargaining or similar
agreements that are subject to periodic renegotiations. Although we
believe that we will successfully negotiate new collective bargaining
agreements when our agreements expire, these negotiations may not prove
successful, may result in a significant increase in the cost of labor
or may result in the disruption of our operations.
We are currently negotiating or will negotiate seven labor agreements
covering approximately 8,100 employees in fiscal 2010. In each of these
negotiations, rising health care and pension costs will be important
issues, as will the nature and structure of work rules. The actual
terms of the renegotiated collective bargaining agreements and/or a
prolonged work stoppage affecting a
15
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
substantial number of stores could have a material adverse effect on
our results. We cannot assure you that our labor negotiations will
conclude successfully or that any work stoppage or labor disturbances
will not occur. We expect that we will incur additional costs and face
increased competition for customers during any work stoppages or labor
disturbances, which would adversely affect operating results.
o We participate in various multi-employer pension plans for
substantially all employees represented by unions.
We will be required to make contributions to these multi-employer
pension plans in amounts established under collective bargaining
agreements. Pension expenses for these plans, which are recognized as
contributions, are currently funded. Benefits generally are based on a
fixed amount for each year of service. We contributed $62.3 million,
$48.2 million and $34.4 million to multi-employer pension plans in
fiscal 2009, fiscal 2008 and fiscal 2007, respectively. 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 us. To date, we have not
established any liabilities for future withdrawals because such
withdrawals from these plans are not probable and the amount cannot be
estimated. As a result, we expect that contributions to these plans may
increase. Additionally, the benefit levels and related items will be
issues in the negotiation of our collective bargaining agreements.
Under current law, an employer that withdraws or partially withdraws
from a multi-employer pension plan may incur withdrawal liability to
the plan, which represents the portion of the plan's underfunding that
is allocable to the withdrawing employer under complex actuarial and
allocation rules. The amount of any increase or decrease in our
required contributions to these multi-employer pension plans will
depend upon the outcome of collective bargaining, actions taken by
trustees who manage the plans affecting the costs of future service
benefits, government regulations and the actual return on assets held
in the plans, among other factors.
o We face the risk of being held liable for environmental damages that
have or may occur.
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
statutes, responsibility for the entire cost of cleanup of a
contaminated site can be imposed upon any current or former site owners
or operators, or upon any party who sent waste to the site, regardless
of the lawfulness of the original activities that led to the
contamination. From time to time we have been named as one of many
potentially responsible parties at Superfund sites, although our share
of liability has typically been de minimis. Although we believe that we
are currently in substantial compliance with applicable environmental
requirements, future developments such as more aggressive enforcement
policies, new laws or discoveries of unknown conditions may require
expenditures that may have a material adverse effect on our business
and financial condition.
o If any of the assignees under our operating leases were to become
unable to continue making payments under the assigned leases we could
be required to assume the lease obligation.
16
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
We are the primary obligor for a significant number of long-term leases
related to closed stores and warehouses. When possible, we have
assigned these leases to third parties (the "Assigned Leases").
However, our ability to sublease or assign these leases depends on the
economic conditions in the real estate markets in which these leases
are located. When the Assigned Leases were assigned, we generally
remained secondarily liable with respect to these lease obligations. As
such, if any of the assignees were to become unable to continue making
payments under our Assigned Leases, we could be required to assume the
lease obligation. As of February 27, 2010, 188 of our Assigned Leases
remained in place. Assuming that each respective assignee became unable
to continue to make payments under an Assigned Lease, an event we
believe to be unlikely, we estimate our maximum potential obligation
with respect to the Assigned Leases to be approximately
$572.1 million as of February 27, 2010, an amount which could be
partially or totally offset by reassigning or subletting such leases.
In the event the assignees do not make payments under any or all of the
Assigned Leases, we could be required to assume any or all of the lease
obligations, which could materially adversely affect our financial
condition or results of operations.
o The loss of key personnel could negatively affect our business.
We are dependent upon a number of key personnel and members of
management. If we were to lose the services of a significant number of
key personnel or management within a short period of time, this could
have a material adverse effect on our operations. We do not maintain
key person insurance on any personnel or management. Our continued
success is also dependent upon our ability to attract and retain
qualified personnel to meet our future growth needs. We face intense
competition for qualified personnel, many of whom are subject to offers
from competing employers. We may not be able to attract and retain
necessary team members to operate our business.
o Any difficulties we experience with respect to our information
technology systems could lead to significant costs or losses.
We have large, complex information technology systems that are
important to our business operations. We could encounter difficulties
developing new systems or maintaining and upgrading existing systems.
Such difficulties could lead to significant expenses or losses due to
disruption in our business operations.
Despite our considerable efforts to secure and maintain our computer
network, security could be compromised, confidential information could
be misappropriated, or system disruptions could occur. This could lead
to disruption of operations, loss of sales or profits or cause us to
incur significant costs to reimburse third parties for damages.
o We may make acquisitions and consequently face integration, management
diversion and other risks.
We may pursue acquisitions in the future. Any future acquisitions could
be of significant size and may involve either domestic or international
parties. To acquire and integrate a separate organization would divert
management attention from other business activities. This diversion,
together with the difficulties we may encounter in integrating an
acquired business, could have a material adverse effect on our
business, financial conditions or results of operations. Moreover, we
may not realize any of the anticipated benefits of an acquisition and
integration costs may exceed anticipated amounts. In connection with
future acquisitions, we may also assume the liabilities of the
businesses
17
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
we acquire. These liabilities could materially and adversely
affect our business and financial condition.
o Our substantial indebtedness could impair our financial condition and
our ability to fulfill our debt obligations, including our obligations
under the notes.
We have substantial indebtedness. As of February 27, 2010, we had total
indebtedness of $1,141.1 million, consisting of approximately $132.9
million outstanding under our credit facility, $253.7 million of senior
secured notes (net of original issue discount), $603.9 million of other
outstanding notes, approximately $150.6 million outstanding under
capital lease obligations. Our indebtedness could have important
consequences to you. For example, it could: (i) make it more difficult
for us to
satisfy our obligations with respect to the notes and our other
indebtedness, which could in turn result in an event of default on the
notes or such other indebtedness, (ii) require us to dedicate a
substantial portion of our cash flow from operations to debt service
payments, thereby reducing the availability of cash for working
capital, capital expenditures, acquisitions, general corporate purposes
or other purposes, (iii) impair our ability to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes, (iv)
diminish our ability to withstand a downturn in our business, the
industry in which we operate or the economy generally, (v) limit our
flexibility in planning for, or reacting to, changes in our business
and the industry in which we operate, and (vi) place us at a
competitive disadvantage compared to certain competitors that have
proportionately less debt.
If we are unable to meet our debt service obligations, we could be
forced to restructure or refinance our indebtedness, seek additional
equity capital or sell assets. We may be unable to obtain such
financing or sell assets on satisfactory terms, or at all.
In addition, at February 27, 2010, we had $132.9 million of variable
rate debt. 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 Provisions in our amended and restated articles of incorporation permit
our board of directors to issue preferred stock without first obtaining
stockholder approval which could be dilutive to common stockholders and
affect the price of our common stock.
Our amended and restated articles of incorporation permit our board of
directors to issue preferred stock without first obtaining stockholder
approval. If we issue preferred stock, these additional securities may
have dividend or liquidation preferences senior to our common stock. If
we issued additional 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.
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.
18
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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.
FISCAL 2009 COMPARED WITH FISCAL 2008
- -------------------------------------
The following table summarizes our results of operations for fiscal
2009 compared to fiscal 2008:
Favorable
Fiscal 2009 Fiscal 2008 (1) (unfavorable) % Change
----------- --------------- ------------- --------
(in millions, except percentages and per share data)
Sales $ 8,813.6 $ 9,516.2 $ (702.6) (7.4%)
(Decrease) increase in comparable
store sales (4.3%) 2.0% NA NA
Loss from continuing operations $ (780.7) $ (89.6) $ (691.1) >(100%)
Loss from discontinued operations $ (95.8) $ (53.7) $ (42.1) (78.4%)
Net loss $ (876.5) $ (143.3) $ (733.2) >(100%)
Net loss per share - basic $ (16.59) $ (2.81) $ (13.78) >(100%)
Net loss per share - diluted $ (29.34) $ (5.41) $ (23.93) >(100%)
Non-GAAP Financial Data:
- -----------------------
Adjusted EBITDA (2) $ 223.5 $ 332.7 $ (109.2) (32.8%)
- -------------------------------------------------------
(1) Fiscal 2008 reflects increased interest expense of $3.5 million for our
6.750% convertible senior notes from the amount recorded in our Form
10-K for fiscal 2008 as a result of the retrospective application of
the new accounting guidance relating to convertible debt, which we
adopted during the first quarter of fiscal 2009. Refer to Note 10 of
our Consolidated Financial Statements - Indebtedness and Other
Financial Liabilities for more information.
(2) For an explanation of Adjusted EBITDA, refer to the Non-GAAP Financial
Measures - Adjusted EBITDA discussion that follows.
Average weekly sales per supermarket were approximately $411.2 thousand
for fiscal 2009 versus $423.8 thousand for the corresponding period of the prior
year, a decrease of 3.0% primarily due to the overall decline in our sales
resulting from the current economic environment and its negative effect on
consumer spending, as well as a lower rate of inflation.
SALES
- -----
Fiscal 2009 Fiscal 2008
----------- -----------
Sales (in thousands)
Fresh $4,402,044 $4,806,467
Pathmark* 3,855,251 4,173,017
Gourmet 273,060 281,767
Other 283,213 254,935
---------- ----------
Total sales $8,813,568 $9,516,186
========== ==========
- ---------------------------
* Includes sales from A&P stores that have been subsequently converted to
Pathmark stores.
19
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
Sales decreased by $702.6 million, from $9,516.2 million in fiscal 2008
to $8,813.6 million in fiscal 2009, primarily due to a decline in comparable
store sales, reflecting decreased volume and the impact of accelerated retail
price deflation mainly resulting from increased promotional spending during
fiscal 2009. The decrease in sales during fiscal 2009 was also attributable to
the absence of sales resulting from store closures and sales generated during
the 53rd week included in fiscal 2008, partially offset by sales generated by
our new stores.
The sales decline in our Fresh segment of $404.4 million was primarily
related to a decline in the comparable store sales of $231.8 million, the
absence of sales resulting from store closures of $88.8 million and the absence
of the additional sales recorded during the 53rd week in fiscal 2008 of $83.8
million. The decrease in sales in our Pathmark segment of $317.8 million
was primarily due to a decline in comparable store sales of $181.6 million,
the absence of sales resulting from store closures of $104.5 million, and
the absence of sales recorded during the 53rd week in fiscal 2008 of $74.9
million, partially offset by an increase in sales from new stores of $43.2
million. Sales generated by our Gourmet segment decreased by $8.7 million,
primarily due to the absence of sales recorded during the 53rd week in
fiscal 2008 of $5.5 million and a decline in comparable store sales of $3.2
million. The sales increase of $28.3 million in our Other segment,
representing our Discount and our Wine, Beer & Spirits businesses, was
primarily driven by increased sales generated by our Discount business,
primarily attributable to sales from three new stores of $21.1 million and
increased comparable store sales of $10.1 million. Refer to Note 20 to our
Consolidated Financial Statements - Segments for further discussion of our
reportable segments.
GROSS MARGIN
- ------------
Gross margin as a percentage of sales decreased 25 basis points from
30.51% in fiscal 2008 to 30.26% for fiscal 2009, reflecting lower margins from
our Pathmark segment, partially offset by improved margin rates from our Fresh
and Gourmet segments.
The following table details how volume and rate impact the gross margin
dollar decrease from fiscal 2008 to fiscal 2009 (in millions):
Sales Volume Rate Total
------------ ---- -----
Total Company $ (214.4) $ (21.9) $ (236.3)
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
- ---------------------------------------------------
Store operating, general and administrative ("SG&A") expense was
$2,790.2 million or 31.66% as a percentage of sales for fiscal 2009, as compared
to $2,949.8 million or 31.00% as a percentage of sales for fiscal 2008.
SG&A expenses for fiscal 2009 included (i) insurance reserve adjustment
of $40.4 million, or 46 basis points, (ii) net real estate related costs of
$37.1 million, or 42 basis points, (iii) net restructuring and other costs of
$16.7 million, or 19 basis points (which includes $14.6 million of severance
costs relating to labor rationalization initiatives during fiscal 2009), (iv)
stock-based compensation of $5.7 million, or 6 basis points and (v) pension
withdrawal costs of $2.4 million, or 3 basis points.
SG&A expenses for fiscal 2008 included (i) net real estate related
costs of $40.2 million, or 42 basis points; (ii) net restructuring and other
costs of $38.4 million, or 41 basis points; (iii) pension obligation costs of
$28.9 million, or 30 basis points, recorded in connection with our withdrawal
from the UFCW
20
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
Local 342 Amalgamated Pension Plan, and (iv) stock-based compensation costs
of $5.7 million, or 6 basis points.
Excluding the items listed above, SG&A as a percentage of sales
increased 69 basis points for fiscal 2009 as compared to fiscal 2008, primarily
due to lower sales leverage on fixed costs, including increased labor costs of
57 basis points, increased advertising related costs of 13 basis points and
increased occupancy expenses of 8 basis points, partially offset by a decrease
in corporate and banner administrative expenses of 20 basis points.
During fiscal 2009 and fiscal 2008, we recorded impairment losses on
long-lived assets relating to closure or conversion of stores in the normal
course of business of $6.5 million and $14.1 million,
respectively. 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 impairment of
assets that are held and used.
GOODWILL, TRADEMARK AND LONG-LIVED ASSET IMPAIRMENT
- ---------------------------------------------------
As a result of experiencing increasing cash flow losses within certain
asset groupings, we determined that triggering events occurred during the third
and fourth quarters of fiscal 2009 for testing the related asset groups'
long-lived assets for potential impairment. As a result of our testing, we
recorded impairment charges aggregating $65.2 million, primarily attributable to
favorable leases and other owned property, $40.8 million of which was recorded
in the third quarter and $24.4 million of which was recorded in the fourth
quarter of fiscal 2009. Refer to Note 5 to our Consolidated Financial Statements
- - Valuation of Long-Lived Assets for additional information.
During fiscal 2009, we recorded goodwill impairment charges of $345.5
million and impaired our Pathmark trademark by $66.4 million. During the third
quarter of fiscal 2009, due to the severity and duration of operating losses
within the Pathmark reporting unit, changes in our management's long-term
forecasts relating to the Pathmark reporting unit, and the significant
impairment of long-lived assets within the Pathmark reporting unit, we concluded
that an interim triggering event had occurred for purposes of determining
whether any portion of our goodwill and trademark balance recorded within our
Pathmark segment has been impaired. As a result, we impaired the entire $321.8
million goodwill balance and $49.9 million of the trademark balance of $127.3
million within our Pathmark reporting unit. During the fourth quarter of fiscal
2009, we performed our annual goodwill impairment testing for our remaining
reporting units (other than Pathmark), which resulted in impairing the entire
$23.7 million goodwill balance attributable to our South (SuperFresh) reporting
unit. In addition, we performed our annual impairment testing of our
indefinite-lived intangible asset, and as a result of further lowering our
anticipated revenue projections, we concluded that an additional impairment of
$16.5 million was required for our Pathmark trademark. Refer to Note 3 to our
Consolidated Financial Statements - Goodwill and Other Intangible Assets for
additional information.
We believe our estimates used to perform the impairment analysis of our
goodwill, trademark and long-lived assets are appropriate given the current
market conditions; however, future impairment charges could be required due to
changes in the market conditions or other factors relating to our performance.
21
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
SEGMENT INCOME
- --------------
Fiscal 2009 Fiscal 2008
----------- -----------
Segment income (in thousands)
Fresh $ 111,582 $ 148,617
Pathmark* (46,326) 19,012
Gourmet 25,691 24,866
Other 1,472 2,184
--------- ---------
Total segment income $ 92,419 $ 194,679
========= =========
- -------------------------------------------------------
* Includes results from A&P stores that have been subsequently converted
to Pathmark stores.
Segment income decreased $102.3 million from $194.7 million in fiscal
2008 to $92.4 million in fiscal 2009. The decrease in segment income of $37.0
million for our Fresh segment was primarily driven by lower sales and gross
margin, partially offset by negotiated cost reductions and reduced labor
and occupancy costs. Our Pathmark segment experienced a decline in segment
income of $65.3 million, which was attributable to lower sales and gross
margins, primarily resulting from higher promotional spending and
reductions in everyday prices for this segment, partially offset by reduced
productive labor and occupancy costs. Segment income for our Gourmet
business improved by $0.8 million, as the decline in sales was more than
offset by the improved gross margin rate and reduced productive labor and
occupancy costs. Segment income in our Other segment, representing our
Discount and our Wine, Beer & Spirits businesses, declined by $0.7 million,
as the increase in its sales was more than offset by increased expenses,
including productive labor and occupancy costs. Refer to Note 20 - Segments
to our Consolidated Financial Statements for further discussion of our
reportable operating segments.
ADJUSTED EBITDA
- ---------------
Adjusted EBITDA declined $109.2 million from $332.7 million in fiscal
2008 to $223.5 million during fiscal 2009, primarily due to the $102.3 million
decline in our segment income (refer to the above Segment Income discussion).
Our management uses Adjusted EBITDA as a supplemental non-GAAP
financial measure. Refer to Non-GAAP Financial Measures-Adjusted EBITDA
discussion that follows for further description and reconciliations to the
appropriate GAAP financial measures.
NONOPERATING INCOME
- -------------------
During fiscal 2009 and fiscal 2008, we recorded unfavorable fair value
adjustments of $9.2 million and favorable fair value adjustments $101.3 million,
respectively, relating to our Series B warrants acquired in connection with our
purchase of Pathmark. In addition, during fiscal 2008, we recorded $15.6 million
of favorable fair value adjustments associated with our Series A warrants that
were exercised on May 7, 2008, the conversion features related to our 5.125%
convertible senior notes, our 6.750% convertible senior notes, and our financing
warrants issued in connection with our convertible senior notes, which were
marked to market until stockholder approval authorizing sufficient shares to be
available for their issuance was obtained on June 26, 2008. These adjustments
are primarily a function of fluctuations in the market price of our Company's
common stock.
22
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
INTEREST EXPENSE
- ----------------
Interest expense increased $35.5 million from $157.6 million in fiscal
2008 to $193.1 million in fiscal 2009, primarily due to $17.6 million of
interest expense recorded during fiscal 2009, to reflect the impact of the lower
discount rate used to revalue our GHI contractual obligation at February 27,
2010 than at February 28, 2009, which is derived each period from published
zero-coupon AA corporate bond yields, as well as interest accretion relating to
this obligation. During fiscal 2009, we also recorded $18.3 million of interest
expense and bond issue cost amortization relating to our $260 million 11.375%
senior secured notes due 2015 that were issued in August 2009 and $3.9 million
of interest expense relating to dividends and issuance cost amortization on the
portion of our preferred stock issued in August 2009 that was classified as a
liability prior to obtaining shareholder approval authorizing its convertibility
on December 15, 2009. These increases in interest expense were partially offset
by $6.5 million of reduced interest
expense relating to bank borrowings resulting from our repayments of a portion
of our variable debt using proceeds from the August 2009 offerings of senior
notes and preferred stock.
During fiscal 2009 and fiscal 2008, we recorded additional non-cash
interest expense of $4.2 million and $3.5 million, respectively, relating to our
$255 million aggregate principal amount of the 6.750% Convertible Senior Notes
that were issued in December 2007, as a result of our retrospective adoption of
the new accounting guidance relating to convertible debt instruments with cash
settlement features during fiscal 2009. Refer to Note 10 of our Consolidated
Financial Statements - Indebtedness and Other Financial Liabilities for
additional information.
INCOME TAXES
- ------------
Benefit from income taxes from continuing operations for fiscal 2009
was $22.0 million compared to a provision of $2.7 million for fiscal 2008.
Consistent with the prior year, we continue to record a valuation allowance
against our net deferred tax assets.
The effective tax rates on continuing operations of (2.7%) for fiscal
2009 varied from the statutory rate of 35%, primarily due to state and local
income taxes, an increase in our valuation allowance, the remeasurement of our
uncertain tax positions, and the impact of the Pathmark financing and fiscal
2009 impairments. Approximately $16 million of the net income tax benefit
resulted from the write-off of the deferred tax liability associated with the
Pathmark trademark, an indefinite-lived intangible asset, as a result of its
impairment during fiscal 2009.
The effective tax rate on continuing operations of 3.1% for fiscal 2008
varied from the statutory rate of 35%, primarily due to state and local income
taxes, an increase in our valuation allowance and the impact of the Pathmark
financing.
DISCONTINUED OPERATIONS
- -----------------------
The loss from operations of discontinued businesses for fiscal 2009 of
$95.8 million increased from loss from operations of discontinued business of
$58.4 million for fiscal 2008, primarily due to higher occupancy related
expenses recorded during fiscal 2009 due to changes in our estimation of such
costs resulting from continuing deteriorating conditions in the Midwest real
estate market, as well as a $13.0 million increase in our worker's compensation
and general liability reserves relating to discontinued
23
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
operations, which was associated with a negative development of prior year
claims and the related state assessment for such claims. The $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 due to the settlement of a contingent note whose value 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, during fiscal 2008, we recorded a gain of $1.8 million relating to the
sale of land in the Greater New Orleans area.
FISCAL 2008 COMPARED WITH FISCAL 2007
- -------------------------------------
The following table summarizes our results of operations for fiscal
2008 compared to fiscal 2007:
Favorable
Fiscal 2008(1) Fiscal 2007(1) (unfavorable) % Change
-------------- -------------- ------------- --------
(in millions, except percentages and per share data)
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 $ (89.6) $ 86.6 $ (176.2) >(100%)
Loss from discontinued operations $ (53.7) $ (247.7) $ 194.0 78.3%
Net loss $ (143.3) $ (161.1) $ 17.8 11.0%
Net loss per share - basic $ (2.81) $ (3.70) $ 0.89 24.1%
Net loss per share - diluted $ (5.41) $ (4.23) $ (1.18) (27.9%)
Non-GAAP Financial Data:
- -----------------------
Adjusted EBITDA (2) $ 332.7 $ 165.4 $ 167.3 >100%
- -------------------------------------------------------
(1) Fiscal 2008 and fiscal 2007 results reflect increased interest expenses
of $3.5 million and $0.4 million, respectively, for our 6.750%
convertible senior notes from the amounts recorded in our Form 10-K for
fiscal 2008, as a result of the retrospective application of the new
accounting guidance relating to convertible debt, which we adopted
during the first quarter of fiscal 2009. Refer to Note 10 of our
Consolidated Financial Statements - Indebtedness and Other Financial
Liabilities for more information.
(2) For an explanation of Adjusted EBITDA, refer to the Non-GAAP Financial
Measures - Adjusted EBITDA discussion that follows.
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 Fiscal 2007
----------- -----------
Sales (in thousands)
Fresh $4,806,467 $4,828,657
Pathmark* 4,173,017 1,077,294
Gourmet 281,767 257,551
Other 254,935 231,836
Investment in Metro, Inc. - 5,792
---------- ----------
Total sales $9,516,186 $6,401,130
========== ==========
- -------------------------------------------------------
* Includes sales from A&P stores that have been subsequently converted to
Pathmark stores.
24
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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 Pathmark segment of
$3,095.7 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 $22.2 million was
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 $83.6 million, an increase in comparable store sales of $68.2 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 in our Other
segment, representing our Discount and our Wine, Beer & Spirits businesses, 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 20 of our Consolidated Financial Statements - Segments for further
discussion of our reportable segments.
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
- ---------------------------------------------------
SG&A expense was $2,949.8 million or 31.00% as a percentage of sales
for fiscal 2008, as compared to $2,009.1 million or 31.39% as a percentage of
sales for fiscal 2007.
SG&A expenses for fiscal 2008 included (i) net real estate related
costs of $40.2 million, or 42 basis points; (ii) net restructuring and other
costs of $38.4 million, or 41 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, and (iv) stock-based
compensation costs of $5.7 million, or 6 basis points.
SG&A expenses for fiscal 2007 included (i) net restructuring and other
costs of $19.3 million, or 31 basis points, (ii) a change in estimate for
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) stock-based compensation costs of $5.7 million, or 9 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.
25
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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.
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
- --------------
Fiscal 2008 Fiscal 2007
----------- -----------
Segment income (in thousands)
Fresh $ 148,617 $ 78,742
Pathmark* 19,012 19,518
Gourmet 24,866 16,613
Other 2,184 (2,931)
--------- ---------
Total segment income $ 194,679 $ 111,942
========= =========
- -------------------------------------------------------
* 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 Pathmark 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 $69.9 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
our Discount and our Wine, Beer & Spirits businesses, is primarily due to
improved sales and margin rates. Refer to Note 20 of our Consolidated Financial
Statements - Segments for further discussion of our reportable segments.
ADJUSTED EBITDA
- ---------------
Adjusted EBITDA increased $167.3 million from $165.4 million in
fiscal 2007 to $332.7 million during fiscal 2008, primarily due increased income
from our Fresh segment, as well as due to our acquisition of Pathmark during the
fourth quarter of fiscal 2007.
Our management uses Adjusted EBITDA as a supplemental non-GAAP
financial measure. Refer to Non-GAAP Financial Measures-Adjusted EBITDA
discussion that follows for further description and reconciliations to the
appropriate GAAP financial measures.
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.
26
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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 by $45.4 million from $112.2 million in
fiscal 2007 to $157.6 million in fiscal 2008, primarily due to the higher level
of indebtedness related to our acquisition of Pathmark, which was primarily
attributable to additional interest expense of $36.3 million ($15.2 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% convertible senior
notes due 2012 in December 2007, additional interest expense of $19.7
million 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.
During fiscal 2008 and fiscal 2007, we recorded additional non-cash
interest expense of $3.5 million and $0.4 million, respectively, relating to our
$255 million aggregate principal amount of the 6.750% Convertible Senior Notes
that were issued in December 2007, as a result of our retrospective adoption of
the new accounting guidance relating to convertible debt instruments with cash
settlement features during fiscal 2009. Refer to Note 10 to our Consolidated
Financial Statements - Indebtedness and Other Financial Liabilities for
additional information.
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.
