Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 12, 2009
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-4141
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
----------------------------------------------
(Exact name of registrant as specified in charter)
Maryland 13-1890974
------------------------------------------ -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Paragon Drive
Montvale, New Jersey 07645
----------------------------------------
(Address of principal executive offices)
(201) 573-9700
----------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate website, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ____ Accelerated filer X
Non-accelerated filer ____ Smaller reporting company____
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
As of October 16, 2009, the Registrant had a total of 58,344,210 shares of
common stock - $1 par value outstanding.
The Great Atlantic & Pacific Tea Company, Inc.
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except share and per share amounts)
(Unaudited)
12 Weeks Ended 28 Weeks Ended
------------------------------------ -------------------------------------
Sept. 12, 2009 Sept. 6, 2008 Sept. 12, 2009 Sept. 6, 2008
---------------- ---------------- ---------------- ----------------
Sales $ 2,065,061 $ 2,182,636 $ 4,855,304 $ 5,105,301
Cost of merchandise sold (1,441,703) (1,531,093) (3,387,077) (3,570,172)
---------------- ---------------- ---------------- ----------------
Gross margin 623,358 651,543 1,468,227 1,535,129
Store operating, general and administrative
expense (631,924) (663,066) (1,478,629) (1,544,561)
---------------- ---------------- ---------------- ----------------
Loss from operations (8,566) (11,523) (10,402) (9,432)
Nonoperating (loss) income (7,079) 42,895 (8,954) 91,492
Interest expense (48,559) (34,680) (102,807) (81,606)
Interest and dividend income 51 57 92 467
---------------- ---------------- ---------------- ----------------
(Loss) income from continuing operations
before income taxes (64,153) (3,251) (122,071) 921
Benefit from (provision for) income taxes 1,994 (1,038) 1,608 (2,422)
---------------- ---------------- ---------------- ----------------
Loss from continuing operations (62,159) (4,289) (120,463) (1,501)
Discontinued operations:
Loss from operations of discontinued
businesses, net of tax provision of $0
for the 12 and 28 weeks ended 9/12/09
and 9/6/08, respectively (18,150) (13,995) (25,006) (18,158)
Gain on disposal of discontinued
businesses, net of tax provision of $0
for the 12 and 28 weeks ended 9/12/09
and 9/6/08, respectively -- 183 -- 2,822
---------------- ---------------- ---------------- ----------------
Loss from discontinued operations (18,150) (13,812) (25,006) (15,336)
---------------- ---------------- ---------------- ----------------
Net loss $ (80,309) $ (18,101) $ (145,469) $ (16,837)
================ ================ ================ ================
Net loss per share - basic:
Continuing operations $ (1.18) $ (0.09) $ (2.29) $ (0.03)
Discontinued operations (0.34) (0.28) (0.47) (0.31)
---------------- ---------------- ---------------- ----------------
Net loss per share - basic $ (1.52) $ (0.37) $ (2.76) $ (0.34)
================ ================ ================ ================
Net loss per share - diluted:
Continuing operations $ (3.06) $ (1.70) $ (5.90) $ (2.24)
Discontinued operations (0.68) (0.27) (1.19) (0.28)
---------------- ---------------- ---------------- ----------------
Net loss per share - diluted $ (3.74) $ (1.97) $ (7.09) $ (2.52)
================ ================ ================ ================
Weighted average number of common
shares outstanding
Basic 53,196,728 49,520,525 53,019,715 49,493,271
================ ================ ================ ================
Diluted 26,614,466 52,270,094 21,044,730 54,246,231
================ ================ ================ ================
See Notes to Consolidated Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Stockholders' Equity and Comprehensive (Loss) Income
(Dollars in thousands)
(Unaudited)
(Accumulated
Common Stock Additional Deficit)/ Accumulated Other Total
----------------------------- Paid-in Retained Comprehensive Stockholders'
Shares Amount Capital Earnings (Loss) Income Equity
-------------- ------------- ------------- ------------- ----------------- ---------------
28 Weeks Ended September 12, 2009
---------------------------------
Balance as of 2/28/2009, as
previously reported 57,674,799 $ 57,675 $ 438,300 $ (123,458) $ (105,147) $ 267,370
Impact of the adoption of
FSP APB 14-1 26,379 (3,856) 22,523
------------ ----------- ----------- ----------- ----------- -----------
Balance as of 2/28/2009, as
adjusted 57,674,799 57,675 464,679 (127,314) (105,147) $ 289,893
Net loss (145,469) (145,469)
Other comprehensive income 1,550 1,550
Beneficial conversion feature
related to preferred stock 10,601 10,601
Dividends on preferred stock (533) (533)
Preferred stock financing fees
amortization (70) (70)
Stock options exercised 477 1 1
Other share based awards 668,934 669 3,374 4,043
------------ ----------- ----------- ------------ ----------- -----------
Balance at end of period 58,344,210 $ 58,344 $ 478,052 $ (272,783) $ (103,597) $ 160,016
============ =========== =========== ============ =========== ===========
28 Weeks Ended September 6, 2008
--------------------------------
Balance as of 2/23/2008, as
previously reported 57,100,955 $ 57,101 $ 373,594 $ 16,423 $ (28,975) $ 418,143
Impact of the adoption of
FSP APB 14-1 26,379 (402) 25,977
------------ ----------- ----------- ----------- ----------- -----------
Balance as of 2/23/2008, as
adjusted 57,100,955 57,101 399,973 16,021 (28,975) 444,120
Net loss (16,837) (16,837)
Other comprehensive loss (590) (590)
Conversion features related to
convertible debt 57,422 57,422
Stock options exercised 106,309 106 2,095 2,201
Other share based awards 455,936 456 6,549 7,005
------------ ----------- ----------- ----------- ------------ -----------
Balance at end of period 57,663,200 $ 57,663 $ 466,039 $ (816) $ (29,565) $ 493,321
============ =========== =========== =========== ============ ===========
See Notes to Consolidated Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Stockholders' Equity and
Comprehensive (Loss) Income - (Continued)
(Dollars in thousands)
(Unaudited)
Comprehensive (Loss) Income
---------------------------
12 Weeks Ended 28 Weeks Ended
----------------------------------- ----------------------------------
Sept. 12, 2009 Sept. 6, 2008 Sept. 12, 2009 Sept. 6, 2008
--------------- -------------- --------------- ---------------
Net loss $ (80,309) $ (18,101) $ (145,469) $ (16,837)
--------------- -------------- --------------- ---------------
Net unrealized gain on marketable securities, net of tax 119 -- 638 --
Pension and other post-retirement benefits, net of tax 53 (250) 912 (590)
--------------- -------------- --------------- ---------------
Other comprehensive income (loss), net of tax 172 (250) 1,550 (590)
--------------- -------------- --------------- ---------------
Total comprehensive loss $ (80,137) $ (18,351) $ (143,919) $ (17,427)
=============== ============== =============== ===============
Accumulated Other Comprehensive Loss Balances
---------------------------------------------
Net Unrealized Pension Accumulated
Gain & Other Other
on Marketable Post-retirement Comprehensive
Securities Benefits (Loss) Income
------------ ----------- -----------
Balance at February 28, 2009 $ -- $ (105,147) $ (105,147)
Current period change 638 912 1,550
----------- ----------- ------------
Balance at September 12, 2009 $ 638 $ (104,235) $ (103,597)
=========== =========== ============
Balance at February 23, 2008 $ -- $ (28,975) $ (28,975)
Current period change -- (590) (590)
----------- ----------- ------------
Balance at September 6, 2008 $