27
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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 3.1% for fiscal 2008
varied from the statutory rate of 35%, primarily due to state and local income
taxes, an increase in our valuation allowance and the impact of the Pathmark
financing.
The effective tax rate on continuing operations of 6.1% 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 $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 due to the settlement of a contingent note whose value 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, during fiscal 2008, we recorded a gain of $1.8 million relating to the
sale of land in the Greater New Orleans area.
NON-GAAP FINANCIAL MEASURES - ADJUSTED EBITDA
- ---------------------------------------------
We present the non-GAAP financial measure of "Adjusted EBITDA" as a
supplemental measure in the financial information made available, as it is among
the primary measures used by our management to monitor and evaluate our
liquidity and the performance of our business, as well as for the planning and
forecasting of future periods. In addition, we have performance targets based on
our Adjusted EBITDA for determining our incentive compensation and
performance-based stock-based compensation. We believe that the presentation of
these measures is relevant and useful for investors because it allows investors
to view results in a manner similar to the method used by our management and
makes it easier to compare our results with other companies that have different
financing and capital structures or tax rates.
Adjusted EBITDA is not a presentation made in accordance with GAAP and
our computation of Adjusted EBITDA may vary from others in our industry.
Adjusted EBITDA has important limitations as analytical tools and should not be
considered in isolation, or as a substitute for analysis of our results as
reported under GAAP.
28
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
Adjusted EBITDA is defined as EBITDA adjusted to exclude the following,
if applicable: (i) goodwill, long-lived asset and intangible asset impairment,
(ii) net restructuring and other charges, (iii) real estate related activity,
(iii) stock based compensation, (iv) pension withdrawal costs, (v) LIFO
provision adjustments, (vi) insurance reserve adjustments, (vii) nonoperating
loss/income, (viii) Equity in earnings of Metro, Inc., (ix) Gain on sale of
Metro, Inc., (x) Loss on sale of Canadian operations and (xi) other items that
management considers nonoperating in nature and excludes when evaluating the
results of the ongoing business.
The following tables reconcile our non-GAAP measure of "Adjusted
EBITDA" to "Net loss" per our Consolidated Statements of Operations and to "Net
cash used in operating activities" per our Consolidated Statements of Cash Flows
prepared in accordance with GAAP (in thousands):
Fiscal 2009 Fiscal 2008 Fiscal 2007
--------------- --------------- --------------
Net Loss $ (876,498) $ (143,335) $ (161,082)
Loss from discontinued operations 95,848 53,730 247,660
(Benefit from) provision for income taxes (21,994) 2,683 5,592
Interest expense, net 192,889 157,000 97,868
Depreciation and amortization 245,460 260,991 178,152
------------ ------------ ------------
EBITDA (364,295) 331,069 368,190
Adjustments:
Goodwill, trademark and long-lived asset impairment 477,180 - -
Net restructuring and other 16,670 35,864 19,320
Real estate related activity 37,093 40,161 (14,057)
Stock-based compensation 5,667 5,694 8,977
Pension withdrawal costs 2,445 28,911 5,944
IT services agreement with Metro - - (5,792)
Insurance reserve adjustment 40,445 - 9,813
LIFO adjustment (842) 7,817 2,310
Nonoperating loss (income) 9,181 (116,864) (37,394)
Gain on sale of Metro, Inc. - - (184,451)
Equity in earnings of Metro, Inc. - - (7,869)
Loss on sale of Canadian operations - - 436
------------ ------------ ------------
Total adjustments to EBITDA 587,839 1,583 (202,763)
------------ ------------ ------------
Adjusted EBITDA $ 223,544 $ 332,652 $ 165,427
============ ============ ============
29
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
Fiscal 2009 Fiscal 2008 Fiscal 2007
--------------- --------------- --------------
Net cash used in operating activities $ (41,917) $ (1,299) $ (43,619)
Goodwill and trademark impairment (411,945) - -
Long-lived asset impairment (71,704) (14,069) (11,657)
Self-insurance reserve (53,452) - (9,813)
Net interest expense 192,889 157,000 97,868
Non-cash interest expense (43,032) (26,651) (5,979)
Financing fees related to bridge loan facility - - (25,421)
Depreciation and amortization on discontinued operations - - (8,637)
Asset disposition initiatives (55,675) (38,217) (135,107)
Occupancy charges for normal store closures (43,746) (21,711) (7,800)
(Loss) gain on disposal of owned property (153) (1,086) 13,743
Amortization of deferred real estate income 4,482 4,497 4,571
Loss from operations of discontinued operations 95,848 58,383 196,848
(Benefit from) provision for income taxes (21,994) 2,683 5,592
Deferred income tax benefit 15,985 - -
Employee benefit related (18,219) - -
Pension withdrawal costs (2,445) (28,911) (5,944)
LIFO adjustment 842 (7,817) (2,310)
Stock compensation expense (5,667) (5,694) (9,039)
Nonoperating (loss) income (9,181) 116,864 37,394
Loss on sale of Canadian operations - - (436)
Gain on sale of Metro, Inc. - - 184,451
Equity earnings of Metro, Inc. - - 7,869
Changes in working capital 21,031 37,140 8,180
Other assets 11,968 16,017 (20,776)
Other non-current liabilities 71,244 85,944 97,670
Other, net 546 (2,004) 542
------------ ------------ ------------
EBITDA (364,295) 331,069 368,190
Adjustments:
Goodwill, trademark and long-lived asset impairment 477,180 - -
Net restructuring and other 16,670 35,864 19,320
Real estate related activity 37,093 40,161 (14,057)
Stock-based compensation 5,667 5,694 8,977
Pension withdrawal costs 2,445 28,911 5,944
IT services agreement with Metro - - (5,792)
Insurance reserve adjustment 40,445 - 9,813
LIFO adjustment (842) 7,817 2,310
Nonoperating loss (income) 9,181 (116,864) (37,394)
Loss on sale of Canadian operations - - 436
Gain on sale of Metro, Inc. - - (184,451)
Equity earnings of Metro, Inc. - - (7,869)
------------ ------------ ------------
Total adjustments to EBITDA 587,839 1,583 (202,763)
------------ ------------ ------------
Adjusted EBITDA $ 223,544 $ 332,652 $ 165,427
============ ============ ============
30
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
- ---------------------------------------------------
Cash Flows
- ----------
The following table presents excerpts from our Consolidated Statements
of Cash Flows (in thousands):
Fiscal 2009 Fiscal 2008 Fiscal 2007
----------- ----------- -----------
Net cash used in operating activities $ (41,917) $ (1,299) $ (43,619)
Net cash used in investing activities (62,966) (64,530) (357,130)
Net cash provided by financing activities 181,934 140,549 415,274
Net Cash Used in Operating Activities
- -------------------------------------
Net cash used in operating activities increased by $40.6 million
during fiscal 2009 as compared to fiscal 2008. The increase in cash used in
operations is primarily driven by lower sales and the related margin income as
reflected in our $72.9 million decrease in net loss adjusted by non-cash
charges. Management has been able to partially reduce the impact of lost income
through a reduction in non-cash working capital of approximately $16.1 million
(described in more detail below). We also experienced a reduction in
self-insurance payments from 2008 of approximately $12.0 million, primarily due
to prior year insurance payments including settlements related to Pathmark that
had been delayed during transition of the acquisition.
Net cash used in operating activities decreased by $42.3 million during
fiscal 2008 as compared to fiscal 2007, primarily due to a $93.8 million
increase in our net loss adjusted by our non-cash charges and a lower decrease
in other non-current liabilities of $11.7 million. Partially offsetting this
increase was a $36.8 million increase in other assets, and a $29.0 million
decrease due to changes in our operating working capital excluding non-cash
charges.
Net Cash Used in Investing Activities
- -------------------------------------
Net cash used in investing activities decreased by $1.6 million from
fiscal 2008 to fiscal 2009, primarily due to a $29.6 million decrease in
property expenditures and $5.9 million received during fiscal 2009 from the
sale of a joint venture, partially offset by a $26.0 million decrease in
proceeds from disposal of property and a $6.7 million decrease in proceeds
from maturities of marketable securities. During fiscal 2009, property
expenditures totaled $86.4 million, reflecting 5 new stores, 6 remodels and
4 store conversions, as compared to $116.0 million during fiscal 2008,
which included 1 new store, 13 remodels, 16 major remodels, 1 major
enlargement and 2 store conversions. Our planned capital expenditures for
fiscal 2010 are expected to be between $75 million and $100 million and
will focus primarily on improving our existing supermarkets.
Net cash used in investing activities decreased by $292.6 million from
fiscal 2008 to fiscal 2007, primarily reflecting the absence of the fiscal 2007
payments of $985.5 million relating to the purchases of Pathmark stores and Best
Cellars Wine, Beer & Spirits stores, partially offset by the absence of the
fiscal 2007 net proceeds of $548.8 million from the sale of shares of Metro,
Inc., a decrease of $115.4 in proceeds from disposal of property and a decrease
in restricted cash of $46.0 million.
Net Cash Provided by Financing Activities
- -----------------------------------------
Net cash provided by financing activities increased $41.4 million from
fiscal 2008 to fiscal 2009, primarily due to $253.2 million in proceeds from the
31
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
issuance of long-term debt and $175.0 million from the issuance of preferred
stock in fiscal 2009 (Refer to Debt Obligations discussion below for additional
information), as well as the absence of the fiscal 2008 payment of $45.7 million
upon our settlement of the Series A warrants. The increase in net cash provided
by financing activities was partially offset by net principal payments of $360.8
million on our revolving lines of credit, primarily attributable to using a
portion of the proceeds from the fiscal 2009 issuances of long-term debt and
preferred stock to repay some of the outstanding borrowings, and payments of
$27.6 million relating to the associated deferred financing costs. Also
partially offsetting the increase in net cash provided by financing activities
were decreased book overdrafts of $24.8 million, and the absence of the fiscal
2008 proceeds from a promissory note of $10.0 million.
Net cash provided by financing activities decreased $274.7 million from
fiscal 2007 to fiscal 2008, primarily due to the absence of the fiscal 2007 net
proceeds of $532.5 million from long-term borrowings, $45.7 million paid in
fiscal 2008 upon our settlement of the Series A Warrants, and the absence of the
2007 proceeds from financing warrants of $36.8 million. These decreases in cash
were partially offset by increased net proceeds from our revolving lines of
credit of $194.9 million, the absence of the fiscal 2007 payments for call
options of $73.5 million, increase in deferred financing fees of $63.5 million,
and increased book overdrafts of $29.0 million.
Working Capital
- ---------------
We had working capital of $201.3 million at February 27, 2010, compared
to working capital of $172.0 million at February 28, 2009. We had cash and cash
equivalents aggregating $252.4 million at February 27, 2010 compared to $175.4
million at February 28, 2009. The increase in working capital was attributable
primarily to the following:
o An increase in cash and cash equivalents primarily due to our issuances
of Redeemable Preferred Stock and Senior Secured Notes in August 2009,
partially offset by repayments of a portion of our variable debt and
cash used in our operations; and
o A decline in accrued salaries, wages and benefits, primarily
attributable to a reduction in the incentive compensation accrued for
our executive and non-executive employees for fiscal 2009, based on our
operating results;
Partially offset by the following:
o A decline in accounts receivable, primarily related to lower sales and
faster collections resulting in a reduction in Days Sales Outstanding.
o A decline in prepaid expenses and other current assets mainly due to a
decline in our deferred tax assets, partially offset by an increase in
other current assets due to the timing of tax payments in relation to
the filings of tax returns; and
o A decline in inventories primarily related to deflation and lower
sales.
32
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
Debt Obligations
- ----------------
Our debt obligations consisted of the following (in thousands):
Feb. 27, 2010 Feb. 28, 2009
------------- -------------
Line of Credit, due December 31, 2009 $ - $ 5,000
Related Party Promissory Note, due August 2, 2011 10,000 10,000
5.125% Convertible Senior Notes, due June 15, 2011(1) 155,333 147,717
9.125% Senior Notes, due December 15, 2011 (1) 12,840 12,840
6.750% Convertible Senior Notes, due December 15, 2012 (1) (2) 223,838 215,053
11.375% Senior Secured Notes, due August 4, 2015 253,668 -
9.375% Notes, due August 1, 2039 (1) 200,000 200,000
Borrowings under Credit Agreement 132,900 331,783
Other 1,971 2,254
--------- ---------
Total debt 990,550 924,647
Less current portion of long-term debt (191) (5,283)
--------- ---------
Long-term debt $ 990,359 $ 919,364
========= =========
(1) Represent public debt obligations.
(2) Our 6.750% Convertible Notes are subject to new accounting guidance for
convertible debt instruments with cash settlement features as our
estimated nonconvertible debt borrowing rate of approximately 12% is
higher than the current contractual rate on these notes. As a result of
adopting this guidance during fiscal 2009, we reclassified $26.4
million of debt and deferred financing costs to "Additional paid-in
capital", net of deferred taxes. We also retrospectively recognized
cumulative additional non-cash
interest expense of $3.9 million from the date of issuance of these
Convertible Senior Notes through February 28, 2009. Refer to Note 10 to
our Consolidated Financial Statements - Indebtedness and Other
Financial Liabilities for additional information.
The increase in our debt obligations was primarily due to the August 4,
2009 issuance of $260.0 million of 11.375% senior secured notes due 2015 (the
"Notes") at a price equal to 97.385% of their face value. The Notes represent
second lien secured obligations, guaranteed by all of our Company's domestic
subsidiaries. The Notes bear interest at a fixed rate of 11.375% payable
semi-annually in cash. As of February 27, 2010, the carrying value of the notes
was $253.7 million. The proceeds from this offering and our preferred stock
offering on August 4, 2009 were used to repay a portion of our existing variable
debt and for operating purposes.
The Notes were offered only to qualified institutional buyers in
reliance on Rule 144A under the Securities Act of 1933, as amended (the
"Securities Act"), and only to non-U.S. investors pursuant to Regulation S
outside the United States. The Notes have not been registered under the
Securities Act or the securities laws of any other jurisdiction and may not be
offered or sold in the United States absent registration or an applicable
exemption from registration requirements. The Notes contain customary covenants
found in secured notes, including, among other things, restrictions on the
incurrence of additional indebtedness, asset sales, liens and restricted
payments.
Pursuant to a registration rights agreement dated August 4, 2009, we
have agreed to exchange the Notes for a new issue of substantially identical
debt securities registered under the Securities Act. Our Company has agreed to
use commercially reasonable efforts to file a registration statement, to cause
it to be effective with the SEC, and to consummate the exchange offer prior to
August 4, 2011. If such registration statement ceases to be effective during the
registration period, subject to certain exceptions, we will be required to pay
0.25% of additional per annum interest for the first 90-day period immediately
following the agreed upon registration date, increased by an additional 0.25%
per annum for each subsequent 90-day period, up to the maximum additional rate
of 1.0% per annum thereafter, or $2.6 million per year, until the exchange offer
is made. We currently do not have a liability recorded with respect to this
arrangement, as we believe that the payment is improbable.
33
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
The increase in the total value of our debt from February 27, 2009 to
February 28, 2010 was also affected by the interest accretion on our Convertible
Senior Notes.
Our call options and financing warrant transactions, which we entered
into concurrent with the offering of our Convertible Senior Notes in December
2007, effectively increased the conversion price of the 5.125% Notes to $46.20
or a 65% premium and increase the conversion price of the 6.750% Notes to $49.00
or a 75% premium. On or about October 3, 2008, Lehman Brothers OTC Derivatives,
Inc. or "LBOTC," which accounts for 50% of our 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 convertible senior notes to their stated prices of $36.40
for the 5.125% Notes and $37.80 for the 6.750% 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 these transactions with
another party for the same period and on the same terms.
Our debt agreements contain customary covenants including, among other
things, restrictions on the incurrence of additional indebtedness, asset sales,
liens and restricted payments. We have no financial ratio covenants with respect
to any of our debt obligations.
Credit Agreement. On July 23, 2009, our Company amended the December
27, 2007 $675 million Amended and Restated Credit Agreement with Banc of America
Securities LLC and Bank of America, N.A., as the co-lead arranger ("Credit
Agreement") in connection with the private offering of senior secured notes and
the sale of preferred stock, which expires in December 2012. The amended
agreement increased the applicable margins on credit advances, reduced
commitments by $20.0 million, reduced the collateral advance and provided for
certain other amendments. Subject to borrowing base requirements, the amended
$655.0 million Credit Agreement provides for a term loan of $82.9 million, a
term loan of $50.0 million and a revolving credit facility of $522.1 million
enabling us to borrow funds and issue letters of credit on a revolving basis.
The Credit Agreement also provides for an increase in commitments of up to an
additional $100.0 million, subject to agreement of new and existing lenders. Our
obligations under the Credit Agreement are secured by certain assets of our
Company, including, but not limited to, inventory, certain accounts receivable,
pharmacy scripts, certain owned real estate and certain Pathmark leaseholds. The
Pathmark leaseholds were removed as eligible collateral throughout fiscal 2009,
which resulted in the total reduction in the borrowing availability under the
revolving credit facility of approximately $73.0 million. Borrowings under the
Credit Agreement bear interest based on LIBOR or Prime interest rate pricing.
The terms of this agreement restrict our ability to pay cash dividends on common
shares. Subject to certain conditions, we are permitted to make bond repurchases
and may do so from time to time in the future.
34
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
As of February 27, 2010, we had the following availability under our
amended Credit Agreement and other resources, available to reduce our
obligations or use in our future operations:
Amount Expiration Date
------ ---------------
Amended $655.0 Credit Agreement $ 655,000 December 2012
Borrowing base collateral adjustment (116,304)
---------
Available for borrowing 538,696(1)
Loans outstanding (132,900)
Letters of Credit Outstanding (202,325)
---------
Net available borrowings as of February 27, 2010 $ 203,471
=========
Invested cash $ 168,647
=========
- -------------------------------------------
(1) The availability under the credit agreement is limited to the value
assigned to the collateral supporting the credit agreement.
We operate under an annual operating plan which incorporates the
specific operating initiatives we expect to pursue and the anticipated financial
results of our Company. We believe that our present cash resources, including
additional liquidity provided by the proceeds from the August 2009 preferred
stock
investment and the Senior Secured Notes Financing, available borrowings from our
Credit Agreement and other sources, are sufficient to meet our needs for the
next twelve months.
During fiscal 2009, we implemented a number of labor rationalization
initiatives designed to reduce the number of our store and administrative
personnel, including a program during the fourth quarter of the year designed to
reduce our administrative labor expenses in excess of 15%, or approximately $20
million per year. We expect to use the resulting savings to support store and
performance initiatives designed to improve our business and increase future
sales. Although we may decide to retire a portion of our debt, we do not have
any significant long-term debt maturities until fiscal 2011 and currently
believe that we have adequate access to capital markets to generate additional
resources to address our upcoming maturities in the next several years. We are
evaluating a number of capital raising alternatives and will communicate our
plans at the appropriate time. However, the availability and cost of financing
to our Company could be greatly affected if our results of operations do not
improve, by future changes in our credit ratings, and due to a decline in
capital market conditions. There is no assurance that we will have the liquidity
necessary to operate our business.
Our existing corporate rating with Moody's Investors Service
("Moody's") is Caa2 with a negative outlook. Our senior unsecured debt is rated
Caa3, our senior secured notes are rated Caa1 and our liquidity rating is SGL-3.
Our corporate credit rating with Standard & Poor's Ratings Group
("S&P") is B- with a stable outlook. Our senior unsecured debt is rated CCC, and
our recovery rating is 6, indicating that unsecured bond holders can expect a
negligible (0%-10%) recovery in the event of a payment default. Our senior
secured notes are rated B-, with a recovery rating of 4, indicating that lenders
can expect an average recovery (30%-50%) in the event of a payment default. Our
preferred stock rating is CCC-.
35
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
Redeemable Preferred Stock
- --------------------------
On August 4, 2009, our Company issued 60,000 shares of 8.0% Cumulative
Convertible Preferred Stock, Series A-T, without par value, to affiliates of
Tengelmann Warenhandelsgesellschaft KG ("Tengelmann") and 115,000 shares of 8.0%
Cumulative Convertible Preferred Stock, Series A-Y, without par value, to
affiliates of Yucaipa Companies LLC ("Yucaipa"), together referred to as the
"Preferred Stock," for approximately $162.8 million, after deducting
approximately $12.2 million in closing and issuance costs. Each share of the
Preferred Stock has an initial liquidation preference of one thousand dollars,
subject to adjustment.
The Preferred Stock is convertible into shares of our Company's common
stock, par value $1.00 per share (the "Common Stock"), at an initial conversion
price of $5.00 per share of Common Stock. The Preferred Stock is convertible
upon the one-year anniversary of the issuance of Preferred Stock, or August 5,
2010, provided that prior to receiving shareholder approval, the Preferred Stock
was not exercisable into greater than 19.99% of the Common Stock outstanding
prior to the issuance of the Preferred Stock. The 57,750 shares that were
originally convertible without shareholder approval were recorded within
temporary stockholders' equity upon issuance since the shares are (i) redeemable
at the option of the holder and (ii) have conditions for redemption which are
not solely within the control of the Company. The 117,250 shares that originally
required shareholder approval in order to become convertible were initially
recorded as a "Preferred stock liability". On December 15, 2009, we obtained
shareholder approval authorizing the convertibility of the shares originally
recorded within "Preferred stock liability", and reclassified $109.5 million to
temporary equity, representing the book value of the liability on December 15,
2009 net of the related debt issuance costs. As of February 27, 2010, the entire
Preferred Stock issuance was recorded within temporary stockholders' equity.
The holders of our Convertible Preferred Stock have the right to cast
votes together with the holders of our common stock on an as-converted basis.
Our Company is required to redeem all of the outstanding Preferred Stock on
August 1, 2016 (the "Maturity Date"), at 100.0% of the liquidation preference,
plus all accrued and unpaid dividends. Subject to the repurchase rights of the
investors, the Preferred Stock is not redeemable prior to the Maturity Date. At
any time after December 3, 2012, in the event of any fundamental change, the
investors may elect to require our Company to repurchase the Preferred Stock in
cash at 101.0% of the liquidation preference amount plus any accrued and unpaid
dividends.
The holders of the Preferred Stock are entitled to an 8.0% dividend,
payable quarterly in arrears in cash or in additional shares of Preferred Stock
if our Company does not meet the liquidity levels required to pay the dividends.
If our Company makes a dividend payment in additional shares of Preferred Stock,
the Preferred Stock shall be valued at the liquidation preference of the
Preferred Stock and the dividend rate will be 8.0% plus 1.5%. Dividends and
deferred financing fees amortization relating to preferred stock that was
classified as a liability prior to receiving shareholder approval, were recorded
within "Interest expense." During fiscal 2009, we recorded Preferred Stock
dividends of $8.1 million, of which $3.5 million was recorded within "Interest
expense" and the remaining $4.6 million was recorded within "Additional paid-in
capital". In addition, during fiscal 2009, we recorded $1.0 million of deferred
financing fees amortization, of which $0.4 million was recorded within "Interest
expense" and the remaining $0.6 million was recorded within "Additional paid-in
capital". All future dividends and deferred financing fees amortization will be
recorded within "Additional paid-in capital," in the absence of retained
earnings.
36
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
In connection with the Preferred Stock issuance, we agreed to register
all of the shares of common stock beneficially owned by Tengelmann and Yucaipa,
including the shares issuable upon conversion of the convertible preferred
stock, no later than February 6, 2010. Such filing was not made by the required
date. According to our current shareholder agreements with Tengelmann and
Yucaipa, we are required to pay liquidated damages for each day we are in
default, at a rate equivalent to 1% of the value of the related shares per year.
We do not expect the amount of damages to be material and are planning to file
the required registration statement following the filing of our Fiscal 2009 Form
10-K, which will cure this default.
Share Lending Agreeements
- -------------------------
We have share lending agreements with certain financial institutions,
pursuant to which 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 to
facilitate hedging transactions relating to the issuance of our 5.125% and
6.750% Senior Convertible Notes. 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 do
not have rights pursuant to the share lending agreements. During fiscal 2009,
Bank of America, N.A., who is a party to our share lending agreement, returned
2,500,000 shares, and we currently have 5,634,002 of loaned shares outstanding
under the share lending agreements.
The 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 share 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 in lieu of the delivery of
loaned shares to settle its obligation. 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.
37
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
Summary of Contractual Obligations and Commitments:
- --------------------------------------------------
As of February 27, 2010, we had the following contractual obligations
and commitments:
Payments Due by Period (in millions)
----------------------------------------------------------
Contractual Less than 1 - 3 4 - 5
Obligations Total 1 Year Years Years Thereafter
----------- ----- ------ ----- ----- ----------
Debt (1) $ 1,037.7 $ 0.2 $ 576.1 $ 0.5 $ 460.9
Capital Leases (2) 248.2 28.2 52.2 42.2 125.6
Operating Leases (2) 1,671.6 198.7 370.7 309.7 792.5
Long-term Real Estate
Liabilities (2) 524.5 36.5 73.6 75.7 338.7
Pension Obligations (3) 185.7 7.0 13.7 13.6 151.4
Postretirement
Obligations (4) 97.3 1.9 4.3 5.0 86.1
Occupancy Payments (5) 530.3 67.2 117.6 103.9 241.6
Severance Payments (6) 15.0 14.2 0.7 0.1 -
Pension Withdrawal
Payments (7) 146.9 10.6 37.2 21.2 77.9
Interest (8) 774.3 75.9 131.4 96.8 470.2
Preferred Stock dividends(9) 89.8 14.0 28.0 28.0 19.8
Postemployment
Obligations (10) 11.6 3.4 2.4 1.6 4.2
Defined Contribution Plans (11) 8.0 8.0 - - -
Multi-employer Pension
Plans (11) 62.3 62.3 - - -
Other Service Contracts (12) 219.0 8.3 16.7 16.2 177.8
Purchase Commitments (13)
Equipment Purchases 6.7 6.7 - - -
Equipment Rentals 0.8 - 0.7 0.1 -
Suppliers 414.8 45.4 93.2 95.8 180.4
Manufacturers/Vendors 63.9 16.6 27.6 18.5 1.2
Service Contracts 37.3 16.7 20.6 - -
Transportation Services 178.5 45.3 91.0 42.2 -
Marketing Contracts 56.2 39.0 17.2 - -
Consulting 3.1 3.1 - - -
---------- -------- ---------- -------- ----------
Total (14) $ 6,383.5 $ 709.2 $ 1,674.9 $ 871.1 $ 3,128.3
========== ======== ========== ======== ==========
(1) Amounts represent contractual amounts due. Refer to Note 10 of our
Consolidated Financial Statements - Indebtedness and Other Financial
Liabilities 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 - Lease Obligations for information
regarding capital leases, operating leases and long-term real estate
liabilities.
(3) Amounts represent expected future cash contributions to our non-qualified
defined benefit pension plans. Refer to Note 13 of our Consolidated
Financial Statements - Retirement Plans and Benefits 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 13 of our
Consolidated Financial Statements - Retirement Plans and Benefits for
information regarding our postretirement benefits.
(5) Amounts represent our future occupancy payments primarily relating to our
asset disposition initiatives (refer to Note 7 to our Consolidated
Financial Statements), discontinued operations (refer to Note 6 of our
Consolidated Financial Statements) and store closures made during the
normal course of business.
(6) Amounts primarily represent our severance obligations primarily relating to
our fiscal 2009 labor rationalization initiatives.
(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.
(9) Amount relates to dividends payable on preferred stock issued in August
2009. Refer to Note 12 of our Consolidated Financial Statements -
Redeemable Preferred Stock for information regarding these dividends.
38
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
(10) Amounts represent our future benefit payments that were actuarially
determined for our short and long term disability programs. Refer to Note
13 of our Consolidated Financial Statements - Retirement Plans and Benefits
for information regarding our postemployment obligations.
(11) Amounts represent our best estimate of our immediate funding requirements
of defined contribution and multiemployer plans in which we participate.
Defined contribution plan requirement primarily relates to our Company's 4%
employer pension contribution relating to calendar 2009 which will be paid
in fiscal 2010. Refer to Note 13 of our Consolidated Financial Statements -
Retirement Plans and Benefits for information regarding these obligations.
(12) The amount represents our unfavorable service contract with GHI in
connection with the purchase of Pathmark.
(13) The purchase commitments include agreements to purchase goods or services
that are enforceable and legally binding and that specify all significant
terms, including open purchase orders. We expect to fund these commitments
with cash flows from operations.
(14) 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. As of February 28, 2010, we had gross unrecognized
tax benefits of $1.4 million. We currently do not expect that this amount
will significantly change in the next 12 months.
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 27, 2010, 188 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
$572.1 million, which could be partially or totally offset by reassigning or
subletting these leases.
We have not repurchased any of our common stock and our Company's
policy is to not pay dividends on common stock. 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 2010. The terms of our Revolving
Credit Agreement restrict the Company's ability to pay cash dividends on common
shares. Holders of our Preferred Stock are entitled to dividend payments, which
have been included in the above table.
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.
Interest Rates
- --------------
Our exposure to market risk for changes in interest rates relates
primarily to our debt obligations. As of February 27, 2010, we did not have cash
flow exposure due to rate changes on any of our debt securities with an
aggregate book value of $857.6 million, because they are at fixed interest rates
ranging from 2.0% to 11.375%. However, we did have cash flow exposure on our
committed and uncommitted lines of credit of $132.9 million due to our variable
floating rate pricing. Accordingly, during fiscal 2009, fiscal 2008 and fiscal
2007, a presumed 1% change in the variable floating rate would have impacted
interest expense by $2.1 million, $3.0 million, and $0.6 million, respectively.
39
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
Foreign Exchange Risk
- ---------------------
As of February 27, 2010, we did not have exposure to foreign exchange
risk as we did not hold any significant 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 27, 2010 and February
28, 2009 was $282.6 million and $231.5 million, respectively. The discount rate
used at February 27, 2010 and February 28, 2009 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
approximately $9.3 million and $7.0 million as of February 27, 2010 and February
28, 2009, respectively. Conversely, a 1% decrease in the discount rate would
increase the required liability for the same periods by approximately $10.3
million and $8.0 million, respectively.
During fiscal 2009, our worker's compensation and general liability
reserves increased by approximately $51.1 million ($38.1 million for continuing
operations and $13.0 million for discontinued operations), primarily due to a
change in estimate of approximately $48.0 million related to the negative
development of prior year claims and the change in the mix of claims between our
continuing and discontinued operations, and the related state assessment for
such claims of approximately $5.4 million. These estimates are determined by
actuarial projections of losses. 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-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
40
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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. 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 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 over the life of the
primary asset within the asset group. If such review indicates impairment, we
estimate the fair value of the assets within the group based on a variety of
methods; including estimating market rents as a percentage of sales to value
lease contracts and observation of market values based on third party
information for land and buildings. We measure such impairment of long-lived
assets as the difference between the carrying value and the fair value of the
assets.
During fiscal 2009, as a result of experiencing increasing cash flow
losses within certain asset groupings, we determined that triggering events
occurred for testing the related asset groups' long-lived assets for potential
impairment. We estimated the future cash flows for these asset groups based on
an internal analysis performed by management. The carrying value was not
recoverable from their undiscounted future cash flows. We determined the fair
value of these assets and, as a result, we recorded an impairment charge for
these asset groups' long-lived assets, primarily consisting of favorable leases
and other owned property of $65.2 million, $62.9 million of which related to
Pathmark and $2.3 million of which related to the South (SuperFresh) reporting
unit. These charges were recorded within "Goodwill, trademark and long-lived
asset impairment" in our Consolidated Statements of Operations for fiscal 2009.
In addition, during fiscal 2009, fiscal 2008 and fiscal 2007, we reported
impairments due to store closures or conversions in the normal course of
business of $6.5 million, $14.1 million and $11.7 million, respectively. These
charges were recorded within "Store Operating, general and administrative
expense" in our Consolidated Statements of Operations. During fiscal 2007, we
also recorded impairments of $54.0 million relating to stores closed in the
Greater Orleans and Midwest Markets within "Gain (loss) on disposal of
discontinued operations."
We believe that our estimates are appropriate based upon the current
assumptions. The effects of changes in estimates of useful lives were not
material to ongoing depreciation and amortization expense. We will continue to
monitor our operating results in future periods to determine whether additional
impairment testing is warranted for any of our asset groups experiencing
operating losses. If current operating levels do not improve, we may have to
record impairments of long-lived assets in the future.
Goodwill and Other Indefinite-Lived Intangible Assets
- -----------------------------------------------------
We test 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
41
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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. We have eight reporting
units, seven of which have goodwill and are assessed for impairment: North,
Central, Waldbaums and South (SuperFresh), which comprise our Fresh reportable
segment; Pathmark; Gourmet; and Food Basics and Beer, Wine & Sprits, which
comprise our Other reportable Segment. In determining fair value, we make
various assumptions, including our 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. We estimate
the fair value of the reporting unit using a net present value methodology,
which is dependent on significant assumptions related to estimated future
discounted cash flows, discount rates and tax rates. Our assumptions for our
annual impairment included reduced shorter term internal revenue and
profitability forecasts based on recent trends, partially offset by an estimate
for improvement for business improvement initiatives and a perpetual growth rate
for cash flow in the terminal year of approximately 1.5% for over 95% of the
goodwill being assessed for impairment. We assumed a market-based weighted
average cost of capital of 11.0% to discount cash flows and a blended federal
and state tax rate of 42.0%. We determined that our carrying value exceeded our
fair value in our Pathmark and South reporting units, indicating that goodwill
was potentially impaired.
During fiscal 2009, due to the severity and duration of operating
losses within the Pathmark reporting unit, changes in our long-term forecasts
relating to the Pathmark reporting unit and the significant impairment of
long-lived assets within the Pathmark reporting unit, we recorded an impairment
of $321.8 million representing the entire goodwill balance attributable to our
Pathmark reporting unit in our third quarter. We noted additional impairment
during our annual impairment analysis performed in the fourth quarter relating
to the $23.7 million goodwill balance attributable to the South (SuperFresh)
reporting unit. In determining these impairments, we performed the second step
of the goodwill impairment test by calculating the implied fair value of
goodwill by allocating the fair value to the assets and liabilities of the
Pathmark and South reporting units, respectively, other than goodwill. The
remaining difference between the fair value of the Pathmark and South reporting
units and the sum of the allocated fair value of the assets and liabilities was
considered the implied fair value of goodwill. The carrying value of goodwill
exceeded its implied fair value of nil for both reporting units, resulting in
full impairment of the carrying value of goodwill for these reporting units.
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. We can provide no assurances that we will not be required to recognize
an impairment of goodwill in the future due to market conditions or other
factors related to our performance. These events could include a decline in the
forecasted results in our business plan, such as changes in forecasted on-going
profitability or capital investment budgets or changes in our interest rates.
Recognition of additional impairment of a significant portion of our goodwill
would negatively affect our Company's reported results of operations and total
capitalization.
We determined that the fair values of reporting units comprising our
Fresh and Gourmet reportable segments exceeded the related carrying values,
inclusive of goodwill of $97.1 million and $12.1 million, respectively, by over
100%. The fair value of our Other reportable segment exceeded its carrying
value,
42
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
inclusive of $6.0 million of goodwill, by over 15%. Thus, a significant decrease
in fair value would be required before the goodwill balance at these reporting
units would have a carrying value in excess of the fair value.
Our only other indefinite-lived intangible asset is the Pathmark
trademark. Impairment loss is recognized when the estimated fair value of the
indefinite-lived intangible asset is less than its carrying value. We evaluated
the fair value of the Pathmark trademark using the relief-from-royalty method
with assumptions consistent with those used to fair value goodwill.
Based on the lower revenues within our Pathmark reporting unit coupled
with lower near term profitability projections and lower estimated market
royalty rate expectations due to current general economic conditions, we
concluded that a triggering event had occurred for an interim impairment test.
The carrying value exceeded the indicated fair value of the Pathmark trademark,
resulting in an impairment charge of $49.9 million during the third quarter of
fiscal 2009. During the fourth quarter of fiscal 2009, we completed our annual
impairment test of our indefinite-lived intangible asset and as a result of
further lowering our anticipated revenue projections, concluded that additional
impairment of $16.5 million was required. We currently estimate that the fair
value of our trademark decreases by approximately $15.0 million for each 5 basis
point decrease in the market royalty rate and by approximately $5.0 million for
each 10% decline in revenue from our current projections. We believe that our
estimates are appropriate based upon our current assumptions. However, we may be
required to record impairment charges in future periods if our revenues differ
from our current projections.
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 5% from the date of inception.
Total adjustments for settlements on leases or sold properties and changes in
estimates resulted in expenses of $36.5 million for continuing operations and
$62.8 million for discontinued operations in fiscal 2009 due to significant
declines in values in the real estate market resulting from deepening economic
recession; expenses of $26.4 million for continuing operations and $29.6 million
for discontinued operations in fiscal 2008, and expense of $4.1 million for
continuing operations and income of $1.9 million for discontinued operations in
fiscal 2007. 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 27, 2010, we had recorded liabilities for estimated
probable obligations of $250.1 million. Of this amount, $51.3 million relates to
stores closed in the normal course of business, $20.4 million relates to stores
and warehouses closed as part of the asset disposition initiatives (refer to
Note 7 of our Consolidated Financial Statements), and $178.4 million relates to
stores closed as part of our discontinued operations (refer to Note 6 of our
Consolidated Financial Statements).
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 our best estimate of these
obligations at this time.
43
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
Warrant Liability
- -----------------
We 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 change as a result of
changes in our stock price, volatility, the remaining time until maturity, and
the current risk-free interest rate.
Pension and Other Benefit Plans
- -------------------------------
The determination of our obligation and expense for pension and other
postretirement benefits is dependent, in part, on our selection of certain
assumptions used by our actuaries in calculating these amounts. These
assumptions include the weighted average discount rate at which obligations can
be effectively settled, the anticipated rate of future increases in compensation
levels, the expected long-term rate of return on 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.
The expected long-term rate of return for the plan was determined by
weighing the expected returns for each asset class by the assets allocated to
that class. The expected return for each asset class was based on our actuaries'
capital market assumptions for real returns on standard asset classes and a
long-term annual inflation range of 2.0% - 3.0%. We use independent actuaries to
assist us in determining our long-term rate of return assumptions. For fiscal
2009, fiscal 2008 and fiscal 2007, we assumed return rates of 7.50%, 6.75% and
6.75%, respectively. Given the target asset allocation of 45-60% equities,
30-40% fixed income and 5-25% other, we consider the assumed return rates to be
reasonable estimates of average expected long-term investment returns over the
life of the plan. 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 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.
44
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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
2009 2008 2007
------------------ ------------------ -----------------
Weighted average discount rate 7.25% 5.75% 5.75%
Weighted average rate of compensation increase 3.00% 2.75% 2.75%
Expected long-term rate of return on plan assets 7.50% 6.75% 6.75%
To determine our pension benefit obligation as of February 27, 2010, we
used a weighted average discount rate of 6.25% and a weighted average rate of
compensation increase of 3.0%.
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 27, 2010 (in millions):
Combined (Decrease)
Weighted Average Expected Return Increase in Pension
Discount Rate on Plan Assets Expense
------------------ ------------------ -----------------
100 basis point increase $ (2.8) $ (3.1) $ (5.9)
100 basis point decrease 3.2 3.1 6.3
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 27, 2010 (in millions):
(Decrease)/Increase
in Pension Benefit
Obligation
----------
100 basis point increase in discount rate $ (51.2)
100 basis point decrease in discount rate 61.3
To determine our postretirement benefit obligation at February 27,
2010, we used a weighted average discount rate of 6.00%. The weighted average
discount rate used to determine our postretirement expense for fiscal 2009 was
7.25%. The following illustrates the annual impact on the accumulated
postretirement benefit obligation ("APBO") and postretirement benefit expense of
a 100 basis point increase or decrease from the healthcare trends used to value
them as of and for the year ended February 27, 2010 (in millions):
Increase/(Decrease) Increase/(Decrease)
in expense in APBO
------------------ ------------------
100 basis point increase in healthcare trends $ 0.2 $ 2.6
100 basis point decrease in healthcare trends (0.2) (2.3)
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 5.75% discount
rate to value this obligation as of February 27, 2010. Due to
45
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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.
The sensitivities to changes in the discount rate used to value the GHI
contractual obligation as of February 27, 2010 are as follows (in millions):
Increase/(Decrease) (Decrease)/Increase
in expense in GHI Obligation
------------------ -----------------------------
100 basis point increase in discount rate $ 0.3 $ (8.7)
100 basis point decrease in discount rate (0.3) 10.3
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 $18.9 million and $24.2 million as
of February 27, 2010 and February 28, 2009, respectively. Adjustments to the
stock loss reserve based on physical inventories were approximately 1% of our
ending inventory balance as of February 27, 2010.
Income Taxes
- ------------
As discussed in Note 17 to the Consolidated Financial Statements -
Income Taxes, 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.
At February 27, 2010 and February 28, 2009, we had unrecognized tax
benefits of $1.4 million and $162.8 million, respectively, that, if recognized
would not affect the effective tax rate, as they would be offset by an increase
in our valuation allowance. The decrease in our valuation allowance was
primarily related to remeasurement of our uncertain tax positions. We do not
expect that the amount of our gross unrecognized tax positions will change
significantly in the next 12 months.
We recognize interest and penalties as incurred within "Benefit from
(provision for) 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.
46
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
CAUTIONARY NOTE
- ---------------
This discussion 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; changes in economic conditions, which may affect the buying patterns of
our customers; and other factors discussed herein.
47
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
Fiscal 2009 Fiscal 2008 Fiscal 2007
------------ ------------ ------------
Sales $ 8,813,568 $ 9,516,186 $ 6,401,130
Cost of merchandise sold (6,146,808) (6,613,150) (4,431,299)
------------ ------------ ------------
Gross margin 2,666,760 2,903,036 1,969,831
Store operating, general and
administrative expense (2,790,154) (2,949,822) (2,009,071)
Goodwill, trademark and long-lived
asset impairment (477,180) - -
------------ ------------ ------------
Loss from operations (600,574) (46,786) (39,240)
Loss on sale of Canadian operations - - (436)
Gain on sale of Metro, Inc. - - 184,451
Nonoperating (loss) income (9,181) 116,864 37,394
Interest expense (193,058) (157,591) (112,218)
Interest and dividend income 169 591 14,350
Equity in earnings of Metro, Inc. - - 7,869
------------ ------------ ------------
(Loss) income from continuing operations
before income taxes (802,644) (86,922) 92,170
Benefit from (provision for) income taxes 21,994 (2,683) (5,592)
------------ ------------ ------------
(Loss) income from continuing operations (780,650) (89,605) 86,578
Discontinued operations:
Loss from operations of discontinued
businesses, net of tax benefit of $0
for fiscal 2009, 2008, and 2007 (95,848) (58,383) (196,848)
Gain (loss) on disposal of discontinued
operations, net of tax benefit of $0
for fiscal 2009, 2008, and 2007 - 4,653 (50,812)
------------ ------------ ------------
Loss from discontinued operations (95,848) (53,730) (247,660)
------------ ------------ ------------
Net loss $ (876,498) $ (143,335) $ (161,082)
============ ============ ============
Net (loss) income per share - basic:
Continuing operations $ (14.79) $ (1.76) $ 1.99
Discontinued operations (1.80) (1.05) (5.69)
------------ ------------ ------------
Net loss per share - basic $ (16.59) $ (2.81) $ (3.70)
============ ============ ============
Net (loss) income per share - diluted:
Continuing operations $ (26.12) $ (4.35) $ 1.36
Discontinued operations (3.22) (1.06) (5.59)
------------ ------------ ------------
Net loss per share - diluted $ (29.34) $ (5.41) $ (4.23)
============ ============ ============
Weighted average common shares outstanding:
Basic 53,203,741 50,948,194 43,551,459
============ ============ ============
Diluted 29,771,904 50,883,221 44,295,214
============ ============ ============
See Notes to Consolidated Financial Statements.
48
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Stockholders' Equity (Deficit) and
Comprehensive Loss
(Dollars in thousands, except share amounts)
Accumulated Retained
Other Earnings
Common Stock Additional Comprehensive Stockholders' Total
------------------------- Paid-in Income (Accumulated Equity
Shares Amount Capital (Loss) Deficit) (Deficit)
------------ ---------- ---------- ---------- ----------- ----------
Balance at 2/24/2007 41,589,195 $ 41,589 $ 212,868 $ 22,888 $ 177,103 $ 454,448
Reclassification of debt and deferred
financing costs upon retrospective
adoption of new accounting guidance
for convertible debt with cash
settlement features - - 26,379 - - 26,379
Net loss - - - - (161,082) (161,082)
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 2/23/2008, as adjusted for
new accounting guidance for convertible
debt 57,100,955 57,101 399,973 (28,975) 16,021 444,120
Net loss - - - - (143,335) (143,335)
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 2/28/2009, as adjusted for
new accounting guidance for convertible
debt 57,674,799 $ 57,675 $ 464,679 $ (105,147) $ (127,314) $ 289,893
Net loss - - - - (876,498) (876,498)
Beneficial conversion feature related to
preferred stock, net of accretion - - 31,036 - - 31,036
Dividends on preferred stock - - (4,572) - - (4,572)
Preferred stock financing fees amortization - - (562) - - (562)
Returned shares under the Share Lending
Agreement (2,500,000) (2,500) 2,500 - - -
Stock options exercised 19,396 19 70 - - 89
Other share based awards 673,934 674 4,993 - - 5,667
Other comprehensive loss - - - 25,744 - 25,744
------------ ---------- ---------- ---------- ----------- ----------
Balance at 2/27/2010 55,868,129 $ 55,868 $ 498,144 $ (79,403) $(1,003,812) $ (529,203)
============ ========== ========== ========== =========== ==========
See Notes to Consolidated Financial Statements.
49
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Stockholders' Equity (Deficit) and
Comprehensive Loss - Continued
(Dollars in thousands)
Accumulated Other Comprehensive Loss Balances
- ---------------------------------------------
Net Unrealized Pension and Accumulated
Foreign (Loss) / Gain Other Other
Currency on Marketable Postretirement Comprehensive
Translation Securities Benefits Income (Loss)
----------- ---------- -------- -------------
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)
Current period change - - 25,744 25,744
--------- --------- --------- ---------
Balance at
February 27, 2010 $ - $ - $ (79,403) $ (79,403)
========= ========= ========= =========
Comprehensive Loss
- ------------------
Fiscal 2009 Fiscal 2008 Fiscal 2007
------------ ----------- --------------
Net loss $ (876,498) $ (143,335) $ (161,082)
------------ ----------- --------------
Foreign currency translation adjustment, net of tax - - (9,710)
Net unrealized gain on marketable securities, net of tax - - 22
Pension and other postretirement benefits, net of tax 25,744 (76,172) (42,175)
----------- ----------- --------------
Other comprehensive income (loss), net of tax 25,744 (76,172) (51,863)
----------- ----------- --------------
Total comprehensive loss $ (850,754) $ (219,507) $ (212,945)
============ =========== ==============
See Notes to Consolidated Financial Statements.
50
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share and per share amounts)
February 27, February 28,
2010 2009
----------- -----------
Assets
Current assets:
Cash and cash equivalents $ 252,426 $ 175,375
Restricted cash 1,993 2,214
Restricted marketable securities - 2,929
Accounts receivable, net of allowance for doubtful
accounts of $8,728 and $8,463 at February 27, 2010
and February 28, 2009, respectively 166,143 196,537
Inventories, net 467,227 474,002
Prepaid expenses and other current assets 43,374 67,465
----------- -----------
Total current assets 931,163 918,522
----------- -----------
Non-current assets:
Property:
Land 107,062 112,257
Buildings 371,605 381,779
Equipment 1,245,079 1,220,283
Leasehold improvements 1,325,236 1,358,515
----------- -----------
Total - at cost 3,048,982 3,072,834
Less accumulated depreciation and amortization (1,651,011) (1,481,584)
----------- -----------
Property owned, net 1,397,971 1,591,250
Property under capital leases, net 89,599 114,574
----------- -----------
Property, net 1,487,570 1,705,824
Goodwill 115,197 483,560
Intangible assets, net 147,713 224,838
Other assets 145,574 193,953
----------- -----------
Total assets $ 2,827,217 $ 3,526,697
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 191 $ 5,283
Current portion of obligations under capital leases 13,702 11,574
Current portion of real estate liabilities 4,220 716
Accounts payable 227,779 221,073
Book overdrafts 60,465 60,835
Accrued salaries, wages and benefits 145,170 161,054
Accrued taxes 31,802 39,404
Other accruals 246,516 246,596
----------- -----------
Total current liabilities 729,845 746,535
----------- -----------
Non-current liabilities
Long-term debt 990,359 919,364
Long-term obligations under capital leases 136,880 147,921
Long-term real estate liabilities 329,363 330,196
Deferred real estate income 87,061 95,000
Other financial liabilities 13,946 4,766
Other non-current liabilities 936,209 993,022
----------- -----------
Total liabilities 3,223,663 3,236,804
----------- -----------
Series A redeemable preferred stock - no par value, $1,000 redemption value;
authorized - 700,000 shares and none; issued - 175,000 and ----------- -----------
none at Feb. 27, 2010 and Feb. 28, 2009, respectively 132,757 -
----------- -----------
Commitments and contingencies (Refer to Note 22)
Stockholders' (deficit) equity:
Common stock - $1 par value; authorized - 160,000,000 shares; issued and
outstanding - 55,868,129 and 57,674,799 shares at February 27, 2010 and
February 28, 2009, respectively 55,868 57,675
Additional paid-in capital 498,144 464,679
Accumulated other comprehensive loss (79,403) (105,147)
Accumulated deficit (1,003,812) (127,314)
----------- -----------
Total stockholders' (deficit) equity (529,203) 289,893
----------- -----------
Total liabilities and stockholders' (deficit) equity $ 2,827,217 $ 3,526,697
=========== ===========
See Notes to Consolidated Financial Statements.
51
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Fiscal 2009 Fiscal 2008 Fiscal 2007
----------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (876,498) $ (143,335) $ (161,082)
Adjustments to reconcile net loss to net cash used in
operating activities (see next page) 939,370 279,133 203,079
Other changes in assets and liabilities, net of acquisitions:
Decrease (increase) in receivables 30,838 (28,625) 37,098
Decrease in inventories 7,617 21,889 113,675
(Increase) decrease in prepaid expenses and other current assets (24,638) (8,081) 3,696
(Increase) decrease in other assets (11,968) (16,017) 20,776
Increase (decrease) in accounts payable 6,189 5,850 (72,714)
Decrease in accrued salaries, wages and benefits, and taxes (38,118) (21,177) (42,345)
(Decrease) increase in other accruals (2,919) (6,996) (47,590)
Decrease in other non-current liabilities (71,244) (85,944) (97,670)
Other operating activities, net (546) 2,004 (542)
----------- ----------- -----------
Net cash used in operating activities (41,917) (1,299) (43,619)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (86,378) (115,994) (122,850)
Proceeds from disposal of property 11,651 37,616 153,038
Proceeds from sale of joint venture 5,914 - -
Purchase of businesses, net of cash acquired - - (985,521)
Disposal related expenditures for sale of Canadian operations - - (1,040)
Proceeds from derivatives - - 2,442
Decrease in restricted cash 221 1,499 47,463
Net proceeds from the sale of shares of Metro, Inc. - - 548,796
Purchases of marketable securities - - (32,700)
Proceeds from maturities of marketable securities 5,626 12,349 33,242
----------- ----------- -----------
Net cash used in investing activities (62,966) (64,530) (357,130)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 253,201 - 1,018,300
Principal payments on long-term debt (283) (274) (485,830)
Proceeds under revolving lines of credit 39,450 1,683,823 1,027,335
Principal payments on revolving lines of credit (238,333) (1,521,940) (1,060,336)
Proceeds under line of credit 378 54,973 -
Principal payments on line of credit (5,378) (61,573) -
Proceeds from issuance of preferred stock 175,000 - -
Proceeds from promissory note - 10,000 -
Settlement of Series A warrants - (45,735) -
Proceeds from long-term real estate liabilities 170 3,150 8,528
Principal payments on long-term real estate liabilities (1,081) (1,147) (671)
Proceeds from sale-leaseback transaction 3,000 - -
Principal payments on capital leases (11,198) (9,015) (2,187)
Proceeds from the financing warrants - - 36,771
Payments for the call options - - (73,509)
(Decrease) increase in book overdrafts (370) 24,400 (4,562)
Deferred financing fees (27,617) 1,674 (61,782)
Tax benefit on stock options - - 2,640
Dividends paid on preferred stock (5,094) - -
Proceeds from exercises of stock options 89 2,213 10,577
----------- ----------- -----------
Net cash provided by financing activities 181,934 140,549 415,274
----------- ----------- -----------
Effect of exchange rate changes on cash and
cash equivalents - (78) 14
----------- ----------- -----------
Net increase in cash and cash equivalents 77,051 74,642 14,539
Cash and cash equivalents at beginning of year 175,375 100,733 86,194
----------- ----------- -----------
Cash and cash equivalents at end of year $ 252,426 $ 175,375 $ 100,733
=========== =========== ===========
See Notes to Consolidated Financial Statements.
52
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Cash Flows - Continued
(Dollars in thousands)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
- --------------------------------------------------------------------------
Fiscal 2009 Fiscal 2008 Fiscal 2007
----------- ----------- -----------
Depreciation and amortization $ 245,460 $ 260,991 $ 186,789
Impairment of goodwill and trademark 411,945 - -
Impairment of long-lived assets 71,704 14,069 11,657
Nonoperating loss (income) 9,181 (116,864) (37,394)
Non-cash interest expense 43,032 26,651 5,979
Stock compensation expense 5,667 5,694 9,039
Pension withdrawal costs 2,445 28,911 5,944
Employee benefit related costs 18,219 - -
LIFO adjustment (842) 7,817 2,310
Self-insurance reserve 53,452 - 9,813
Provision for deferred income taxes (15,985) - -
Asset disposition initiatives in the normal course of business (2,167) 5,898 (20,215)
Asset disposition initiatives relating to discontinued operations 57,842 32,319 155,322
Non-cash occupancy charges for stores closed in the normal course
of business 43,746 21,711 7,800
Losses (gains) on disposal of owned property and write-down of
property, net 153 1,086 (13,743)
Amortization of deferred real estate income (4,482) (4,497) (4,571)
(Gain) loss on disposal of discontinued operations - (4,653) 50,812
Loss on sale of Canadian operations - - 436
Equity in earnings of Metro, Inc. - - (7,869)
Financing fees relating to bridge loan facility - - 25,421
Gain on disposition of Metro, Inc. - - (184,451)
--------- --------- ---------
Total non-cash adjustments to net loss $ 939,370 $ 279,133 $ 203,079
========= ========= =========
See Notes to Consolidated Financial Statements.
53
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. All intercompany accounts and transactions have been
eliminated.
At February 27, 2010, 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") and
its wholly-owned subsidiaries, owned 42.6% of our common stock as of February
27, 2010. Yucaipa Companies LLC ("Yucaipa") owned 4.6% of our common stock as of
February 27, 2010. In addition to common stock, Tengelmann and Yucaipa have
beneficial ownership of 60,000 shares and 115,000 shares of preferred stock,
respectively, which are convertible into 12,000,000 shares and 23,000,000 shares
of our common stock, respectively. Assuming all preferred shares are converted,
Tengelmann and Yucaipa would have ownership of approximately 39% and 28%,
respectively, of our common stock, which also represents their voting interest.
Refer to Note 12 - Redeemable Preferred Stock for additional information.
As discussed in Note 6 - Discontinued Operations, the operations for
the Midwest and the Greater New Orleans areas have been classified as
discontinued for all periods presented in our Consolidated Statements of
Operations.
Certain reclassifications have been made to prior year amounts to
conform to current year presentation. Refer to Note 10 - Indebtedness and Other
Financial Liabilities for reclassifications made upon our retroactive adoption
of the new accounting guidance for convertible debt with cash settlement
features.
Fiscal Year
- -----------
Our fiscal year ends on the last Saturday in February. Fiscal 2009 and
fiscal 2007 were each comprised of 52 weeks, consisting of 13 four-week periods.
Fiscal 2008 was comprised of 53 weeks, consisting of 12 four-week periods and
one five-week period.
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
54
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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.
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 when the related performance is completed and the related inventory
is sold as a reduction of cost of goods 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
- -----------------
Media advertising costs 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 $96.7 million for fiscal 2009, $92.0 million for fiscal 2008 and
$77.7 million for fiscal 2007 ($73.3 million for continuing operations and $4.4
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 2009, fiscal
2008 and fiscal 2007 was $5.6 million, $10.6 million and $4.8 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 2009, fiscal 2008 and fiscal 2007, we capitalized $0.9 million, $1.8
million and $3.6 million, respectively, of such software costs. These costs are
amortized over five years. For fiscal 2009, fiscal 2008 and fiscal 2007, we
recorded related amortization expense for continuing operations of $2.8 million,
$3.5 million and $8.9 million, respectively. Also during fiscal 2009, fiscal
2008 and fiscal 2007, we capitalized $0.6 million, $16.2 million, and $3.6
million, respectively, of externally purchased software costs. The fiscal 2008
amount was related to the acquisition of Pathmark. These costs are being
amortized over five years.
55
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Externally purchased and internally developed software are classified
in "Property - Equipment" on our Consolidated Balance Sheets.
Earnings (Loss) Per Share
- -------------------------
Basic earnings (loss) per share is computed by dividing income (loss)
available to common shareholders by the weighted average shares outstanding for
the reporting period. Diluted earnings (loss) per share reflects all potential
dilution, using either the treasury stock method or the "if-converted" method,
and assumes that the convertible debt, stock options, restricted stock,
performance restricted stock, warrants, preferred stock, and other potentially
dilutive financial instruments were converted into common stock on the first day
of the period. If the conversion of a potentially dilutive security yields an
antidilutive result, such potential dilutive security is excluded from the
diluted earnings per share calculation. Refer to Note 18 - Earnings (Loss) per
Share for the related calculations.
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 $39.7 million and $46.7 million at February
27, 2010 and February 28, 2009, 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.
Accounts Receivable
- -------------------
Our accounts receivables primarily include amounts due from vendor
allowances, third party insurance billings and receivables from subtenants.
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 at the lower of cost
or market. As of February 27, 2010 and February 28, 2009, the cost of 63.5% and
61.0% of our inventories, respectively, was determined using the first-in, first
out ("FIFO") method and the cost of 36.5% and 39.0% of our inventories,
respectively, was determined using the last-in, first-out ("LIFO") method. At
February 27, 2010 and February 28, 2009, the excess of estimated current costs
over LIFO carrying values, or LIFO reserves, were approximately $9.3 million and
$10.1 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.
56
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 impairment, we measure such impairment of long-lived
intangible assets as the difference between the carrying value and the fair
value of the assets. Refer to Note 5 - Valuation of Long-Lived Assets for
impairment analyses performed and the resulting impairment charges.
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 ten years. Leasehold improvements are amortized
over the lesser of their estimated useful lives or the remaining available lease
terms, up to a maximum life of 10 years. Property leased under capital leases is
amortized over the lives of the respective leases or over their economic useful
lives, whichever is shorter. Land is not subject to depreciation. During fiscal
2009, fiscal 2008 and fiscal 2007, in addition to the impairment losses
discussed in Note 5 - Valuation of Long-Lived Assets, we disposed of certain
assets, which resulted in losses from continuing operations of $0.1 million and
$1.1 million and a net gain from continuing operations of $13.7 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, significant impairment of long-lived assets, or
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. We have eight reporting
units, seven of which have goodwill and are assessed for impairment: North,
Central, Waldbaums and South (SuperFresh), which comprise our Fresh reportable
segment; Pathmark; Gourmet; and Food Basics and Beer, Wine & Sprits, which
comprise our Other reportable Segment. 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
57
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
recognized for the difference. Refer to Note 3 - Goodwill and Other Intangible
Assets for impairment analyses performed and impairment charges recorded.
Our only 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 value of the indefinite-lived intangible asset is less than its
carrying value. Refer to Note 3 - Goodwill and Other Intangible Assets for
impairment analyses performed and impairment charges recorded.
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 $58.8 million and $60.3 million
at February 27, 2010 and February 28, 2009, 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
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 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 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 $74.2 million and $208.4
million, respectively, at February 27, 2010 and $77.6 million and $153.9
million, respectively, at February 28, 2009. 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).
58
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
During fiscal 2009, our worker's compensation and general liability
reserves increased by approximately $51.1 million ($38.1 million for continuing
operations and $13.0 million for discontinued operations), primarily due to a
change in estimate of approximately $48.0 million related to the negative
development of prior year claims and the change in the mix of claims between our
continuing and discontinued operations, and the related state assessment for
such claims of approximately $5.4 million. These estimates are determined by
actuarial projections of losses. 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.
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.
Redeemable Preferred Stock
- --------------------------
The initial carrying amount of our preferred stock issued in August
2009 was valued at fair value on the date of issuance, net of closing and
issuance costs. Based on the terms of the preferred stock agreement, our
preferred stock could not be converted into more than 19.99% of the common stock
outstanding prior to its issuance without shareholder approval. The shares that
were immediately convertible without shareholder approval were recorded within
temporary stockholders' equity, and the shares requiring shareholder approval to
become convertible were classified as a liability up to the date of receiving
shareholder approval. The portion of the issuance originally classified within
"Preferred stock liability" was recorded at its fair value, with the related
issuance cost amortization recorded within "Interest expense" over its life.
Dividends relating to preferred stock originally classified as a liability were
also recorded within "Interest expense". Upon receiving the required shareholder
approval authorizing the convertibility of the remaining shares on December 15,
2009, we have reclassified the book value of the liability on the date of the
shareholder approval net of the related issuance costs, to temporary
stockholders' equity. Refer to Note 12 - Redeemable Preferred Stock for
additional information relating to our preferred stock issuance.
Our preferred stock classified within temporary stockholders' equity is
recorded at liquidation value, net of transaction costs and the embedded
beneficial conversion feature. The discount for shares classified within
temporary stockholders' equity is accreted through "Additional paid-in capital,"
in the absence of retained earnings, over the period from the date of issuance
to the earliest redemption date. Dividends relating to preferred stock recorded
within temporary stockholders' equity are recorded within "Additional paid-in
capital," in the absence of retained earnings.
Our preferred stock contains an embedded beneficial conversion feature
since the fair value of our Company's common stock on the date of issuance was
in excess of the effective conversion price. The
59
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
embedded beneficial conversion feature was recorded by allocating a portion of
the proceeds equal to the intrinsic value of the feature to "Additional
paid-in-capital". The intrinsic value of the feature is calculated on the
issuance date by multiplying the difference between the quoted market price of
our common stock and the effective conversion price by the number of common
shares into which the shares recorded within temporary stockholders' equity
convert. The resulting discount on the immediately convertible shares is
recorded within "Additional paid-in capital" and is amortized over the period
from the date of issuance to the stated redemption date. The additional
beneficial conversion feature relating to preferred stock that became
convertible and was reclassified to temporary equity upon receiving shareholder
approval is amortized from December 15, 2009 through the stated redemption date.
Refer to Note 12 - Redeemable Preferred Stock for additional information.
Comprehensive Loss
- ------------------
Our other comprehensive loss relates to changes in foreign currency
translation, pension and other postretirement benefits and unrealized gains
(losses) on marketable securities available for sale.
Income Taxes
- ------------
We provide deferred income taxes on temporary differences between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax regulations. A valuation allowance is recorded to
reduce a deferred tax asset to the amount expected to be realized. Our Company
records sales and use tax on a net basis (excluded from "Sales" and included in
"Store operating, general and administrative expense" in our Consolidated
Statements of Operations).
Recently Adopted Accounting Guidance
- ------------------------------------
Postretirement Plans. In December 2008, the FASB issued new accounting
guidance to expand employer's disclosures about plan assets of a defined benefit
pension or other postretirement plan to 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. Refer to Note 13 - Retirement Plans and Benefits for related
disclosures.
Investments in Certain Entities That Calculate Net Asset Value per
Share (or Its Equivalent). During fiscal 2009, we adopted new accounting
guidance, which allows net asset value to be used in estimating the fair value
of alternative investments without readily determinable fair values. It also
requires additional disclosures of redemption restrictions, unfunded commitments
and investment strategies. Refer to Note 13 - Retirement Plans and Benefits for
the application of this guidance to our disclosures of our Company's pension
plan assets.
Convertible Debt. During fiscal 2009, we adopted the new accounting
guidance for convertible debt instruments that may be settled in cash upon
conversion, which requires separate recognition of the liability and equity
components of convertible debt instruments with cash settlement features in a
manner that reflects an issuer's nonconvertible debt borrowing rate and
accretion of the resulting debt discount over the expected life of the
convertible debt. Financial statements for prior periods have been adjusted to
reflect the retroactive application of this guidance. Refer to Note 10 -
Indebtedness and Other Financial Liabilities for related disclosures and tables.
60
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Other than Temporary Impairments. During fiscal 2009, we adopted the
amended accounting guidance for determining whether impairment in debt
securities should be considered other-than-temporary and the related accounting
and disclosure requirements. The adoption of this guidance did not have a
material effect on our consolidated financial statements.
Fair Value Measurement. During fiscal 2009, we adopted the new
accounting guidance relating to fair value measurements of our nonrecurring
nonfinancial assets and nonfinancial liabilities, which include goodwill, long
lived assets and store exit costs, and are measured at fair value to test for
and measure impairment, when necessary. Refer to Note 3 - Goodwill and Other
Intangible Assets and Note 5 - Valuation of Long-Lived Assets for a summary of
impairment charges recorded during fiscal 2009.
During fiscal 2009, we adopted the new accounting guidance for interim
and annual disclosures of the fair value of financial instruments, and the
methods and significant assumptions used to estimate fair value. During fiscal
2009, we also adopted the new accounting guidance for determining fair value
when the volume level of activity for the asset or liability has significantly
decreased and identifying transactions that are not orderly, as well as the
expanded fair value disclosure requirements for all equity and debt securities
by major security type. Refer to Note 4 - Fair Value Measurements for related
disclosures.
During fiscal 2009, we adopted the new accounting guidance for
estimating the fair value of a liability when a quoted price in an active market
for the identical liability is not available. The adoption of this guidance did
not have a material impact on our consolidated financial statements.
Intangible Assets. During fiscal 2009, we adopted the new accounting
guidance relating to determining the useful life of intangible assets. The
adoption of the new guidance did not have a material impact on our consolidated
financial statements.
Business Combinations. During fiscal 2009, we adopted the new
accounting guidance for business combinations for recognizing and measuring in
the acquirer's financial statements of any noncontrolling interest in the
acquiree, the identifiable assets and goodwill acquired and the liabilities
assumed, including those that arose from contingencies. Our acquisition of
Pathmark was not impacted by this guidance as it applies to transactions with
acquisition dates during or after our fiscal 2009.
Recently Issued Accounting Guidance
- -----------------------------------
Fair Value Measurement. In January 2010, the FASB issued new accounting
guidance requiring additional disclosures about the different classes of assets
and liabilities measured at fair value, valuation techniques and inputs used,
the activity in Level 3 fair value measurements, and the transfers between
Levels 1 and 2. It also clarified guidance around disaggregation and disclosures
of inputs and valuation techniques for Level 2 and Level 3 fair value
measurements. The current guidance is effective beginning with the first quarter
of our fiscal 2010, except for the new disclosures relating to the Level 3
reconciliation, which are effective for the first quarter of our fiscal 2011. We
do not expect that this guidance will have a material impact on our consolidated
financial statements.
Variable Interest Entities. In June 2009, the FASB issued new accounting
guidance relating to consolidation of variable interest entities ("VIEs"), with
additional disclosure requirements relating to involvement in VIEs. The new
guidance is effective beginning with our fiscal 2010. The adoption of this
standard is not expected to have a material impact on our consolidated financial
statements.
61
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Share Lending Arrangements. In June 2009, the FASB issued new guidance
on accounting for own-share lending arrangements in contemplation of convertible
debt issuance or other financing, which requires share lending arrangements to
be measured at fair value and recognized as a debt issuance cost, amortized
using the effective interest method over the life of the financing arrangement
as interest cost. The loaned shares are excluded from basic and diluted earnings
per share, unless a default occurs. In case default becomes probable, expense
equal to the fair value of the unreturned loaned shares, net of any probable
recoveries, must be recognized. This guidance is effective beginning with our
fiscal 2010, with retrospective application required. Our share lending
arrangement with Lehman Europe, who is a party to a 3,206,058 share lending
agreement with our Company (refer to Note 19 - Capital Stock), is subject to
this default provision guidance as a result of their September 15, 2008
bankruptcy filing. In connection with Lehman Europe's default, we will record a
retrospective adjustment of $28.3 million during the first quarter of fiscal
2010, which represents the fair value of the unreturned shares at September 15,
2008, to our third quarter of fiscal 2008 financial statements by charging
"Store operating, general and administrative expense" and crediting "Additional
Paid In Capital". In our Company's first quarter Form 10-Q for the 16 weeks
ended June 19, 2010, this expense will be reflected as an adjustment to the
opening "Accumulated deficit" within Stockholder's Equity, and the loaned shares
will be included in basic and diluted earnings per shares, consistent with the
earnings per share treatment in our filings since September 15, 2008.
NOTE 2 -- Acquisition of Pathmark Stores, Inc.
On December 3, 2007, our Company completed the acquisition of 100% of
Pathmark Stores, Inc. ("Pathmark") for $1.4 billion in cash, stock, assumed or
retired debt, warrants and options. Pathmark is a regional supermarket chain
with supermarkets in New York, New Jersey and Philadelphia metropolitan areas.
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. 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. 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.
62
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Historical Pro Forma Combined
February 23, 2008 Impact Pathmark February 23, 2008
----------------- --------------- -----------------
Sales $6,401,130 $2,981,510 $9,382,640
Income (loss) from continuing operations 86,578 (146,108) (59,530)
Net loss (161,082) (146,108) (307,190)
Net income (loss) per share - basic
Continuing operations $ 1.99 $ (1.22)
Discontinued operations (5.69) (5.05)
---------- ----------
Net loss per share - basic $ (3.70) $ (6.27)
========== ==========
Net income (loss) per share - diluted
Continuing operations $ 1.36 $ (1.22)
Discontinued operations (5.59) (5.05)
---------- ----------
Net loss per share - diluted $ (4.23) $ (6.27)
========== ==========
Included in this pro forma financial information for fiscal 2007 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 is $7.9 million in equity earnings relating to our equity
investment in Metro, Inc.
For purposes of computing pro forma net income (loss) per share we used
common shares outstanding at February 23, 2008 of 57,100,955 less shares
borrowed in our share lending agreement of 8,134,002 as it reasonably
approximates the merger effect on weighted average shares outstanding for fiscal
2007.
NOTE 3 - Goodwill and Other Intangible Assets
Goodwill
- --------
During the fourth quarter of fiscal 2007, we completed our acquisition
of Pathmark. In connection with this purchase, we recorded Goodwill in the
amount of $475.9 million. This goodwill is not deductible for tax purposes. We
allocated 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.
During fiscal 2007, we also completed the purchase of Best Cellars and
recorded goodwill in the amount of $1.8 million within our Other segment.
63
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
As of February 27, 2010 and February 28, 2009, our goodwill balance was
$115.2 million and $483.6 million, respectively. Changes in the carrying amount
of goodwill by reportable segment during fiscal 2009 were as follows:
Fresh Pathmark Gourmet Other Total
--------- --------- --------- --------- ---------
Balance as of February 28, 2009:
- -------------------------------
Goodwill $ 126,609 $ 338,048 $ 12,720 $ 6,183 $ 483,560
Accumulated impairment losses - - - - -
--------- --------- --------- --------- ---------
126,609 338,048 12,720 6,183 483,560
Adjustment to goodwill* (5,792) (16,208) (610) (209) (22,819)
Impairment losses (23,704) (321,840) - - (345,544)
Balance as of February 27, 2010:
- -------------------------------
Goodwill 120,817 321,840 12,110 5,974 460,741
Accumulated impairment losses (23,704) (321,840) - - (345,544)
--------- --------- --------- --------- ---------
$ 97,113 $ - $ 12,110 $ 5,974 $ 115,197
========= ========= ========= ========= =========
* During the second quarter of fiscal 2009, the amount of goodwill related to
the Pathmark acquisition was reduced by $22.8 million as a result of an
adjustment to the deferred tax valuation allowance that should have been
released in connection with the original purchase price allocation.
During the third quarter of fiscal 2009, we concluded that an interim
triggering event had occurred for purposes of testing whether any portion of the
$321.8 million goodwill balance attributable to our Pathmark reporting unit was
impaired. Based on our testing, we impaired our goodwill by $321.8 million, as a
result of which no goodwill remains at our Pathmark reporting unit. There were
no triggering events during the third quarter of fiscal 2009 for our remaining
reporting units.
During the fourth quarter of fiscal 2009, we performed our annual
goodwill impairment testing for our remaining reporting units (other than
Pathmark) and recorded additional impairment of the full amount of the $23.7
million goodwill balance attributable to the South (SuperFresh) reporting unit.
In calculating the impairments described above, we estimated the future
discounted cash flows for each of these reporting units. These estimates
included assumptions for reduced shorter term internal revenue and profitability
forecasts based on recent trends, partially offset by an estimate for
improvement expected from the impact of current business improvement initiatives
expected to be delivered by fiscal 2011 and a perpetual growth rate for cash
flow in the terminal year of approximately 1.5% for over 95% of the goodwill
being assessed for impairment. We assumed a market-based weighted average cost
of capital of 11.0% to discount cash flows and a blended tax rate of 42.0%. We
determined that our carrying value in our Pathmark and South reporting units
exceeded our fair value, indicating that goodwill was potentially impaired.
As a result, we performed the second step of the goodwill impairment
test by allocating the calculated fair value to the assets and liabilities
(other than goodwill) for the Pathmark and South reporting units. As there was
no excess fair value at either reporting unit after allocating of the calculated
fair value to the assets and liabilities, the implied fair value of goodwill at
the both reporting units was nil. Therefore, we recorded impairments at the
Pathmark and South reporting units of $321.8 million and $23.7 million,
respectively, during the third and fourth quarters of fiscal 2009. Subsequent to
the impairment, no goodwill remains at the Pathmark or South reporting units.
64
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
We determined that the fair values of reporting units comprising our
Fresh and Gourmet reportable segments exceeded the related carrying values,
inclusive of goodwill of $97.1 million and $12.1 million, respectively, by over
100%. The fair value of our Other reportable segment exceeded its carrying
value, inclusive of $6.0 million of goodwill by over 15%. Thus, a significant
decrease in fair value would be required before the goodwill balance at these
reporting units would have a carrying value in excess of the fair value.
We believe the assumptions used in calculating the estimated fair value
of the reporting units are reasonable and attainable. However, we can provide no
assurances that we will achieve such projected results. Further, we can provide
no assurances that we will not have to recognize additional impairment of
goodwill in the future due to other market conditions or changes in our interest
rates. Recognition of additional impairment of a significant portion of our
goodwill would negatively affect our Company's reported results of operations
and total capitalization.
There were no goodwill impairment charges recorded during fiscal 2008
and fiscal 2007.
Intangible Assets, net
- ----------------------
Intangible assets, net, were acquired upon our acquisition of Pathmark
in December 2007 and consisted of the following:
At February 27, 2010 At February 28, 2009
--------------------------------------------- ---------------------------
Weighted Avg. Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period (years) Amount Amortization Amount Amortization
-------------- -------- ------------ -------- ------------
Loyalty card customer relationships 5 $ 19,200 $ 7,595 $ 19,200 $ 3,376
In-store advertiser relationships 20 14,720 1,642 14,720 906
Pharmacy payor relationships 13 75,000 12,870 75,000 7,100
Pathmark trademark Indefinite 60,900 - 127,300 -
-------- -------- -------- --------
Total $169,820 $ 22,107 $236,220 $ 11,382
======== ======== ======== ========
Based on the lower revenues within our Pathmark reporting unit coupled
with lower near term profitability projections and lower estimated market
royalty rate expectations due to current general economic conditions, we
concluded that there was an interim triggering even during the third quarter of
fiscal 2009. As a result, we determined that the carrying value exceeded the
indicated fair value of the Pathmark Trademark, resulting in an impairment
charge of $49.9 million. During the fourth quarter of fiscal 2009, we completed
our annual impairment test of our indefinite-lived intangible asset and as a
result of further lowering our anticipated revenue projections, concluded that
additional impairment of $16.5 million was required, for a total impairment of
$66.4 million recorded during fiscal 2009. We believe that our estimates are
appropriate based upon our current assumptions. However, we may be required to
record impairment charges in future periods if our revenues differ from our
current projections.
We believe that our amortizable intangible assets are not impaired.
Amortization expense of these finite-lived Pathmark intangible assets for fiscal
2009, fiscal 2008 and fiscal 2007 was $10.7 million, $9.2 million, and $2.1
million, respectively.
65
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
The following table summarizes the estimated future amortization
expense for other intangible assets:
2010 10,725
2011 10,725
2012 9,670
2013 6,505
2014 6,505
Thereafter 42,683
Favorable Lease Rights
- ----------------------
In connection with our acquisition of Pathmark in December 2007, we
also acquired net favorable lease rights of $444.6 million, which had a balance
of $401.2 and $440.5 million as of February 27, 2010 and February 28, 2009,
respectively, and were recorded in "Property, net" and "Other non-current
liabilities" in our Consolidated Balance Sheets. 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 27, 2010 is 17.4 years. Amortization expense related to
the net favorable lease rights was $20.1 million, $20.5 million and $4.8 million
for fiscal 2009, fiscal 2008 and fiscal 2007, respectively. Estimated annual
amortization expense for the next five years is as follows: fiscal 2010 - $18.8
million, fiscal 2011 - $17.9 million, fiscal 2012 - $17.8 million, fiscal 2013 -
$17.7 million and fiscal 2014 - $18.2 million.
NOTE 4 - Fair Value Measurements
The accounting guidance for fair value measurement defines and
establishes a framework for measuring fair value. Inputs used to measure fair
value are classified based on the following three-tier fair value hierarchy:
Level 1 - Quoted prices in active markets for identical assets or
liabilities.
Level 2 - Directly or indirectly observable inputs other than Level 1
quoted prices in active markets. Our Level 2 liabilities include warrants, which
are valued using the Black Scholes pricing model with inputs that are observable
or can be derived from or corroborated by observable market data. In addition,
our investments in money market funds, which are considered cash equivalents,
are classified as Level 2, as they are valued based on their reported Net Asset
Value (NAV).
Level 3 - Unobservable inputs that are supported by little or no market
activity 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 our 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.
66
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
The following tables provide the assets and liabilities carried at fair
value measured on a recurring basis as of February 27, 2010 and February 28,
2009:
Fair Value Measurements at Feb. 27, 2010 Using
----------------------------------------------
Quoted Prices Significant Other Significant
Total Carrying in Active Observable Unobservable
Value at Markets Inputs Inputs
Feb. 27, 2010 (Level 1) (Level 2) (Level 3)
--------------- ----------- ------------- -------------
Assets:
- ------
Cash equivalents $ 158,695 $ - $ 158,695 $ -
=============== =========== ============= =============
Liabilities:
- -----------
Series B Warrant $ 13,946 $ - $ 13,946 $ -
=============== =========== ============= =============
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:
- -----------
Series B Warrant $ 4,766 $ - $ 4,766 $ -
=============== =========== ============= =============
Level 3 Financial Assets
- ------------------------
Our 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. These
securities were valued with the assistance of broker pricing models that
incorporate transaction details such as contractual terms, maturity, timing and
amount of future cash inflows, and assumptions about liquidity. As of February
27, 2010 and February 28, 2009, we had restricted marketable securities of nil
and $4.9 million, respectively, which were held by Bank of America in the
Columbia Fund. These securities were classified as available-for-sale and
classified within "Restricted marketable securities" and "Other assets". On
December 6, 2007, Bank of America froze the Columbia Fund as a result of the
increased risk in subprime asset backed securities. 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 and these amounts were
categorized as Level 3.
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 28, 2009 to February 27, 2010:
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
--------------------------------
Restricted Marketable Securities
--------------------------------
Beginning Balance $ 4,857
Total realized and unrealized gains (losses) included in:
Realized losses (1) (861)
Other comprehensive income (2) 1,635
Settlements (5,631)
-----------------
Ending Balance $ -
=================
67
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(1) Amounts are recorded in "Store operating, general and administrative
expense" in the Consolidated Statements of Operations.
(2) Represents unrealized gains relating to Level 3 assets recorded during
fiscal 2009, primarily as a result of the improved pricing of certain underlying
securities included in the fund. As of February 27, 2010 and February 28, 2009,
there were no investments with unrealized gains or losses in "Other
comprehensive income (loss)."
During fiscal 2009, fiscal 2008 and fiscal 2007, we received
distributions from the Columbia Fund in the amount of $5.6 million, $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, $0.9 million and $0.2 million, respectively. In addition, during
fiscal 2008 and fiscal 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 was not expected to
be recovered from future distributions from the fund. During fiscal 2009, as a
result of an increase in the net asset value compared to prior years, we were
able to recover the previously recorded realized losses, resulting in a gain of
$1.6 million, which was recorded within "Store operating, general and
administrative expense."
Nonfinancial Assets and Liabilities Measured on a Nonrecurring Basis
- --------------------------------------------------------------------
Fair value measurements of our nonfinancial assets and nonfinancial
liabilities on a nonrecurring basis using Level 3 inputs are primarily used in
the impairment analyses of our goodwill and other indefinite-lived intangible
assets, our long-lived assets and closed store occupancy costs. We perform our
annual review of goodwill and other intangible assets for impairment in the
fourth quarter of each fiscal year unless an interim triggering event has
occurred indicating the possibility of an impairment. Refer to Note 3 - Goodwill
and Other Intangible Assets for further information relating to the carrying
value of our goodwill and other intangible assets and the goodwill impairment
charge recorded during fiscal 2009. Long-lived assets and closed store occupancy
costs were measured at fair value on a nonrecurring basis using Level 3 inputs,
as unobservable inputs were used to measure their fair value. Refer to Note 5-
Valuation of Long-Lived Assets, Note 6 - Discontinued Operations and Note 7 -
Asset Disposition Initiatives for more information relating to the valuation of
these assets and liabilities and the impairment of our long-lived assets.
Long-Term Debt
- --------------
The following table provides the carrying values recorded on our
balance sheet and the estimated fair values of financial instruments as of
February 27, 2010 and February 28, 2009:
As of February 27, 2010 As of February 28, 2009
--------------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------- ----------- ----------- -----------
Current portion of long-term debt $ 191 $ 191 $ 5,283 $ 5,283
Long-term debt, net of related discount (1) 990,359 962,040 919,364 675,902
(1) The balance of our Long-term debt decreased by $23.1 million from the amount
reported in our 2008 Annual Report on Form 10-K as a result of the retrospective
application of the new accounting guidance for convertible debt, which we
adopted during the first quarter of fiscal 2009. Refer to Note 10 - Indebtedness
and Other Financial Liabilities for additional information.
Our long-term debt includes borrowings under our line of credit, credit
agreement, related party promissory note and our debt securities. The fair
value of our debt securities are determined based on quoted market prices for
such notes in non-active markets.
68
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
NOTE 5 - 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 impairment exists, we
measure such impairment as the difference between the fair value and carrying
value of the asset.
During fiscal 2009, fiscal 2008 and fiscal 2007, we recorded property
impairment losses as follows:
Fiscal 2009 Fiscal 2008 Fiscal 2007
------------------------------ -------------------------------- ------------------------------
CO(1) DO(1) Total CO (1) DO (1) Total CO (1) DO (1) Total
-------- -------- -------- ---------- -------- -------- --------- -------- -------
Impairments due to closure/
conversion in the normal
course of business (2) $ 6,469 $ - $ 6,469 $ 14,069 $ - $ 14,069 $ 11,657 $ - $11,657
Impairments due to
unrecoverable assets 65,235 - 65,235 - - - - - -
Impairments related to our
discontinued operations (3) - - - - - - - 53,995 53,995
-------- -------- -------- ---------- -------- -------- --------- -------- -------
Total $ 71,704 $ - $ 71,404 $ 14,069 $ - $ 14,069 $ 11,657 $ 53,995 $65,652
======== ======== ======== ========== ======== ======== ========= ======== =======
(1) The headings in the tables included above have been indexed with the
following abbreviations: Continuing Operations (CO) and Discontinued
Operations (DO).
(2) We review assets in stores planned for closure or conversion in the normal
course of business for impairment upon determination that such assets will
not be used for their intended useful lives. Impairment losses on the
related property and equipment are recorded within "Store operating, general
and administrative expense" in our Consolidated Statements of Operations.
(3) The fiscal 2007 impairment charge related to stores closed in the Greater
New Orleans and Midwest Markets and was recorded within "Gain (loss) on
disposal of discontinued operations, net of tax" in our Consolidated
Statements of Operations, as discussed in Note 6 - Discontinued Operations.
Impairments due to unrecoverable assets
- ---------------------------------------
During fiscal 2009, as a result of experiencing increasingly severe
cash flow losses within certain asset groupings, we determined that a triggering
event occurred during our third and fourth quarters for testing the related
asset groups' long-lived assets for potential impairment. We estimated the
future cash flows for these asset groups based on an internal analysis performed
by management. The carrying value was not recoverable from their undiscounted
future cash flows. As a result, we recorded an impairment charge of $65.2
million, primarily attributable to favorable leases and other owned property, to
write down these asset groups' long-lived assets with a carrying amount of
$177.7 million to their fair value of $112.5 million ($40.8 million was recorded
in the third quarter and $24.4 million was recorded in the fourth quarter of
fiscal 2009). The fourth quarter amount included $7.3 million of impairment
charges for capital lease assets, which related to the third quarter of fiscal
2009. The fiscal 2009 impairment charges, $62.9 million of which related to
Pathmark and $2.3 million of which related to South (SuperFresh) reporting unit,
were recorded within "Goodwill, trademark and long-lived asset impairment" in
our Consolidated Statements of Operations.
The effects of changes in estimates of useful lives were not material
to our ongoing depreciation expense.
69
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
NOTE 6 -- Discontinued Operations
We have had multiple transactions throughout the years which met the
criteria for discontinued operations. These events are described based on the
year the transaction was initiated.
2007 Events
- -----------
On May 30, 2007, our Company announced advanced negotiations for the
sale of our non-core stores located within the Greater New Orleans area,
including inventory related to these stores. Our Company ceased sales operations
in all stores not sold as of November 1, 2007. Planned sale transactions for
these stores have been completed resulting in a loss on disposal of $16.5
million 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.
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 from operations of discontinued businesses, net of tax"
and "Gain (loss) on disposal of discontinued businesses, net of tax" for fiscal
2009, fiscal 2008 and fiscal 2007.
Fiscal 2009 Fiscal 2008 Fiscal 2007
-------------- -------------- -------------
Loss from operations of discontinued businesses
Sales $ - $ - $ 562,654
============== ============== =============
Loss from operations of discontinued businesses, before tax (95,848) (58,383) (196,848)
Tax benefit - - -
-------------- -------------- -------------
Loss from operations of discontinued businesses, net of tax $ (95,848) $ (58,383) $ (196,848)
============== ============== =============
Gain (loss) on disposal of discontinued businesses
Property impairments $ - $ - $ (53,995)
Gain on sale of fixed assets - 4,653 3,183
-------------- -------------- -------------
Gain (loss) on disposal of discontinued operations, before tax - 4,653 (50,812)
Tax benefit - - -
-------------- -------------- -------------
Gain (loss) on disposal of discontinued businesses, net of tax $ - $ 4,653 $ (50,812)
============== ============== =============
70
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 2009
------------------------------------------------------------------------------------
Balance at Interest Balance at
2/28/2009 Accretion (1) Adjustments(2) Utilization(3) 2/27/2010
--------------- -------------- --------------- -------------- -----------
2007 Events
- -----------
Occupancy $ 70,583 $ 8,974 $ 46,075 $ (28,723) $ 96,909
Pension withdrawal 59,239 3,674 37 (4,935) 58,015
--------------- -------------- --------------- ------------- -----------
2007 events total 129,822 12,648 46,112 (33,658) 154,924
2005 Event
- ----------
Occupancy 60,327 3,291 5,916 (10,560) 58,974
2003 Events
- -----------
Occupancy 18,712 1,194 5,814 (3,226) 22,494
--------------- -------------- --------------- ------------- -----------
Fiscal 2009 total $ 208,861 $ 17,133 $ 57,842 $ (47,444) $ 236,392
=============== ============== =============== ============= ===========
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 and pension withdrawal 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 and pension withdrawal - - 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
=============== ============== =============== ============= ===========
(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 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 result of changes in circumstances and/or estimates. Adjustments are
recorded as a component of "Loss from operations of discontinued
businesses" on the Consolidated Statements of Operations.
71
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Fiscal 2009
-----------
The charge to occupancy for the 2007, 2005 and 2003 events represents
adjustments for additional occupancy related costs of $46.1 million,
$5.9 million and $5.8 million, respectively, due to changes in our
estimation of such future costs due to the continuing deteriorating
economic conditions in the Midwest real estate market including the
recent bankruptcies in the auto industry. We now expect our occupancy
costs to be higher as the current economic conditions affecting the
Midwest real estate market are expected to persist for some time and
subleased properties in the area have been occurring at heavily
discounted rates as compared to the related contractual agreements.
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.
(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
---------- ---------- ---------- ----------
Total severance payments made to date $ 33,087 $ 2,650 $ 22,528 $ 58,265
Expected future severance payments 58,015 - - 58,015
---------- ---------- ---------- ----------
Total severance payments expected to be incurred 91,102 2,650 $ 22,528 116,280
---------- ---------- ---------- ----------
Total occupancy payments made to date 80,580 57,211 32,747 170,538
Expected future occupancy payments,
excluding interest accretion 96,909 58,974 22,494 178,377
---------- ---------- ---------- ----------
Total occupancy payments expected to be incurred,
excluding interest accretion 177,489 116,185 55,241 348,915
---------- ---------- ---------- ----------
Total severance and occupancy payments made to date 113,667 59,861 55,275 228,803
Expected future severance and occupancy payments,
excluding interest accretion 154,924 58,974 22,494 236,392
---------- ---------- ---------- ----------
Total severance and occupancy payments
expected to be incurred, excluding interest accretion $ 268,591 $ 118,835 $ 77,769 $ 465,195
========== ========== ========== ==========
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
72
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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 27, 2010
------------------------------------------------------------
2007 2005 2003
Events Event Events Total
---------- ---------- ---------- ----------
Other accruals $ 28,528 $ 10,773 $ 3,490 $ 42,791
Other non-current liabilities $ 126,396 $ 48,201 $ 19,004 $ 193,601
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
We evaluated the reserve balances as of February 27, 2010 based on
current information and have concluded that they are adequate to cover future
costs. We will continue to monitor the status of the vacant and subsidized
properties, severance and benefits, and pension withdrawal liabilities, and
adjustments to the reserve balances may be recorded in the future, if necessary.
NOTE 7 - Asset Disposition Initiatives
In addition to the events described in Note 6 - Discontinued
Operations, there were restructuring transactions which were not primarily
related to our discontinued operations 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.
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
73
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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 2009
------------------------------------------------------------------------------------
Balance at Interest Balance at
2/28/2009 Accretion (1) Adjustments(2) Utilization(3) 2/27/2010
-------------- -------------- -------------- -------------- --------------
2005 Event
- ----------
Continuing Operations
Occupancy $ 1,114 $ 11 $ (1,120) $ (5) $ -
Health benefits 904 - 63 (280) 687
-------------- -------------- -------------- -------------- --------------
2005 event total 2,018 11 (1,057) (285) 687
2001 Event
- ----------
Continuing Operations
Occupancy 7,080 452 284 (1,492) 6,324
Discontinued Operations
Occupancy 11,307 618 4 (1,920) 10,009
-------------- -------------- -------------- -------------- --------------
2001 event total 18,387 1,070 288 (3,412) 16,333
1998 Event
- ----------
Continuing Operations
Occupancy 8,696 221 (1,398) (3,421) 4,098
Pension withdrawals and
health benefits 824 - - (158) 666
Discontinued Operations
Occupancy 543 16 - (546) 13
-------------- -------------- -------------- -------------- --------------
1998 event total 10,063 237 (1,398) (4,125) 4,777
-------------- -------------- -------------- -------------- --------------
Fiscal 2009 total $ 30,468 $ 1,318 $ (2,167) $ (7,822) $ 21,797
============== ============== ============== ============== ==============
74
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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
Health benefits 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
Health benefits 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
============== ============== ============== ============== ==============
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
Health benefits 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
Health benefits 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
============== ============== ============== ============== ==============
75
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 in "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 in
"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 2009
-----------
During fiscal 2009, we recorded a $1.1 million adjustment to eliminate
occupancy related costs due to the termination of the lease on the one
remaining property included in the 2005 event. We increased occupancy
related costs for the 2001 event by $0.3 million due to changes in our
estimation of such future costs. Occupancy related costs for the 1998
event were reduced by $1.4 million primarily due to entering into new
sublease agreements that were more favorable than our original
estimates.
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.
(3) Occupancy utilization represents payments made during those periods
for rent. Severance and benefits utilization represents payments made
to terminated employees during the period.
Summarized below are the payments made to date from the time of the
original charge and expected future payments related to these events:
2005 2001 1998
Event Event Event Total
---------- ---------- ---------- ----------
Total severance payments made to date $ 48,995 $ 28,205 $ 30,798 $ 107,998
Expected future severance payments 687 - 666 1,353
---------- ---------- ---------- ----------
Total severance payments expected
to be incurred 49,682 28,205 31,464 109,351
---------- ---------- ---------- ----------
Total occupancy payments made to date 13,856 65,782 119,192 198,830
Expected future occupancy payments,
excluding interest accretion - 16,333 4,111 20,444
---------- ---------- ---------- ----------
Total occupancy payments expected
to be incurred, excluding interest
accretion 13,856 82,115 123,303 219,274
---------- ---------- ---------- ----------
Total severance and occupancy
payments made to date $ 62,851 $ 93,987 $ 149,990 $ 306,828
Expected future severance and
occupancy payments, excluding
interest accretion 687 16,333 4,777 21,797
---------- ---------- ---------- ----------
Total severance and occupancy payments
expected to be incurred, excluding
interest accretion $ 63,538 $ 110,320 $ 154,767 $ 328,625
========== ========== ========== ==========
76
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 2005, 2001 and 1998 events are 2015, 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 27, 2010
-------------------------------------------------
2005 2001 1998
Event Event Event Total
---------- ---------- ---------- ----------
Other accruals $ 336 $ 2,992 $ 2,235 $ 5,563
Other non-current liabilities $ 351 $ 13,341 $ 2,542 $ 16,234
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
We evaluated the reserve balances as of February 27, 2010 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 - Other Accruals
Other accruals are comprised of the following:
At At
Feb. 27, 2010 Feb. 28, 2009
------------- -------------
Self-insurance reserves $ 74,221 $ 77,560
Deferred taxes 3,295 -
Closed store and warehouse reserves 62,189 64,508
Pension withdrawal liabilities 10,461 5,393
GHI Contractual Liability for Employee Benefits 8,066 5,742
Accrued occupancy related costs for open stores 26,952 27,439
Deferred income 26,534 33,558
Deferred real estate income 2,775 2,558
Accrued audit, legal and other 8,758 11,719
Accrued interest 12,509 9,000
Other postretirement and postemployment benefits 2,674 4,153
Accrued advertising 1,911 1,493
Dividends payable on preferred stock 2,982 -
Other 3,189 3,473
-------- --------
Total $246,516 $246,596
======== ========
77
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
NOTE 9 - Other Non-Current Liabilities
Other non-current liabilities are comprised of the following:
At At
Feb. 27, 2010 Feb. 28, 2009
------------- -------------
Unrecognized Tax Benefits $ - $156,267
Deferred taxes 11,367 -
Self-insurance Reserves 208,419 153,870
Closed Store and Warehouse Reserves 187,911 140,593
Pension Withdrawal Liabilities 89,495 109,714
GHI Contractual Liability for Employee Benefits 87,703 85,690
Pension Plan Benefits 109,549 89,842
Other Postretirement and Postemployment Benefits 36,091 34,295
Corporate Owned Life Insurance Liability 60,436 59,529
Deferred Rent Liabilities 57,963 54,047
Deferred Income 68,250 83,128
Unfavorable Lease Liabilities 5,391 12,322
Other 13,634 13,725
-------- --------
Total $936,209 $993,022
======== ========
NOTE 10 - Indebtedness and Other Financial Liabilities
Our debt consists of the following:
At At
Feb. 27, 2010 Feb. 28, 2009
------------- -------------
Line of Credit (1) $ - $ 5,000
Related Party Promissory Note, due August 2, 2011 10,000 10,000
5.125% Convertible Senior Notes, due June 15, 2011 155,333 147,717
9.125% Senior Notes, due December 15, 2011 12,840 12,840
6.750% Convertible Senior Notes, due December 15, 2012 223,838 215,053
11.375% Senior Secured Notes, due August 4, 2015 253,668 -
9.375% Notes, due August 1, 2039 200,000 200,000
Borrowings under Credit Agreement 132,900 331,783
Other 1,971 2,254
-------- ---------
990,550 924,647
Less current portion of long-term debt (191) (5,283)
-------- ---------
Long-term debt $990,359 $ 919,364
======== =========
(1) Expired on December 31, 2009
CREDIT AGREEMENT
- ----------------
On July 23, 2009, our Company amended the December 27, 2007 $675
million Amended and Restated Credit Agreement with Banc of America Securities
LLC and Bank of America, N.A., as the co-lead arranger ("Credit Agreement") in
connection with the private offering of senior secured notes and the sale of
preferred stock, which expires in December 2012. The amended agreement increased
the applicable margins on credit advances, reduced commitments by $20.0 million,
reduced the collateral advance and provided for certain other amendments.
Subject to borrowing base requirements, the amended $655.0 million Credit
Agreement provides for a term loan of $82.9 million, a term loan of $50.0
million and a revolving credit facility of $522.1 million enabling us to borrow
funds and issue letters of credit on a revolving basis. The Credit Agreement
also provides for an increase in commitments of up to an additional $100.0
million, subject to agreement of new and existing lenders. Our obligations under
the Credit
78
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Agreement are secured by certain assets of our Company, including, but not
limited to, inventory, certain accounts receivable, pharmacy scripts, certain
owned real estate and certain Pathmark leaseholds. The Pathmark leaseholds were
removed as eligible collateral throughout fiscal 2009, which resulted in the
total reduction in the borrowing availability under the revolving credit
facility of approximately $73.0 million. Borrowings under the Credit Agreement
bear interest based on LIBOR or Prime interest rate pricing. The terms of this
agreement restrict our ability to pay cash dividends on common shares. Subject
to certain conditions, we are permitted to make bond repurchases and may do so
from time to time in the future.
As of February 27, 2010, there were $132.9 million of loans and $202.3
million in letters of credit outstanding under this agreement. As of February
27, 2010, after reducing availability for borrowing base requirements, we had
$203.5 million available under the Amended Credit Agreement. In addition, we
have invested cash available to reduce borrowings under this Credit Agreement or
to use for future operations of $168.6 million as of February 27, 2010.
Fees paid and capitalized in connection with the Credit Agreement were
$23.3 million and the net amortized amounts are included in "Other assets" on
our Consolidated Balance Sheet at February 27, 2010 and February 28, 2009.
RELATED PARTY PROMISSORY NOTE
- -----------------------------
On September 2, 2008, our Company borrowed $10.0 million from Erivan
Karl Haub and issued a three-year, unsecured promissory note (the "Note").
Erivan Haub is the father of our Executive Chairman and is a limited partner of
Tengelmann. The principal is due in a lump sum payment on August 18, 2011 and
will bear interest at the rate of 6% per year, payable in 12 equal payments of
$0.15 million over the term of the Note. During fiscal 2009 and fiscal 2008, we
paid interest of $0.75 million and $0.15 million, respectively, and recorded
interest expense of $0.6 million and $0.3 million, respectively, on this note.
SENIOR SECURED NOTES
- --------------------
On August 4, 2009, we issued $260.0 million of 11.375% senior secured
notes due 2015 (the "Notes") at a price equal to 97.385% of their face value.
The Notes represent second lien secured obligations, guaranteed by all of our
Company's domestic subsidiaries. The Notes bear interest at a fixed rate of
11.375% payable semi-annually in cash. As of February 27, 2010, the carrying
value of the notes was $253.7 million. The proceeds from this offering and our
preferred stock offering on August 4, 2009 (Refer to Note 12 - Redeemable
Preferred Stock) were used to repay a portion of our existing variable debt.
The Notes were offered only to qualified institutional buyers in
reliance on Rule 144A under the Securities Act of 1933, as amended (the
"Securities Act"), and only to non-U.S. investors pursuant to Regulation S
outside the United States. The Notes have not been registered under the
Securities Act or the securities laws of any other jurisdiction and may not be
offered or sold in the United States absent registration or an applicable
exemption from registration requirements. The Notes contain customary covenants
found in secured notes, including, among other things, restrictions on the
incurrence of additional indebtedness, asset sales, liens and restricted
payments.
Pursuant to a registration rights agreement dated August 4, 2009, we
have agreed to exchange the Notes for a new issue of substantially identical
debt securities registered under the Securities Act. Our Company has agreed to
use commercially reasonable efforts to file a registration statement, to cause
it to be effective with the SEC, and to consummate the exchange offer prior to
August 4, 2011. If such registration statement ceases to be effective during the
registration period, subject to certain exceptions, we will be
79
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
required to pay 0.25% of additional per annum interest for the first 90-day
period immediately following the agreed upon registration date, increased by an
additional 0.25% per annum for each subsequent 90-day period, up to the maximum
additional rate of 1.0% per annum thereafter, or $2.6 million per year, until
the exchange offer is made. We currently do not have a liability recorded with
respect to this arrangement, as we believe that payment is improbable.
PUBLIC DEBT OBLIGATIONS
- -----------------------
As of February 27, 2010 and February 28, 2009, we had outstanding notes
of $592.0 million and $575.6 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 unsecured notes are not guaranteed by
any of our subsidiaries.
Convertible Senior Notes
- ------------------------
On December 18, 2007, we completed a public offering and issued $165.0
million 5.125% Convertible Senior Notes due 2011 and $255.0 million 6.750%
Convertible Senior Notes due 2012, to pay down our one-year $370 million Senior
Secured Bridge Credit Agreement entered into on December 3, 2007 in connection
with funding the acquisition of Pathmark. The 5.125% Notes are not redeemable at
our option at any time. The 6.750% 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 5.125% Notes is $36.40, representing a 30.0% premium to the
offering price of $28.00 and the initial conversion price of the 6.750% 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
the 5.125% Notes to $46.20 or a 65% premium and increase the conversion price of
the 6.750% Notes to $49.00 or a 75% premium. Refer to the Call Option and
Financing Warrants discussion below for additional information and the effect of
Lehman Brothers OTC Derivatives, Inc. "LBOTC" bankruptcy, which effectively
reduced the conversion prices for 50% of our Notes to their stated prices.
Upon the completion of our public offering of the Notes on 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.
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 an increase in
available shares
80
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
primarily due to the settlement 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 value of the conversion features of the 5.125%
and 6.750% convertible senior notes of $13.8 million and $14.7 million,
respectively, was reclassified from liabilities to "Additional paid-in-capital"
on our Consolidated Statements of Stockholder's Equity and Comprehensive (Loss)
Income as of June 26, 2008.
Our $255.0 million 6.750% Convertible Senior Notes that were issued in
December 2007 are subject to the new accounting guidance, which we adopted
during the first quarter of fiscal 2009 (Refer to Note 1 - Summary of
Significant Accounting Policies) relating to convertible debt instruments with
cash settlement features, as our estimated nonconvertible debt borrowing rate is
higher than the current contractual rate on these notes. We estimated that our
effective interest rate for similar debt without the conversion feature was
approximately 12.000%. As a result, we retrospectively recognized cumulative
additional non-cash interest expense of $3.9 million from the date of issuance
of these Convertible Senior Notes through February 28, 2009. During fiscal 2009,
fiscal 2008 and fiscal 2007, we recognized additional non-cash interest expense
of $4.2 million, $3.5 million and $0.4 million, respectively, as a result of our
adoption of this new accounting guidance. Our non-cash interest expense will
increase by approximately $18.3 million in total in subsequent periods during
which our convertible notes remain outstanding. Upon adoption, we also
reclassified $26.4 million of debt and deferred financing costs to "Additional
paid-in capital", net of deferred taxes.
Due to the retrospective application of the new accounting guidance
relating to certain convertible debt instruments, our prior period consolidated
financial statements have been adjusted as follows:
Consolidated Statements of Operations Fiscal 2008 Fiscal 2007
-------------------------------------- --------------------------------------
As adjusted in As reported in As adjusted in As reported in
this Annual Report Annual Report this Annual Report Annual Report
on Form 10-K on Form 10-K on Form 10-K on Form 10-K
------------------ ------------------ ------------------ ------------------
Interest expense $ (157,591) $ (154,137) $ (112,218) $ (111,816)
(Loss) income from continuing operations (89,605) (86,151) 86,578 86,980
Net loss (143,335) (139,881) (161,082) (160,680)
Per share data
Net (loss) income per share - basic:
Continuing operations $ (1.76) $ (1.69) $ 1.99 $ 2.00
Discontinued operations (1.05) (1.05) (5.69) (5.69)
----------------- ----------------- ----------------- -----------------
Net loss per share - basic $ (2.81) $ (2.74) $ (3.70) $ (3.69)
================= ================= ================= =================
Net (loss) income per share - diluted:
Continuing operations $ (4.35) $ (4.28) $ 1.36 $ 1.37
Discontinued operations (1.06) (1.13) (5.59) (5.59)
----------------- ----------------- ----------------- -----------------
Net loss per share - diluted $ (5.41) $ (5.41) $ (4.23) $ (4.22)
================= ================= ================= =================
81
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Consolidated Balance Sheets At February 28, 2009 At February 23, 2008
------------------------------------- -------------------------------------
As adjusted in As reported in As adjusted in As reported in
this Annual Report Annual Report this Annual Report Annual Report
on Form 10-K on Form 10-K on Form 10-K on Form 10-K
------------------ ----------------- ------------------ -----------------
Assets:
Prepaid expenses and other current assets $ 67,465 $ 66,190 $ 96,788 $ 94,969
Current assets 918,522 917,247 886,245 884,426
Other assets 193,953 195,856 234,439 236,995
Liabilities:
Long-term debt 919,364 942,514 732,172 758,886
Stockholders' equity:
Additional paid-in capital 464,679 438,300 399,973 373,594
(Accumulated deficit)/Retained earnings (127,314) (123,458) 16,021 16,423
Total stockholders' equity 289,893 267,370 444,120 418,143
Consolidated Statement of Cash Flows Fiscal 2008 Fiscal 2007
------------------------------------- -------------------------------------
As adjusted in As reported in As adjusted in As reported in
this Annual Report Annual Report this Annual Report Annual Report
on Form 10-K on Form 10-K on Form 10-K on Form 10-K
------------------ ----------------- ------------------ -----------------
Cash flows from operating activities:
Net loss $ (143,335) $ (139,881) $ (161,082) $ (160,680)
Non-cash interest expense 26,651 23,197 5,979 5,577
The net carrying value of the 6.750% Convertible Senior Notes as of
February 27, 2010 and February 28, 2009 was $223.8 million and $215.1 million,
respectively, net of unamortized discount of $31.2 million and $39.9 million,
respectively. As of February 27, 2010, our remaining unamortized discount will
be recognized as follows:
Fiscal 2010 $ 9,884
Fiscal 2011 11,139
Fiscal 2012 10,140
------------------
$ 31,163
==================
DEBT MATURITIES
- ---------------
Maturities on indebtedness for the next five fiscal years and
thereafter are:
Fiscal 2010 $ 191
Fiscal 2011 188,044
Fiscal 2012 388,118
Fiscal 2013 234
Fiscal 2014 250
Fiscal 2015 and thereafter 460,872
Interest payments on indebtedness were approximately $146.2 million,
$131.3 million and $100.8 million for fiscal 2009, fiscal 2008 and fiscal 2007,
respectively.
SERIES B WARRANTS
- -----------------
Our Series B warrants issued as part of the acquisition of Pathmark on
December 3, 2007, 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 our Company to
purchase our common stock held by Tengelmann to settle these warrants. Based on
82
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
the rights provided to Tengelmann, our Company 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 our shares. Therefore,
these warrants are recorded as liabilities and marked-to-market each reporting
period based on our Company's current stock price. Series A warrants, which were
also issued as part of the acquisition of Pathmark were cash settled on May 7,
2008 for $45.7 million.
The value of the Series B warrants as of February 27, 2010 and
February 28, 2009 was $13.9 million and $4.8 million, respectively, and is
included in "Other financial liabilities" on our Consolidated Balance Sheets.
The following assumptions and estimates were used in the Black-Scholes model
used to value the Series B warrants:
February 27, 2010 February 28, 2009
----------------- -----------------
Expected life 5.28 years 6.28 years
Volatility 68.6% 61.3%
Dividend yield 0% 0%
Risk-free interest rate 2.30% 2.69%
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 19 - 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 for all potential issuances of common stock.
Therefore, the financing warrants were accounted for as freestanding derivatives
required to be settled in cash, recorded as a long-term liability and marked to
market each reporting period utilizing the Black-Scholes option pricing model
until sufficient shares became available for their potential issuance upon the
majority shareholder vote on June 26, 2008. As a result, the fair value of the
financing warrants of $28.9 million was reclassified from liabilities to
"Additional paid-in-capital" on our Consolidated Statements of Stockholder's
Equity and Comprehensive (Loss) Income as of June 26, 2008.
On or about October 3, 2008, Lehman Brothers OTC Derivatives, Inc. or
"LBOTC," which accounts for 50% of our 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 convertible senior notes to their stated prices of $36.40
for the 5.125% Notes and $37.80 for the 6.750% 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 these transactions with another party for the same period and on
the same terms.
83
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Our "Nonoperating (loss) income" for fiscal 2009, fiscal 2008 and
fiscal 2007 was comprised of (losses) gains relating to market value adjustments
on the following:
Fiscal 2009 Fiscal 2008 Fiscal 2007
----------- ----------- -----------
Series A warrants (1) $ - $ (1,197) $ 11,514
Series B warrants (2) (9,181) 101,336 14,838
5.125% convertible senior notes (3) - 9,342 3,207
6.750% convertible senior notes (3) - 5,129 2,258
Financing warrants on convertible senior notes (4) - 2,254 5,577
----------- ----------- -----------
Total $ (9,181) $ 116,864 $ 37,394
=========== =========== ===========
(1) 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. on May 7, 2008 for $45.7 million in cash. These
warrants were recorded as liabilities and marked to market each reporting
period using our Company's common stock price.
(2) Refer to the preceding Series B Warrants discussion.
(3) The portion of the conversion features relating to our 5.125% and 6.750%
convertible senior notes for which our Company did not have sufficient
authorized shares to provide for all potential issuances of common stock
was recorded as a long-term liability and marked to market until
stockholder approval authorizing the issuance of sufficient shares was
obtained on June 26, 2008.
(4) Our Company did not have sufficient authorized shares to provide for all
potential issuances of common stock relating to our financing warrants
issued in conjunction with our convertible senior notes. As such, these
financing warrants were recorded as a liability and marked to market until
stockholder approval authorizing the issuance of more shares was obtained
on June 26, 2008.
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. 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 assets as of February 27, 2010 and February 28, 2009
were as follows:
At At
February 27, February 28,
2010 2009
Real property under capital leases $ 114,137 $ 130,472
Equipment under capital leases 17,267 14,676
------------ ------------
131,404 145,148
Accumulated amortization (41,805) (30,574)
------------ ------------
Net property under capital leases $ 89,599 $ 114,574
============ ============
During fiscal 2009, we entered into a new capital lease for equipment
totaling $3.0 million. We did not enter into any new capital leases during
fiscal 2008 and fiscal 2007. Amounts relating to this capital lease represent
non-cash transactions and, accordingly, have been excluded from our Consolidated
Statement of Cash Flows for fiscal 2009. Interest paid in connection with our
capital lease obligations during fiscal 2009, fiscal 2008 and fiscal 2007 was
approximately $17.4 million, $18.6 million and $7.2 million, respectively.
84
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:
Fiscal 2009 Fiscal 2008 Fiscal 2007
----------- ----------- -----------
Minimum Rentals
---------------
Continuing operations $ 171,937 $ 174,232 $ 145,682
Discontinued operations - - 20,452
----------- ----------- -----------
171,937 174,232 166,134
----------- ----------- -----------
Contingent Rentals
------------------
Continuing operations 2,736 2,753 2,136
Discontinued operations - - 64
----------- ----------- -----------
2,736 2,753 2,200
----------- ----------- -----------
Total rent expense $ 174,673 $ 176,985 $ 168,334
=========== =========== ===========
Future minimum annual lease payments for capital leases and
non-cancelable operating leases in effect at February 27, 2010 are as follows:
Operating Leases
-------------------------------------------------------------
Future Net Future
Future Minimum Rental Payments Minimum Minimum
Capital Open Closed Sublease Rental
Fiscal Leases Stores Sites Total Rentals Payments
- ------ --------- ---------- ---------- ---------- --------- ----------
2010 28,181 198,684 67,197 265,881 35,384 230,497
2011 26,580 190,469 61,612 252,081 33,510 218,571
2012 25,617 180,186 55,989 236,175 29,371 206,804
2013 22,271 162,111 53,479 215,590 25,303 190,287
2014 19,951 147,594 50,443 198,037 21,334 176,703
2015 and thereafter 125,588 792,576 241,545 1,034,121 100,383 933,738
--------- ---------- ---------- ---------- --------- ----------
Net minimum rentals 248,188 $1,671,620 $ 530,265 $2,201,885 $ 245,285 $1,956,600
========== ========== ========== ========= ==========
Less interest portion (98,939)
---------
Present value of future
minimum rentals $ 149,249
=========
"Long-term real estate liabilities" on our Consolidated Balance Sheets
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 for the leased properties that we previously sold but did not qualify
for sale-leaseback treatment have been included in the table below.
85
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Long-term Real Estate Liabilities
------------------------------------------
Future Future Net Future
Minimum Minimum Minimum
Rental Sublease Rental
Fiscal Payments Rentals Payments
- ------ ----------- ----------- -----------
2010 $ 36,528 $ 4,516 $ 32,012
2011 36,688 3,487 33,201
2012 36,875 2,791 34,084
2013 37,044 1,787 35,257
2014 38,673 1,493 37,180
2015 and thereafter 338,732 4,537 334,195
----------- ----------- -----------
$ 524,540 $ 18,611 $ 505,929
=========== =========== ===========
During fiscal 2009, fiscal 2008 and fiscal 2007, we recognized gains
related to our qualified sale-leaseback transactions of $2.8 million, $2.6
million and $27.6 million, of which $24.1 million related to the reversal of
gains on terminated or assigned properties. The remaining deferred gains at
February 27, 2010 and February 28, 2009 amounted to $32.3 million and $34.6
million, respectively.
NOTE 12 - Redeemable Preferred Stock
On August 4, 2009, our Company issued 60,000 shares of 8.0% Cumulative
Convertible Preferred Stock, Series A-T, without par value, to affiliates of
Tengelmann Warenhandelsgesellschaft KG ("Tengelmann") and 115,000 shares of 8.0%
Cumulative Convertible Preferred Stock, Series A-Y, without par value, to
affiliates of Yucaipa Companies LLC ("Yucaipa"), together referred to as the
"Preferred Stock," for approximately $162.8 million, after deducting
approximately $12.2 million in closing and issuance costs. Each share of the
Preferred Stock has an initial liquidation preference of one thousand dollars,
subject to adjustment.
The Preferred Stock is convertible into shares of our Company's common
stock, par value $1.00 per share (the "Common Stock"), at an initial conversion
price of $5.00 per share of Common Stock. The Preferred Stock is convertible
upon the one-year anniversary of the issuance of Preferred Stock, or August 5,
2010, provided that prior to receiving shareholder approval, the Preferred Stock
was not exercisable into greater than 19.99% of the Common Stock outstanding
prior to the issuance of the Preferred Stock. The 57,750 shares that were
originally convertible without shareholder approval were recorded within
temporary stockholders' equity upon issuance since the shares are (i) redeemable
at the option of the holder and (ii) have conditions for redemption which are
not solely within the control of the Company. The 117,250 shares that originally
required shareholder approval in order to become convertible were initially
recorded as a "Preferred stock liability". On December 15, 2009, we obtained
shareholder approval authorizing the convertibility of the shares originally
recorded within "Preferred stock liability", and reclassified $109.5 million to
temporary equity, representing the book value of the liability on December 15,
2009 net of the related debt issuance costs. As of February 27, 2010, the entire
Preferred Stock issuance was recorded within temporary stockholders' equity.
The holders of our Convertible Preferred Stock have the right to cast
votes together with the holders of our common stock on an as-converted basis.
Our Company is required to redeem all of the outstanding Preferred Stock on
August 1, 2016 (the "Maturity Date"), at 100.0% of the liquidation preference,
plus all accrued and unpaid dividends. Subject to the repurchase rights of the
investors, the Preferred Stock is not redeemable prior to the Maturity Date. At
any time after December 3, 2012, in the event of any fundamental
86
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
change, the investors may elect to require our Company to repurchase the
Preferred Stock in cash at 101.0% of the liquidation preference amount plus any
accrued and unpaid dividends.
The holders of the Preferred Stock are entitled to an 8.0% dividend,
payable quarterly in arrears in cash or in additional shares of Preferred Stock
if our Company does not meet the liquidity levels required to pay the dividends.
If our Company makes a dividend payment in additional shares of Preferred Stock,
the Preferred Stock shall be valued at the liquidation preference of the
Preferred Stock and the dividend rate will be 8.0% plus 1.5%. Dividends and
deferred financing fees amortization relating to preferred stock that was
classified as a liability prior to receiving shareholder approval, were recorded
within "Interest expense". During fiscal 2009, we recorded Preferred Stock
dividends of $8.1 million, of which $3.5 million was recorded within "Interest
expense" and the remaining $4.6 million was recorded within "Additional paid-in
capital". In addition, during fiscal 2009, we recorded $1.0 million of deferred
financing fees amortization, of which $0.4 million was recorded within "Interest
expense" and the remaining $0.6 million was recorded within "Additional paid-in
capital". All future dividends and deferred financing fees amortization will be
recorded within "Additional pain-in capital" in absence of retained earnings.
The shares classified within temporary equity contained an embedded
beneficial conversion feature as the fair value of the Company's common stock on
the date of issuance, $5.67 per share, was in excess of the effective conversion
price of $4.74 per share, which represents the $5.00 per share conversion price
reduced for fees paid to the investors. The embedded beneficial conversion
feature relating to the 57,750 shares that were convertible without prior
shareholder approval resulted in a discount of $10.8 million, which has been
recorded within "Additional paid-in capital" and will be amortized over a
seven-year period from the date of issuance until the stated redemption date.
The 117,250 shares that were reclassified to temporary equity upon receiving
shareholder approval on December 15, 2009, also contained an embedded beneficial
conversion feature, which resulted in a discount of $21.8 million being recorded
within "Additional paid-in capital", which will be amortized from December 15,
2009 through the stated redemption date. During fiscal 2009, we accreted $1.6
million relating to these beneficial conversion features through "Additional
paid-in capital".
In connection with the Preferred Stock issuance, we agreed to register
all of the shares of common stock beneficially owned by Tengelmann and Yucaipa,
including the shares issuable upon conversion of the convertible preferred
stock, no later than February 6, 2010. Such filing was not made by the required
date. According to our current shareholder agreements with Tengelmann and
Yucaipa, we are required to pay liquidated damages for each day we are in
default, at a rate equivalent to 1% of the value of the related shares per year.
We do not expect the amount of damages to be material and are planning to file
the required registration statement following the filing of our Fiscal 2009 Form
10-K, which will cure this default.
Certain features of the Preferred Stock constitute derivatives separate
from the Preferred Stock; however, at issuance and the current balance sheet
date, those features had little or no value and are not expected to have
significant value for the foreseeable future.
NOTE 13 - Retirement Plans and Benefits
We recognize the funded status of our defined benefit pension and other
postretirement benefit plans as a net liability or asset on our consolidated
balance sheets. Any unrecognized prior service costs and actuarial gains or
losses are recognized as a component of accumulated other comprehensive income
or loss.
87
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Our assumptions used to measure our annual expenses are determined as
of our fiscal year-end and all plan assets and liabilities are valued as of that
date.
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
at February 27, 2010 and February 28, 2009 for our defined benefit plans and
postretirement plans:
Pension Postretirement
------------------------------- -------------------------------
Feb. 27, 2010 Feb. 28, 2009 Feb. 27, 2010 Feb. 28, 2009
------------- ------------- ------------- -------------
Change in Benefit Obligation
- ----------------------------
Benefit obligation - beginning of year $ 408,139 $ 460,601 $ 27,765 $ 41,089
Benefit obligations assumed (1) 13,357 - - -
Service cost 6,675 7,428 506 1,013
Interest cost 29,147 25,868 1,947 2,291
Actuarial loss (gain) 57,513 (60,156) 3,508 (14,119)
Benefits paid (25,459) (26,748) (1,993) (2,632)
Amendments - 346 - -
Settlement payments (2) (14,179) - - -
Curtailment payments (3) (1,457) - - -
Special termination benefits (4) 3,184 800 - -
Retiree drug subsidy received - - 116 123
----------- ----------- ----------- -----------
Benefit obligation - end of year (5) $ 476,920 $ 408,139 $ 31,849 $ 27,765
=========== =========== =========== ===========
Change in Plan Assets
- ---------------------
Fair value of plan assets - beginning of year 339,550 $ 466,971 $ - $ -
Fair value of plan assets - GHI asset transfer (5) - 13,624 - -
Actual return on plan assets 105,427 (118,938) - -
Company contributions 6,873 7,074 1,993 2,632
Trust reverting to A&P (577) - - -
Settlements (14,179) - - -
Benefits paid to GHI employees (5) (14,442) (2,433) - -
Benefits paid to our employees (25,460) (26,748) (1,993) (2,632)
----------- ----------- ----------- -----------
Fair value of plan assets - end of year (5) $ 397,192 $ 339,550 $ - $ -
----------- ----------- ----------- -----------
Funded status at end of year (5) $ (79,728) $ (68,589) $ (31,849) $ (27,765)
=========== =========== =========== ===========
Noncurrent assets $ 34,876 $ 26,276 $ - $ -
Current liabilities (5,055) (5,023) (1,823) (1,785)
Non-current liabilities (109,549) (89,842) (30,026) (25,980)
----------- ----------- ----------- -----------
Net (liability) asset recognized (5) $ (79,728) $ (68,589) $ (31,849) $ (27,765)
=========== =========== =========== ===========
(1) On June 30, 2007, the UFCW Local 174 Retail Pension Fund ("UFCW")
experienced a mass withdrawal termination, which caused our Company to
incur a mass withdrawal liability. On July 14, 2009, we signed a Transfer
Agreement to settle our mass withdrawal liability
88
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
owed to UFCW, pursuant to which we agreed to pay UFCW $0.7 million and to
transfer the existing pension benefit liabilities relating to our
employees and retirees from UFCW to the A&P pension plan. On July 29, 2009,
our A&P Pension Plan was amended for the transfer of the UFCW pension
benefit obligation effective July 1, 2009.
(2) During fiscal 2009, we settled our pension obligation relating to a
participant in one of our non-qualified pension plans.
(3) Effective January 31, 2010, we froze our Supplemental Executive Retirement
Plan, resulting in curtailment.
(4) During fiscal 2009, we recorded a $2.0 million loss based on the terms of
the settlement agreement with one of the participants in our non-qualified
pension plan. In addition, during fiscal 2009 and fiscal 2008, we recorded
special termination benefits of $1.2 million and $0.8 million,
respectively, to recognize retirement supplement payments to certain
eligible union participants.
(5) 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".
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
2009 2008 2009 2008
--------- ---------- --------- ----------
Discount rate 6.25% 7.25% 6.0% 7.25%
Compensation increase 3.00% 3.00% N/A N/A
Healthcare cost rate for next year N/A N/A 9.5% 9.5%
Ultimate healthcare cost trend rate N/A N/A 5.0% 5.0%
Year ultimate trend is reached N/A N/A 2019 2018
For postretirement benefits, assumed healthcare cost trend rates have
an 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 $0.2 million, while the accumulated postretirement benefit
obligation would either increase by $2.6 million or decrease by $2.3 million.
Pension and postretirement benefits related amounts recorded in
accumulated other comprehensive loss at February 27, 2010 and February 28, 2009
were as follows:
Pension Postretirement
---------------------------- ----------------------------
Feb. 27, 2010 Feb. 28, 2009 Feb. 27, 2010 Feb. 28, 2009
------------- ------------- ------------- -------------
Net actuarial (loss) gain $ (89,040) $ (119,260) $ 10,269 $ 14,597
Prior service (cost) credit (1,490) (2,689) 858 2,205
------------ ------------ ----------- -----------
Total $ (90,530) $ (121,949) $ 11,127 $ 16,802
============ ============ =========== ===========
Plans with accumulated benefit obligation in excess of plan assets
consisted of the following:
Fiscal Fiscal
2009 2008
---------- ---------
Accumulated benefit obligation $ 252,139 $ 206,408
Projected benefit obligation $ 259,918 $ 212,690
Fair value of plan assets $ 145,314 $ 117,824
The Company's accumulated benefit obligation for defined benefit plans
was $469,141 and $401,857 at February 27, 2010 and February 28, 2009,
respectively.
89
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
2009 2008 2007 2009 2008 2007
-------- -------- -------- -------- -------- --------
Net Periodic Benefit Cost:
Service cost $ 6,675 $ 7,428 $ 5,320 $ 506 $ 1,013 $ 409
Interest cost 29,147 25,868 15,609 1,947 2,291 1,265
Expected return on plan
assets (24,575) (31,307) (18,114) - - -
Amortization of:
Prior service cost
(credit) 291 274 255 (1,347) (1,347) (1,347)
Actuarial loss (gain) 4,716 117 98 (820) - (455)
Special termination
benefits (1) 3,184 800 - - - -
Curtailment loss (gain) (2) 908 - (166) - - -
Settlement loss (gain) (2) 708 - (1,037) - - -
-------- -------- -------- -------- -------- --------
Net periodic benefit
cost (income) (3) $ 21,054 $ 3,180 $ 1,965 $ 286 $ 1,957 $ (128)
-------- -------- -------- -------- -------- --------
Other Changes in Plan Assets
and Benefit Obligations
Recognized in Other Comprehensive
Loss:
Net actuarial loss (gain) $(24,796) $ 88,990 $ 30,331 $ 3,508 $(14,120) $ 7,780
Prior service cost (credit) - 346 2,615 - - -
Amortization of prior
service cost (291) (274) (255) 1,347 1,347 1,347
Recognized prior service
cost due to curtailments (2) (908) - - - - -
Recognized actuarial
loss due to settlements (2) (708) - - - - -
Amortization of net loss (4,716) (117) (98) 820 - 455
-------- -------- -------- -------- -------- --------
Total recognized in
comprehensive (loss)
income $(31,419) $ 88,945 $ 32,593 $ 5,675 $(12,773) $ 9,582
-------- -------- -------- -------- -------- --------
Recognized in total
comprehensive (loss) income $(10,365) $ 92,125 $ 34,558 $ 5,961 $(10,816) $ 9,454
======== ======== ======== ======== ======== ========
Discount rate 7.25% 5.75% 5.75% 7.25% 5.75% 5.75%
Compensation increase 3.00% 2.75% 2.75% N/A N/A N/A
Expected long-term rate of
return on plan assets 7.50% 6.75% 6.75% N/A N/A N/A
(1) During fiscal 2009, we recorded a $2.0 million loss based on the terms
of the settlement agreement with one of the participants in our
non-qualified pension plan. In addition, during fiscal 2009 and fiscal
2008, we recorded special termination benefits of $1.2 million and $0.8
million, respectively, to recognize retirement supplement payments to
certain eligible union participants.
(2) In fiscal 2009, we recorded a curtailment loss of $0.9 million to
immediately recognize the unrecognized prior service cost relating to
our non-qualified Supplemental Executive Retirement Plan, which has
been frozen effective January 31, 2010. In addition, we recorded a
settlement loss of $0.7 million to immediately recognize the
unrecognized losses for one of our non-qualified pension plans due to a
settlement agreement with the associated participant.
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
90
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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.
(3) Pension and postretirement benefit expenses are recorded within "Store
operating, general and administrative expense."
For determining the fiscal 2009 net periodic pension cost, the expected
long-term rate of return for the plan was determined by weighing the expected
returns for each asset class by the assets allocated to that class. The expected
return for each asset class was based on our actuaries' capital market
assumptions for real returns on standard asset classes and a long-term annual
inflation range of 2.0% - 3.0%. Given the target asset allocation of 45-60%
equities, 30-40% fixed income and 5-25% other, we consider 7.5% to be a
reasonable estimate of average expected long-term investment returns over the
life of the plan.
Our Company expects approximately $1.9 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 2010 for defined benefit pension plans. For
postretirement plans, approximately $0.9 million of prior service credits and
$0.5 million of actuarial gains is expected to be recognized during fiscal 2010.
The following table details our expected benefit payments for the years
2010 through 2019.
Pension Postretirement
------- --------------
2010 $ 25,191 $ 1,878
2011 25,669 2,054
2012 26,998 2,232
2013 27,950 2,456
2014 29,132 2,599
Years 2015 - 2019 163,469 13,401
We also expect to contribute approximately $7.0 million in cash to our
defined benefit pension plans in fiscal 2010. 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.
Plan Assets
- -----------
Our postretirement plans are unfunded. Our defined benefit pension plan
assets are held in trust funds and are actively managed by external fund
managers. Our overall investment strategy is to diversify investments across
types of investments and investment managers. The investment managers have full
discretion to manage their portion of the investments subject to the objectives
and policies of the respective plans. The performance of the investment managers
is reviewed on a regular basis. Our primary investment objectives are to achieve
a sufficient rate of return to meet the current and future pension plan cash
obligations, while avoiding excessive risk. 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,
investment-grade corporate debt securities, mortgages and other asset backed
obligations. Our plans do not allow for direct investments in the publicly
traded securities of our Company and investments in derivatives for speculative
purposes.
91
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Our defined benefit pension plan target and actual weighted average
asset allocations by asset class were as follows:
Actual Allocation
-----------------------------------------
Target February 27, February 28,
Allocation 2010 2009
---------- ---- ----
Equity securities 45 - 60% 55% 48%
Fixed income securities 30 - 40% 38% 38%
Other 5 - 25% 7% 14%
--- ---
Total 100% 100%
The following table provides the fair value of our pension plan assets,
by level as determined by the fair value hierarchy, at February 27, 2010:
Fair Value Measurements at Feb. 27, 2010 Using
----------------------------------------------
Quoted Prices Significant Other Significant
in Active Observable Unobservable
Markets Inputs Inputs
Asset Class: Total (Level 1) (Level 2) (Level 3)
- ------------ ----- --------- --------- ---------
Cash and cash equivalents $ 1,056 $ - $ 1,056 $ -
Short-term investment collective trust 2,560 - 2,560 -
--------- --------- --------- ---------
Total cash and cash equivalents 3,616 - 3,616 -
Equity securities
Common stock 83,174 83,174 - -
Mutual equity funds 133,101 133,101 - -
--------- --------- --------- ---------
Total equity securities 216,275 216,275 - -
Fixed income securities:
Corporate bonds 17,244 - 17,244 -
U.S. government and agency securities 27,344 16,592 10,752 -
Mutual fixed income funds 97,568 97,568 - -
Agency mortgage backed securities 8,555 - 8,555 -
--------- --------- --------- ---------
Total fixed income securities 150,711 114,160 36,551 -
Hedge Funds - Common Collective Trusts 24,525 - - 24,525
Other 2,030 - 2,030 -
--------- --------- --------- ---------
Fair value of investment securities 397,157 330,435 42,197 24,525
--------- --------- --------- ---------
Receivables 7,818
Payables (7,783)
---------
Total fair value of Plan Assets 397,192
=========
The following is a description of the valuation methodologies used for
assets measured at fair value.
The fair values of investments in money market accounts and common
collective trust funds are valued based on their reported Net Asset Value (NAV).
The NAV of short-term securities are based on the value of their underlying
investments, adjusted for charges and expenses, and are classified as Level 2 of
the fair value hierarchy.
The fair values of common stock, mutual funds and U.S. government
securities are determined based on their quoted closing market prices in active
markets for identical investments, and are classified as Level 1 of the fair
value hierarchy.
92
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
The fair values of corporate bonds and U.S. agency securities are based
on observable market information in primary markets or determined by pricing
services based on values for investments with similar ratings and maturity
dates. These securities are classified as Level 2 of the fair value hierarchy.
Agency mortgage-backed pass through securities issued by the
government, Freddie Mac and Fannie Mae are valued based on observable market
information relating to the underlying loans. As such, these securities are
classified as Level 2 of the fair value hierarchy.
The fair value of the common collective trust invested in a fund of
offshore hedge funds is determined based on the NAV of the underlying hedge
funds, as reported by each third party administrator of the underlying hedge
funds and further analyzed by the trust. The Plan's investment in the trust is
valued based on its proportionate share of the trust's net assets, adjusted for
related fees. The trust contains a holdback provision, whereas 10% of its
investments cannot be redeemed by the Plan until after the fund's fiscal
year-end. As such, these investments are classified as Level 3.
The methods described above may produce a fair value calculation that
may not be indicative of net realizable value or reflective of future fair
values. Furthermore, while we believe that the valuation methods used by our
pension plans are appropriate and consistent with other market participants, the
use of different methodologies or assumptions to determine fair value of certain
financial instruments could result in a different fair value measurement at the
reporting date.
The table below provides a reconciliation of the beginning and ending
balances for Level 3 assets for the year ended February 27, 2010:
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
-------------------------------
Hedge Funds-
Common Collective
Trusts
-----------------
Beginning Balance as of 2/28/2009 $24,200
Realized gains (losses) -
Unrealized gains (losses) 325
Transfers in/out of Level 3 -
Net purchases, sales and settlements -
-------
Ending Balance as of 2/27/2010 $24,525
=======
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 we believed the Fund was likely to have funding challenges and would
present a risk of higher future contribution requirements, our Company entered
into a series of agreements with GHI and the Fund, which enabled us to transfer
the pension assets attributable to GHI's employees of $13.6 million from the
Fund and combine them with our existing Pathmark Pension Plan's assets in
January 2009. We believe that our cash-flow and earnings will benefit from
gaining a better control over the future costs and by limiting
93
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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, similar
to all of our other pension plan assets. 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
pension accounting. 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 $95.8 million and $91.4 million,
respectively, using discount rates of 5.75% and 7.00%, respectively, which were
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 27, 2010 and
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 $8.3 million for fiscal 2010 and will be paid from the Pathmark
Pension Plan assets.
Defined Contribution Plans
We maintain savings plans to which eligible participants may contribute
a percentage of their eligible salaries. Due to the deteriorating economic
conditions and our results of operations, effective March 1, 2009, we suspended
our Company's matching contributions to the savings plans, which were based on a
percentage of the participants' eligible contributions. Effective January 1,
2010, we also suspended our Company's contributions to the defined contribution
retirement plans, which were equal to 4% of eligible participants' salaries.
Participants vest in our prior contributions after 2 years of service for
contributions made after January 1, 2008, and after 5 years of service for
contributions made prior to such date. Our contributions charged to operations
for all plans were approximately $6.7 million, $12.0 million and $8.3 million in
fiscal years 2009, 2008 and 2007, 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 in fiscal 2009,
fiscal 2008 and fiscal 2007 was approximately $65.2 million (all of which
related to continuing operations), $81.2 million ($4.1 million of which related
to discontinued operations) and $97.3 million ($62.2 million of which related to
discontinued operations), 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 2009, fiscal 2008 and fiscal 2007 pension expense
amounts for the multi-employer plans include $2.8 million (all of which relates
to continuing operations), $33.0 million ($4.1 million of
94
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
which relates to discontinued operations) and $62.9 million ($57.0 million of
which 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 2009, fiscal
2008 and fiscal 2007. As of February 27, 1010 and February 28, 2009, we had
liabilities reflected on the Consolidated Balance Sheets of $23.7 million and
$19.2 million, respectively, related to such benefits, which were recorded
within "Other accruals" and "Other non-current liabilities".
NOTE 14 - Stock Based Compensation
The components of our compensation expense related to our share-based
incentive plans were as follows, none of which have been capitalized:
Fiscal Fiscal Fiscal
2009 2008 2007
------ ------ ------
Stock options $1,492 $1,283 $ 547
Roll-over stock options (1) - - 1,983
Restricted stock units 1,076 - -
Performance restricted stock units 2,358 3,781 5,969
Common stock granted to Directors 741 630 540
------ ------ ------
Total stock-based compensation $5,667 $5,694 $9,039
====== ====== ======
(1) Represents incremental compensation expense recognized for stock
options that were exchanged for Pathmark stock options upon
acquisition.
At February 27, 2010, 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 2008 Plan replaced the
1998 Long Term Incentive and Share Award 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 2009, fiscal
2008 and fiscal 2007 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.
Performance restricted stock units 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.
95
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Stock options
-------------
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.
Our stock options have a contractual term of 10 years and vest 33% on
each anniversary date of the issuance over a three-year period.
Compensation expense of all awards is calculated at fair value 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. The following
assumptions were in place during fiscal 2009, fiscal 2008 and fiscal
2007:
Fiscal 2009 Fiscal 2008 Fiscal 2007
---------- ---------- -----------
Expected life 6 years 7 years 7 years
Volatility 66% 52% 54% - 55%
Risk-free interest rate range 2.65%-2.68% 2.96% 4.46% - 4.57%
As of February 27, 2010, approximately $3.2 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 2009, fiscal 2008 and fiscal 2007 was $3.7 million or
$2.81 per share, $1.9 million or $14.64 per share and $1.7 million or
$19.47 per share, respectively.
The following is a summary of the stock option activity during fiscal
2009, fiscal 2008 and fiscal 2007:
Weighted Avg.
Weighted Avg. Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term (years) Value
------ ----- ------------ -----
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
Granted 1,316,829 4.58
Canceled or expired (772,899) 17.28
Exercised (19,396) 4.63
-------------- ----------
Outstanding at February 27, 2010 2,076,468 $ 14.18 5.6 $ 2.6
============= ========== ===== ======
Exercisable at:
February 27, 2010 1,033,266 $ 21.40 1.9 $ 0.3
===== ======
Nonvested at:
February 27, 2010 1,043,202 $ 7.04 9.2 $ 2.4
===== ======
The total intrinsic value of options exercised during fiscal 2009, fiscal
2008 and fiscal 2007 was $0.1 million, $0.5 million and $7.9 million,
respectively. The amount of cash received from the exercise of stock
options in fiscal 2009 was approximately $0.1 million.
96
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Restricted Stock
----------------
For restricted stock units granted in 2009, one-fourth of the awards will
vest at the end of fiscal 2009 and three-fourths will vest at the end of
fiscal 2011, subject to the recipients of such restricted stock units
meeting the appropriate eligibility and service conditions. As of February
27, 2010, approximately $4.1 million of total unrecognized compensation
expense relating to these restricted stock units is expected to be
recognized through fiscal 2013.
The following is a summary of the restricted stock units activity during
fiscal 2009. There were no restricted stock units granted prior to fiscal
2009.
Weighted Avg.
Grant Date
Shares Fair Value
------------- -------------
Nonvested at February 28, 2009 - $ -
Granted 1,573,755 4.29
Canceled or expired (326,237) 4.01
Vested - -
------------- -------------
Nonvested at February 27, 2010 1,247,518 $ 4.37
============= =============
Performance Restricted Stock Units
----------------------------------
The following is a summary of the performance restricted stock units
activity during fiscal 2009, fiscal 2008 and fiscal 2007:
Weighted Avg.
Grant Date
Shares Fair Value
------ ----------
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
Granted 1,440,968 4.01
Canceled or expired (795,242) 18.94
Vested (590,795) 17.97
--------- ----------
Nonvested at February 27, 2010 1,870,468 $ 14.53
========= ==========
During fiscal 2009, fiscal 2008 and fiscal 2007, our Company granted
1,440,968, 471,731 and 782,723 of performance restricted stock units to
selected employees, respectively, for a total grant date fair value of $5.8
million, $12.5 million and $25.4 million, respectively. The total fair
value of shares vested during fiscal 2009, fiscal 2008 and fiscal 2007 was
$3.1 million, $12.1 million and $0.2 million, respectively. We currently
expect to recognize approximately $2.4 million of unrecognized fair value
compensation expense for our performance restricted stock units under our
executive and non-executive Integration Programs in fiscal 2007 through
fiscal 2011, based on our estimates of attaining vesting criteria. We are
no longer recognizing stock compensation expense for any of our
non-integration related grants due to our determination that the related
performance conditions will not be achieved.
Fiscal 2009 Annual Grant
------------------------
Performance restricted stock units issued during fiscal 2009 were to be
earned based on our Company achieving certain operating targets in fiscal
2009, which include Adjusted EBITDA targets. One-third of
97
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
these awards were scheduled to vest at the end of fiscal 2009 and
two-thirds at the end of fiscal 2010, subject to meeting the appropriate
eligibility and service conditions. During the second quarter of fiscal
2009, we determined that the related performance conditions would not be
achieved based on the changes in our forecast for fiscal 2009. Once this
determination was made, our Company reversed the associated stock
compensation expense recorded during the first quarter of fiscal 2009 and
will no longer record future compensation expense for the 2009 grant.
Fiscal 2008 and Fiscal 2007 Annual Grants
-----------------------------------------
Performance restricted stock units granted during fiscal 2008 and fiscal
2007 are earned based on our Company achieving certain operating targets in
fiscal 2010 and fiscal 2009, 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 described
under the terms of the remaining two-thirds of our 2006 award (performance
criteria relating to one third of the 2006 grant was deemed to have been
met upon the closing of the Pathmark transaction), our fiscal 2008 award,
and our fiscal 2007 award were 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 performance 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 recorded this reversal during
fiscal 2007, the reversal for not meeting performance targets in fiscal
2008 would have been approximately $3.0 million.
Fiscal 2007 Integration Program Grants
--------------------------------------
On June 15, 2007, the Committees approved an executive and a non-executive
Acquisition Closing and Integration Incentive Compensation Program (the
"Integration Program") subject to: a) the closing of the Pathmark
transaction; b) the achievement of certain Pathmark transaction closing
performance criteria or certain Pathmark transaction synergy targets; c)
the achievement of certain Company stock price targets over a performance
period comprised of the three calendar years following the closing of the
Pathmark transaction for executive grants and 24 months for non-executive
grants; and d) other terms, conditions, limitations, restrictions and
eligibility requirements. Depending on actual performance as compared with
the foregoing targets, each executive officer could earn up to a maximum of
200% of the performance restricted share units and each non-executive
officer could earn up to a maximum of 125% of the performance restricted
share units awarded under the Integration Plan. The executive Integration
Programs awards were considered granted on June 15, 2007. The non-executive
Integration Programs awards were considered granted on August 7, 2007 and
December 20, 2007. With the closing of the Pathmark transaction on December
3, 2007, compensation expense was recorded over the vesting period, as
these units are earned upon achievement of the other terms as described
above.
These performance restricted stock units vest subject to the achievement of
certain Company stock price targets over the 24-month performance 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.
98
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
On May 21, 2009, our Board of Directors modified the terms of the
performance restricted stock units granted under our executive and
non-executive Integration Program by removing the achievement of specific
stock price targets as a precondition to the vesting of earned units. The
Board also approved a modification of the vesting schedule for
non-executives for the earned units to vest as follows: one-third in July
2009, one-third in July 2010 and one-third in July 2011. The earned units
for executives will vest December 3, 2010, subject to the other terms and
conditions of the awards. Additionally, on July 16, 2009, the Board
determined that 100% of the performance restricted stock units had been
earned. In connection with this decision, we reversed $0.4 million of
previously recognized expense for the ancillary shares. As a result of the
foregoing modification and Board determination, our Company will incur an
additional incremental compensation cost of $1.3 million, adjusted for
actual forfeitures, of which $0.7 million has been recognized during 2009
and the remainder is being recognized over the new vesting period. During
fiscal 2009, increased forfeitures associated with the departure of certain
executive employees resulted in a reversal of a portion of the previously
recognized stock compensation expense.
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 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 15 - Interest Expense
Interest expense is comprised of the following:
Fiscal 2009 Fiscal 2008 (1) Fiscal 2007(1)
-------------- --------------- --------------
$675 million Credit Agreement $ 15,411 $ 21,139 $ 4,671
Related Party Promissory Note, due Aug. 18, 2011 607 300 -
7.75% Notes, due April 15, 2007 - - 342
11.375% Senior Secured Notes, due Aug. 1, 2015 16,665 - -
9.125% Senior Notes, due Dec. 15, 2011 1,168 1,188 1,168
5.125% Convertible Senior Notes, due June 15, 2011 8,433 8,553 1,575
6.750% Convertible Senior Notes, due Dec. 15, 2012 17,165 17,409 3,207
9.375% Notes, due August 1, 2039 18,729 19,011 18,699
Bridge Loan Facility - - 27,285
Capital lease obligations and Real estate liabilities 52,552 53,970 39,134
Dividends on Preferred Stock Liability 3,505 - -
Self-insurance and GHI interest 14,792 10,859 10,117
GHI discount rate adjustment and COLI non-cash interest 15,906 1,375 867
Amortization of deferred financing fees and discounts 26,619 23,030 5,193
Other 1,506 757 (40)
--------- --------- ----------
Total $ 193,058 $ 157,591 $ 112,218
========= ========= ==========
99
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(1) The interest expense associated with the 6.750% convertible senior
notes increased by $3.5 million and $0.4 million, respectively, from
the amounts reported in our Forms 10-K for fiscal 2008 and fiscal
2007, as a result of the retrospective application of the new
accounting guidance relating to convertible debt, which we adopted
during the first quarter of fiscal 2009. Refer to Note 10 -
Indebtedness and Other Financial Liabilities for additional
information.
NOTE 16 - 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, 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, we recorded $7.9 million within
"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.
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.
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 measured
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.
100
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 is as follows (in millions):
Year Ended
Sept. 29, 2007
---------------
Balance sheet:
Current assets $ 1,048.8
Noncurrent assets 3,201.2
---------------
Total assets $ 4,250.0
===============
Current liabilities $ 1,063.1
Noncurrent liabilities* 1,265.4
---------------
Total liabilities $ 2,328.5
==============
Income statement:
Net sales $ 10,183.7
===============
Cost of sales and operating expenses $ 9,580.3
===============
Net income $ 264.6
===============
* Includes minority interests of $6.0 million.
NOTE 17 - Income Taxes
A reconciliation of income taxes from continuing operations at the 35%
federal statutory income tax rate for fiscal 2009, fiscal 2008 and fiscal 2007
to income taxes as reported is as follows:
Fiscal 2009 Fiscal 2008 Fiscal 2007
------------- ----------- -----------
Income tax benefit from (provision for) continuing
operations computed at federal statutory income tax rate 280,925 $ 30,421 $ (32,261)
State and local income taxes, net of federal tax benefit 3,975 (2,924) (1,792)
Permanent difference relating to the sale of Canadian assets 153,841 - (5,590)
Permanent differences relating to Pathmark financing
and impairments (108,168) 40,902 13,088
Valuation allowance (307,784) (69,377) 21,217
Other (795) (1,705) (254)
---------- --------- ----------
Income tax benefit (provision), as reported $ 21,994 $ (2,683) $ (5,592)
========== ========= ==========
The effective tax rate on continuing operations of (2.7%) for fiscal
2009 varied from the statutory rate of 35%, primarily due to state and local
income taxes, the increase in our valuation allowance, the remeasurement of
uncertain tax positions, and the impact of the Pathmark financing and fiscal
2009 impairments. Approximately $16 million of the net income tax benefit
resulted from the write-off of the deferred tax liability associated with the
Pathmark trademark, an indefinite-lived intangible asset, as a result of its
impairment during fiscal 2009.
The effective tax rate on continuing operations of 3.1% for fiscal 2008
varied from the statutory rate of 35%, primarily due to state and local income
taxes, the increase in our valuation allowance and the impact of the Pathmark
financing.
101
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
The effective tax rate on continuing operations of 6.1% 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 benefit from (provision for) income taxes from continuing
operations consisted of the following:
Fiscal 2009 Fiscal 2008 Fiscal 2007
----------- ----------- -----------
Current:
Federal $ 156,196 $ 2,397 $ -
State and local 6,116 (4,498) (2,757)
Foreign taxes (36) (582) (195)
----------- ---------- -----------
162,276 (2,683) (2,952)
----------- ---------- ----------
Deferred:
Federal (140,282) - (2,640)
----------- ---------- -----------
Benefit from (provision for) income taxes $ 21,994 $ (2,683) $ (5,592)
=========== ========== ===========
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 $361.1 million during fiscal 2009,
to reflect generation of additional operating losses, remeasurement of our
uncertain tax positions and impairment of indefinite lived intangible assets,
partially offset by an adjustment to the valuation allowance that was released
in connection with the original purchase price allocation for Pathmark. Our
valuation allowance increased by $162.9 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 "Other comprehensive
loss." 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.
102
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
The components of net deferred tax assets (liabilities) are as follows:
Feb. 27, 2010 Feb. 28, 2009
------------- -------------
Current assets:
Insurance reserves $ 33,403 $ 33,689
Other reserves and accrued benefits 52,988 56,968
Accrued postretirement and postemployment benefits 959 1,780
Pension obligations 16,111 6,250
Other 6,648 7,506
------------- -------------
110,109 106,193
------------- -------------
Current liabilities:
Inventories (39,589) (37,097)
Health and welfare (1,777) (1,902)
Other (6,101) (3,273)
-------------- --------------
(47,467) (42,272)
-------------- --------------
Valuation allowance (65,937) (26,973)
-------------- --------------
Net current deferred income taxes included in "Other accruals" and
"Prepaid expenses and other current assets," respectively $ (3,295) $ 36,948
============== ==============
Non-current assets:
Net operating losses $ 282,688 $ 214,370
Foreign tax credits 69,261 69,261
Alternative minimum tax credits and general business credits 51,661 53,433
Other reserves including asset disposition charges 147,971 130,084
Lease obligations 9,480 7,748
Insurance reserves 87,536 64,626
Accrued postretirement and postemployment benefits 15,696 10,731
Pension obligations 114,552 83,752
Step rents 24,344 22,700
State tax credits 22,789 29,852
Pathmark financing 9,084 9,571
Other 2,765 10,709
------------- -------------
837,827 706,837
------------- -------------
Non-current liabilities:
Depreciation (261,842) (339,542)
Pension obligations - (1,068)
Intangibles (62,039) (94,432)
Pathmark financing (9,460) (9,762)
Other (14,137) (16,645)
-------------- --------------
(347,478) (461,449)
-------------- --------------
Valuation allowance (501,716) (179,535)
-------------- --------------
Net non-current deferred income tax asset in
"Other non-current liabilities" and "Other assets," respectively $ (11,367) $ 65,853
============== ==============
At February 27, 2010, we had federal Net Operating Loss ("NOL")
carryforwards of $664.8 million, which will expire between fiscal 2023 and 2030,
some of which are subject to an annual limitation. The federal NOL carryforwards
include $7.4 million related to the excess tax deductions for 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, we had state loss
carryforwards of $1.0 billion that will expire between fiscal 2010 and fiscal
2030. Our Company's general business credits consist of federal and state work
incentive credits, which expire between fiscal 2010 and fiscal 2030, 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
103
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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 the new accounting guidance
relating to uncertain tax positions. As a result, 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
Decrease related to prior period
tax positions (156,773) - (156,773)
Settlements 534 534
Lapse of statute of limitations (4,171) (958) (5,129)
---------- ---------- ----------
Balance at February 27, 2010 $ 1,404 $ 6 $ 1,410
========= ========== =========
Our Company is subject to U.S. federal income tax, as well as income
tax in multiple state and foreign jurisdictions. As of February 27, 2010, with a
few exceptions, we remain subject to examination by federal, state and local tax
authorities for tax years 2004 through 2008. With a few exceptions, we are no
longer subject to federal, state or local examinations by tax authorities for
tax years 2003 and prior.
At February 27, 2010, we had unrecognized tax benefits of $1.4 million,
which were recorded within deferred tax liabilities in "Other accruals". At
February 28, 2009, unrecognized tax benefits of $162.8 million were recorded as
unrecognized tax liabilities in "Other noncurrent liabilities." The
remeasurement of our uncertain tax positions resulted in a decrease in our
unrecognized tax benefits and an increase in our valuation allowance on our net
deferred tax asset and did not impact our effective tax rate. We do not expect
that the amount of our gross unrecognized tax positions will change
significantly in the next 12 months. Any future decrease in our Company's gross
unrecognized tax positions would require a reevaluation of our Company's
104
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
valuation allowance maintained on our net deferred tax asset and, therefore, is
not expected to affect our effective tax rate. Our Company classifies interest
and penalty expense related to unrecognized tax benefits within "Benefit from
(provision for) income taxes" in our Consolidated Statements of Operations.
During fiscal 2009, fiscal 2008 and fiscal 2007, we did not record any interest
or penalties.
Income tax payments, net of income tax refunds, for fiscal 2009, fiscal
2008 and fiscal 2007 were approximately $3.8 million, $3.9 million and $2.2
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 Alternative Minimum Tax
(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. The American Reinvestment and Recovery Tax Act,
which was enacted on February 17, 2009, extended this election through 2009. We
expect the refund to be approximately $1.7 million for fiscal 2010, for a total
refund of $4.8 million to date.
NOTE 18 -- Earnings (Loss) Per Share
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 2009 Fiscal 2008 Fiscal 2007
------------ ----------- -----------
(Loss) income from continuing operations $ (780,650) $ (89,605) $ 86,578
Preferred stock dividends (4,572) - -
Beneficial conversion feature amortization (1,552) - -
------------ ----------- -----------
(Loss) income from continuing
operations - basic (786,774) (89,605) 86,578
Adjustments for convertible debt (1) - (30,621) -
Adjustments on Other financial liabilities (2) 9,181 (101,336) (26,352)
------------ ----------- -----------
(Loss) income from continuing operations-
diluted $ (777,593) $ (221,562) $ 60,226
============ =========== ===========
Weighted average common shares outstanding 57,646,795 57,647,679 45,007,214
Performance restricted stock options - - 63,784
Share lending agreement (3) (4,443,054) (6,699,485) (1,519,539)
------------ ----------- -----------
Common shares outstanding-basic 53,203,741 50,948,194 43,551,459
Effect of dilutive securities:
Options to purchase common stock - - 348,357
Convertible debt (1) - 7,725,182 -
Convertible financial liabilities (2) (23,431,837) (7,790,155) 395,398
------------ ----------- -----------
Common shares outstanding-diluted 29,771,904 50,883,221 44,295,214
============ =========== ===========
(1) We have debt instruments with a bifurcated conversion feature that were
recorded at a significant discount. (Refer to Note 10 - Indebtedness and
Other Financial Liabilities). For purposes of determining if an application
of the "if-converted method" to these convertible instruments produces a
dilutive result, we consider the combined impact of the numerator and
denominator adjustments, including a numerator adjustment for gains and
losses, which would have been incurred had the instruments been converted
on the first day of the period presented.
105
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(2) Our Series B Warrants are classified as a liability because a third party
has the right to determine their cash or share settlement. (Refer to Note
10 - Indebtedness and Other Financial Liabilities). These warrants are
marked-to-market on our Consolidated Statements of Operations. For example,
in periods when the market price of our common stock decreases, our income
from continuing operations is increased. For purposes of determining if an
application of the treasury stock method produces a dilutive result, we
assume proceeds are used to repurchase common stock and we adjust the
numerator similar to the adjustments required under the "if-converted"
method. We consider the combined impact of the numerator and denominator
adjustments, including a denominator adjustment to reduce shares, even when
the average market price of our common stock for the period is below the
warrant's strike price.
(3) As of February 27, 2010 and February 28, 2009, we had 5,634,002 and
8,134,002, respectively, of loaned shares under our share lending
agreements, which were considered issued and outstanding. The obligation of
the financial institutions to return the borrowed shares has been accounted
for as 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 our 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 19 - Capital Stock). During fiscal
2009, Bank of America, N.A., who is a party to our share lending agreement,
returned 2,500,000 shares, eliminating our obligation to lend additional
shares to them in the future. The returned shares were immediately retired,
reducing our issued and outstanding shares. During fiscal 2009, fiscal 2008
and fiscal 2007, weighted average common shares relating to share lending
agreement of 4,443,054, 6,699,485, and 1,519,539, respectively, were
excluded from the computation of earnings per share.
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 2009 Fiscal 2008 Fiscal 2007
------------- ------------- -------------
Stock options 2,258,431 1,785,583 486,375
Warrants 686,277 686,277 156,486
Performance restricted stock units 482,579 514,031 30,183
Restricted stock units 1,016,272 - -
Convertible debt 11,278,988 3,553,806 2,107,064
Financing warrant 11,278,988 11,278,988 -
Preferred stock 35,000,000 - -
NOTE 19 - 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.
106
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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, to facilitate hedging transactions relating to the issuance of
our 5.125% and 6.75% Convertible Notes. 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 for shares held by Lehman described below, are
removed from the computation of basic and dilutive earnings per share. On
November 23, 2009, Bank of America, N.A., who is a party to our share lending
agreement, returned 1,000,000 shares, eliminating our obligation to lend
additional shares to them in the future. On January 6, 2010, Bank of America,
N.A. returned an additional 1,500,000 shares. All of the returned shares were
immediately retired, reducing the number of our common shares issued and
outstanding. The return of these shares has no impact on the computations of our
basic and diluted earnings per share. As of February 27, 2010, 5,634,002 of
loaned shares were outstanding under the share lending agreements.
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 to reduce the potential dilution
upon future conversion of the notes and effectively increase the conversion
price of the notes. The call options allow the Company to purchase common shares
at $36.40 with respect to the 5.125% Notes and $37.80 with respect to the 6.75%
Notes. These instruments are accounted for as free standing derivatives and are
recorded as equity of $73.5 million in the Consolidated Balance Sheet.
On or about October 3, 2008, Lehman Brothers OTC Derivatives, Inc. or
"LBOTC," who accounts for 50% of our 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 convertible senior notes to their stated prices of $36.40
for the 5.125% Notes and $37.80 for the 6.750% 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
107
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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.
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 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.
NOTE 20 - 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.
We currently have four reportable segments: Fresh, Pathmark, Gourmet
and Other. The Other segment includes our Food Basics and Wine, Beer & Spirits
businesses. During fiscal 2007, we had a fifth reportable segment, Investment in
Metro, Inc., which represents our former economic interest in Metro, Inc. that
was 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. Refer to Note 6 - Discontinued Operations for further discussion. Prior
year information has been restated to conform to current year presentation.
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 (i) the merchandising department (including the design and production
of private label merchandise sold in our retail stores), (ii) real estate
management and (iii)
108
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
information technology, finance and other corporate administrative personnel, as
well as, other reconciling items primarily attributed to nonrecurring
activities. Refer to the table below for detailed information relating to the
other reconciling items.
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.
OPERATING DATA Fiscal 2009 Fiscal 2008 Fiscal 2007
- -------------- ----------- ----------- -----------
Sales by category
Grocery (1) $ 6,151,413 $ 6,663,157 $ 4,364,970
Meat (2) 1,664,226 1,792,311 1,253,847
Produce (3) 997,929 1,060,718 776,521
Other (4) - - 5,792
----------- ----------- -----------
Total Company $ 8,813,568 $ 9,516,186 $ 6,401,130
=========== =========== ===========
(1) The grocery category includes grocery, frozen foods; dairy; general
merchandise/health and beauty aids; wine, beer & spirits 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 21 - Related Party Transactions for further
discussion.
Fiscal 2009 Fiscal 2008 Fiscal 2007
------------- ------------- ---------------
Sales
Fresh $ 4,402,044 $ 4,806,467 $ 4,828,657
Pathmark (5) 3,855,251 4,173,017 1,077,294
Gourmet 273,060 281,767 257,551
Other 283,213 254,935 231,836
Investment in Metro, Inc. - - 5,792
------------- ------------- ---------------
Total sales $ 8,813,568 $ 9,516,186 $ 6,401,130
============= ============= ===============
Segment income (loss)
Fresh 111,582 $ 148,617 $ 78,742
Pathmark (5) (46,326) 19,012 19,518
Gourmet 25,691 24,866 16,613
Other 1,472 2,184 (2,931)
------------- ------------- --------------
Total segment income 92,419 194,679 111,942
Corporate (114,335) (123,016) (124,667)
Reconciling items (6) (578,658) (118,449) (26,515)
------------- ------------- ---------------
Loss from operations (600,574) (46,786) (39,240)
Loss on sale of Canadian operations - - (436)
Gain on sale of Metro, Inc. - - 184,451
Nonoperating (loss) income (9,181) 116,864 37,394
Interest expense (7) (193,058) (157,591) (112,218)
Interest and dividend income 169 591 14,350
Equity earnings in Metro - - 7,869
------------- ------------- ---------------
(Loss) income from continuing operations before income taxes $ (802,644) $ (86,922) $ 92,170
============== ============= ===============
109
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Fiscal 2009 Fiscal 2008 Fiscal 2007
------------- ------------- ---------------
Segment depreciation and amortization - continuing operations
Fresh $ 83,080 $ 91,327 $ 99,214
Pathmark (5) 95,029 99,061 18,776
Gourmet 9,386 10,119 9,876
Other 4,661 3,722 4,378
------------- ------------- ---------------
Total segment depreciation and amortization - continuing operations 192,156 204,229 132,244
Corporate 53,304 56,762 45,908
------------- ------------- ---------------
Total depreciation and amortization - continuing operations 245,460 260,991 178,152
Discontinued operations - - 8,637
------------- ------------- ---------------
Total company depreciation and amortization $ 245,460 $ 260,991 $ 186,789
============= ============= ===============
- --------------------------------------------------------------------------------
(5) Includes results from A&P stores that have been subsequently converted to
Pathmark stores.
(6) Reconciling items, which are not included in segment income, consist of the
following:
Fiscal 2009 Fiscal 2008 Fiscal 2007
------------- ------------- ---------------
Goodwill, trademark and long-lived asset impairment $ (477,180) $ - $ -
Net restructuring and other (16,670) (35,866) (19,320)
Real estate related activity (37,093) (40,161) 14,057
Stock-based compensation (5,667) (5,694) (8,977)
Pension withdrawal costs (2,445) (28,911) (5,944)
IT services agreement with Metro - - 5,792
Insurance reserve adjustment (40,445) - (9,813)
LIFO adjustment 842 (7,817) (2,310)
------------- ------------- ---------------
Total reconciling items $ (578,658) $ (118,449) $ (26,515)
------------- ------------- ---------------
(7) Interest expense associated with the 6.750% Convertible Senior Notes
increased by $3.5 million and $0.4 million, respectively, from the amounts
reported in the Forms 10-K for fiscal 2008 and 2007 as a result of the
retrospective application of the new accounting guidance relating to
convertible debt, which we adopted during the first quarter of fiscal 2009.
Refer to Note 10 - Indebtedness and Other Financial Liabilities for
additional information.
NOTE 21 - Related Party Transactions
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"). This agreement provided
Pathmark 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
110
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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.
On August 4, 2009, our Company issued 60,000 shares of 8.0% Cumulative
Convertible Preferred Stock, Series A-T, without par value, to affiliates of
Tengelmann and 115,000 shares of 8.0% Cumulative Convertible Preferred Stock,
Series A-Y, without par value, to affiliates of Yucaipa for net proceeds of
approximately $162.2 million. Concurrently with the issuance of the Preferred
Stock, the Company entered into an amended and restated stockholder agreement
with Tengelmann (the "Amended and Restated Tengelmann Stockholder Agreement")
and an amended and restated stockholder agreement with Yucaipa (the "Amended and
Restated Yucaipa Stockholder Agreement" and, together with the Amended and
Restated Tengelmann Stockholder Agreement, the "Stockholder Agreements"),
amended its By-laws and filed Articles Supplementary with respect to the
Preferred Stock, appointed two directors designated by Yucaipa to the Company's
Board and reelected four existing Tengelmann directors to the Company's Board.
Without Tengelmann and Yucaipa's approval, the Company may not
consummate certain business combinations, issue additional equity securities,
amend the Company's charter or by-laws, make amendments to Board committee
charters which would circumvent the Stockholder Agreements, take actions which
would dilute their ownership, take actions to amend certain of the Company's
existing indebtedness or limit the Company's ability to pay cash dividends on
the Preferred Stock. In addition, depending upon specified ownership thresholds
maintained by Tengelmann and Yucaipa, without the approval of a majority of
Tengelmann-appointed directors and at least one Yucaipa-appointed director, the
Company may not enter into certain acquisitions or dispositions of assets, offer
or repurchase equity securities, incur debt above specified levels or declare
dividends on the Company's common stock. Based upon certain ownership
thresholds, without Tengelmann's approval, the Company may not adopt certain
anti-takeover measures or enter into affiliate transactions and the approval of
a majority of Tengelmann directors may be required in order to adopt or amend
any long-term strategic plan, adopt or amend any operating plan or budget or
make capital expenditures over a certain threshold or appoint a chief executive
officer.
The Company granted certain registration rights, preemptive rights and
rights to nominate directors to the Company's Board to Tengelmann and Yucaipa
and certain tag-along rights to Yucaipa. In addition, Yucaipa granted the
Company a right of first offer under certain circumstances on the transfer of
voting power, which if exercised by the Company would then provide Tengelmann
the right to purchase any such securities, pursuant to an agreement between the
Company and Tengelmann.
Until August 4, 2014, or earlier if certain conditions occur, Yucaipa
is subject to a standstill provision which prevents Yucaipa, without the
approval of the majority of the Board of Directors (excluding the directors
designated by Yucaipa), from acquiring beneficial ownership of securities above
a 35.5% common stock threshold. Prior to December 4, 2010, subject to limited
exceptions, Yucaipa may not transfer its Preferred Stock and is prohibited from
transferring any securities to certain designated persons.
111
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
We entered into agreements with four employees from Yucaipa for
consulting services. In connection with these consulting agreements agreement,
we made total payments of $0.2 million during fiscal 2009.
During fiscal 2009, fiscal 2008 and fiscal 2007, our Company purchased
$4.7 million, $2.9 million and $0.2 million in store fixtures from Source
Interlink Companies, Inc, a media and marketing services company whose offerings
include design, manufacture, and installation of wire fixtures and displays in
major retail chains. Gregory Mays, who is a member of our Board of Directors, is
the Chairman and Chief Executive Officer of Source Interlink Companies, Inc.
On September 2, 2008, our Company borrowed $10.0 million from Erivan
Karl Haub and issued a three-year, unsecured promissory note (the "Note").
Erivan Haub is the father of our Executive Chairman and is a limited partner of
Tengelmann. The principal is due in a lump sum payment on August 18, 2011 and
will bear interest at the rate of 6% per year, payable in 12 equal payments of
$0.15 million over the term of the Note. During fiscal 2009 and fiscal 2008, we
paid interest of $0.75 million and $0.15 million, respectively, and recorded
interest expense of $0.6 million and $0.3 million, respectively, on this 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
Vice Chairman, Chief Strategy Officer 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. Guldin's annual income is "grossed up" by the Company in an
amount that is necessary to cover this tax obligation.
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 $5.8 million in "Sales" in our Consolidated
Statements of Operations for fiscal 2007. 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.
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. an available
for sale security for the fiscal year ended February 23, 2008, because we no
longer exerted significant influence over substantive operating decisions made
by
112
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Metro, Inc. As such, 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 within "Interest and dividend income" on our
Consolidated Statements of Operations. 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. After these sales, our Company no longer
holds Class A subordinate shares of Metro, Inc. as of the balance sheet dates.
Refer to Note 16 - Investment in Metro, Inc. for further discussion.
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 and $4.6 million during fiscal
2008 and 2007, respectively, for their use of the aircraft.
NOTE 22 - 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 our Company's
entire supply chain. This agreement expires on September 29, 2018. The agreement
defines the parties' respective responsibilities for the procurement and
purchase of merchandise intended for use or resale at our Company's stores, as
well as the parties' respective remuneration for warehousing and
procurement/purchasing activities. In consideration for its services, C&S is
paid an annual fee and has incentive income opportunities based upon our cost
savings and increases in retail sales volume. The agreement also provides that
we will purchase virtually our entire 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.
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 $87.0 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 $6.0 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 $6.0 million deposit held in escrow.
113
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
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 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 recorded an additional recovery of $2.1
million as a credit to "Store operating, general and administrative expense." We
are continuing 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 potential class members and the opt-out deadline
expired in March 2009. The parties have commenced discovery. Our Company intends
to move to decertify the class once certain discovery has been completed.
As discovery on the plaintiffs has recently commenced, 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.
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 27, 2010, 188 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
114
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
Leases to be approximately $572.1 million, which could be partially or totally
offset by reassigning or subletting these leases.
NOTE 23 - Summary of Quarterly Results (Unaudited)
The following table summarizes our results of operations by quarter for
fiscal 2009 and fiscal 2008. 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 2009 contained twelve weeks, while the fourth
quarter of fiscal 2008 contained thirteen weeks.
----------------------------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter(a) Quarter(a) Year
------------- ------------- ---------------- ---------------- -------------
2009 (unaudited) (Dollars in thousands, except per share amounts)
- ----------------
Sales $2,790,243 $2,065,061 $1,962,692 $1,995,572 $8,813,568
Gross margin 844,869 623,358 590,584 607,949 2,666,760
Depreciation and amortization (77,788) (57,784) (55,813) (54,075) (245,460)
Loss from operations (1,836) (8,566) (453,151) (137,021) (600,574)
Nonoperating income(d) (1,875) (7,079) (15,944) 15,717 (9,181)
Interest expense (54,248) (48,559) (45,769) (44,482) (193,058)
Loss from continuing operations (58,304) (62,159) (502,438) (157,749) (780,650)
Loss from discontinued operations (6,856) (18,150) (57,148) (13,694) (95,848)
Net loss (65,160) (80,309) (559,586) (171,443) (876,498)
Per share data(e)
Loss from continuing
operations - basic (1.10) (1.18) (9.43) (3.03) (14.79)
Loss from discontinued operations -
basic (0.13) (0.34) (1.07) (0.25) (1.80)
Net loss - basic (1.23) (1.52) (10.50) (3.28) (16.59)
Loss from continuing operations -
diluted (3.36) (3.06) (12.85) (4.73) (26.12)
Loss from discontinued operations -
diluted (0.28) (0.68) (1.50) (0.34) (3.22)
Net loss - diluted (3.64) (3.74) (14.35) (5.07) (29.34)
Market price: (f)
High $7.47 $7.02 $12.31 $12.89
Low $3.02 $3.63 $6.35 $7.27
Number of stores at end of period 435 432 433 429
115
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
----------------------------------------------------------------------------------
First Second Third Fourth Total
Quarter(b) Quarter Quarter(c) 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 (d) 48,597 42,895 22,777 2,595 116,864
Interest expense (46,926) (34,680) (37,511) (38,474) (157,591)
Income (loss) from
continuing operations 2,788 (4,289) (3,777) (84,327) (89,605)
Loss from discontinued
operations (1,524) (13,812) (10,635) (27,759) (53,730)
Net income (loss) 1,264 (18,101) (14,412) (112,086) (143,335)
Per share data(e)
Income (loss) from continuing
operations - basic 0.06 (0.09) (0.07) (1.59) (1.76)
Loss from discontinued operations -
basic (0.03) (0.28) (0.20) (0.53) (1.05)
Net income (loss) - basic 0.03 (0.37) (0.27) (2.12) (2.81)
Loss from continuing operations -
diluted (0.51) (1.70) (1.62) (3.92) (4.35)
Loss from discontinued operations -
diluted (0.03) (0.27) (0.28) (0.91) (1.06)
Net loss - diluted (0.54) (1.97) (1.90) (4.83) (5.41)
Market price: (f)
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
(a) During the fourth quarter of fiscal 2009, we recorded $7.3 million of
impairment charges for capital lease assets, which related to the third
quarter of fiscal 2009.
(b) 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.
(c) 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.
(d) 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.
(e) 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.
(f) 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.
116
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 and Treasurer, 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 27, 2010.
The effectiveness of the Company's internal control over financial
reporting as of February 27, 2010, has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their
report, which appears herein.
/s/ Ron Marshall /s/ Brenda M. Galgano
Ron Marshall Brenda M. Galgano
President and Senior Vice President,
Chief Executive Officer Chief Financial Officer and Treasurer
117
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 (deficit)
and comprehensive 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 27, 2010 and February 28, 2009, and the results of
their operations and their cash flows for each of the three years in the period
ended February 27, 2010 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 27, 2010, 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 Notes 1 and 10 to the consolidated financial
statements, the Company changed the manner in which it accounts for convertible
debt with cash settlement features during fiscal 2009.
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.
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 6, 2010
118
Five Year Summary of Selected Financial Data
- --------------------------------------------
Fiscal 2009(e)(l) Fiscal 2008(e)(j) Fiscal 2007(a)(b)(c)(e)(j) Fiscal 2006(e) Fiscal 2005(d)(e)
(52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)
----------------- ----------------- -------------------------- -------------- -----------------
(Dollars in thousands, except per share amounts)
Operating Results
Sales $8,813,568 $9,516,186 $6,401,130 $5,369,203 $7,090,018
Loss from operations (600,574) (46,786) (39,240) (27,170) (170,860)
Depreciation and amortization (245,460) (260,991) (178,152) (148,762) (174,040)
(Loss) gain on sale of Canadian
Operations - - (436) (1,299) 912,129
Gain on sale of Metro, Inc. - - 184,451 - -
Interest expense (f) (193,058) (157,591) (112,218) (65,884) (84,404)
(Loss) income from continuing
operations (780,650) (89,605) 86,578 12,751 518,059
(Loss) income from discontinued
operations (95,848) (53,730) (247,660) 14,142 (125,429)
Net (loss) income (876,498) (143,335) (161,082) 26,893 392,630
Per Share Data
(Loss) income from continuing
operations - basic (14.79) (1.76) 1.99 0.31 12.85
(Loss) income from discontinued
operations - basic (1.80) (1.05) (5.69) 0.34 (3.11)
Net (loss) income - basic (16.59) (2.81) (3.70) 0.65 9.74
(Loss) income from continuing
operations - diluted (26.12) (4.35) 1.36 0.30 12.72
(Loss) income from discontinued
operations - diluted (3.22) (1.06) (5.59) 0.34 (3.08)
Net (loss) income - diluted (29.34) (5.41) (4.23) 0.64 9.64
Cash dividends - common stock (i) - - - 7.25 -
Book value per share (g) (9.47) 5.03 7.78 10.36 16.32
119
Five Year Summary of Selected Financial Data - Continued
- --------------------------------------------------------
Fiscal 2009 Fiscal 2008(j) Fiscal 2007(a)(b)(c)(j) Fiscal 2006 Fiscal 2005(d)
(52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)
----------- -------------- ----------------------- ----------- --------------
(Dollars in thousands, except per share amounts)
Financial Position
Current assets $931,163 $918,522 $886,245 $748,908 $1,210,014
Current liabilities 729,845 746,535 771,815 558,391 610,273
Working capital (g) 201,318 171,987 114,430 190,517 599,741
Current ratio (g) 1.28 1.23 1.15 1.34 1.98
Expenditures for property 86,378 115,994 122,850 208,159 191,050
Total assets 2,827,217 3,526,697 3,622,633 2,111,623 2,498,865
Current portion of
long-term debt (h) 191 5,283 11,875 32,069 569
Current portion of
capital lease obligations 13,702 11,574 10,716 1,554 2,274
Long-term debt (f) (k) 990,359 919,364 732,172 284,214 246,282
Long-term portion of
capital lease obligations 136,880 147,921 157,430 29,938 32,270
Total debt (g) 1,141,132 1,084,142 912,193 347,775 281,395
Debt to total capitalization (g) 186% 79% 67% 45% 30%
Series A redeemable preferred stock (k) 132,757 - - - -
Equity
Stockholders' (deficit) equity (i) (529,203) 289,893 444,120 430,670 671,727
Weighted average shares
outstanding - basic 53,203,741 50,948,194 43,551,459 41,430,600 40,301,132
Weighted average shares
outstanding - diluted 29,771,904 50,883,221 44,295,214 41,902,358 40,725,942
Number of registered
stockholders (g) 5,485 5,677 5,856 4,649 4,916
Other (g)
Number of employees 45,000 48,000 51,000 38,000 38,000
New store openings 5 1 10 10 3
Total number of stores at year end 429 436 447 406 405
Total store area (square feet) 18,106,877 18,385,645 18,813,135 16,538,410 16,508,969
- ----------------------------------------------------------------------------------------------------------------------------
(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 new accounting guidance for stock-based compensation.
We recorded share-based compensation expense of $5.7 million, $5.7
million, $9.0 million, $8.2 million and $9.0 million in fiscal 2009,
fiscal 2008, fiscal 2007, fiscal 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, in December 2007, we entered into a new $675 million
credit agreement, which was amended in July 2009. As of February 27,
2010 and February 28, 2009, there were $132.9 million and $331.8
million, respectively, of loans outstanding under the amended $655.0
million credit agreement.
(g) Unaudited.
(h) In April 2007, our 7.75% Notes become due and payable in full.
(i) 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.
(j) Our 6.750% Convertible Notes are subject to new accounting guidance for
convertible debt instruments with cash settlement features, As a result
of adopting this guidance during fiscal 2009, we reclassified $26.4
million of debt and deferred financing costs to "Additional paid-in
capital", net of deferred taxes. We also retrospectively recognized
additional non-cash interest expense of $0.4 million for fiscal 2007
and $3.5 million for fiscal 2008.
(k) On August 4, 2009, we issued $260.0 million of 11.375% senior secured
notes due 2015 and 175,000 shares of 8.0% Cumulative Convertible
Preferred Stock for approximately $162.8 million, net of closing and
issuance costs.
(l) During fiscal 2009, we recorded goodwill impairment charges of $345.5
million, trademark impairment charges of $66.4 million and long-lived
asset impairment charges of $65.2 million, resulting from our interim
and annual impairment testing.
120
Executive Officers
- ------------------
Ron Marshall
President and
Chief Executive Officer
Brenda M. Galgano
Senior Vice President,
Chief Financial Officer and Treasurer
Christian W. E. Haub
Executive Chairman
Andreas Guldin
Vice Chairman, Chief Strategy Officer
Mark Kramer
Senior Vice President, Operations
Christopher W. McGarry
Senior Vice President,
General Counsel and Secretary
Rebecca Philbert
Senior Vice President,
Merchandising and Supply & Logistics
Melissa E. Sungela
Vice President and Corporate Controller
Board Of Directors
- ------------------
Christian W. E. Haub (b) (f)
Executive Chairman
John D. Barline, Esq. (b) (f)
Williams, Kastner & Gibbs LLP,
Tacoma, Washington
Jens-Jurgen Bockel (c)
Chief Financial Officer and Member of the Managing Board
Tengelmann Warenhandelsgesellschaft KG
Mulheim, Germany
Frederic F. Brace (a) (b) (c)
Former Executive Vice President and
Chief Financial Officer, UAL Corp.
Bobbie A. Gaunt (b) (c) (d) (e)
Former President and CEO,
Ford Motor Company of Canada
Andreas Guldin (b) (c)
Vice Chairman, Chief Strategy Officer
Dan P. Kourkoumelis (a) (b) (d) (f)
Former President and CEO,
Quality Food Centers, Inc.
Edward Lewis (a) (d)
Chairman and Founder,
Essence Communications Inc.
Gregory Mays (e) (f)
Chief Executive Officer,
Simon Worldwide
Maureen B. Tart-Bezer (a) (c) (d)
Former Executive Vice President &
Chief Financial Officer
Virgin Mobile USA, LLC
Terrence J. Wallock (d) (e) (f)
Acting General Counsel & Secretary,
Simon Worldwide Inc.
(a) Member of Audit Committee (Maureen B. Tart-Bezer, Chair)
(b) Member of Executive Committee (Christian W. E. Haub, Chair)
(c) Member of Finance Committee (Andreas Guldin, Chair)
(d) Member of Governance Committee (Dan P. Kourkoumelis, Chair)
(e) Member of Management Development & Compensation Committee (Terrence
Wallock, Chair)
(f) Member of Real Estate Committee (Greg Mays, Chair)
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Stockholder Information
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Executive Offices
Box 418
2 Paragon Drive
Montvale, NJ 07645
Telephone 201-573-9700
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
400 Campus Drive
PO Box 988
Florham Park, NJ 07932
Stockholder Inquiries and Publications
Stockholders, security analysts, members of the media and others interested in
further information about our Company are invited to contact the Investor
Relations Help Line at 201-571-4537.
Internet users can access information on A&P at: www.aptea.com
Correspondence concerning stockholder address changes or other stock account
matters should be directed to our Company's Transfer Agent & Registrar
American Stock Transfer and Trust Company
59 Maiden Lane
New York, NY 10038
Telephone 800-937-5449
www.amstock.com
Communications with the Board of Directors
Stockholders who would like to contact our Company's Board of Directors,
including a committee thereof or a specific Director, can send an e-mail to
bdofdirectors@aptea.com or write to the following address:
c/o The Great Atlantic & Pacific Tea Company, Inc., Senior Vice President,
General Counsel and Secretary, 2 Paragon Drive, Montvale, NJ 07645
Form 10-K
Copies of Form 10-K filed with the Securities and Exchange Commission will be
provided to stockholders upon written request to the Secretary at the Executive
Offices in Montvale, New Jersey. Exhibits to the Form 10-K include the most
recent certifications by A&P's Chief Executive Officer and Chief Financial
Officer.
Annual Meeting
The Annual Meeting of Stockholders will be held at 9:00 a.m. (EST) on
Thursday, July 15, 2010 at
The Woodcliff Lake Hilton
200 Tice Boulevard
Woodcliff Lake, New Jersey, USA
Common Stock
Common stock of our Company is listed and traded on the New York Stock Exchange
under the ticker symbol "GAP" and has unlisted trading privileges on the Boston,
Midwest, Philadelphia, Cincinnati, and Pacific Stock Exchanges. The stock is
generally reported in newspapers and periodical tables as "GtAtPc".
(C) 2010 The Great Atlantic & Pacific Tea Co., Inc. All rights reserved.
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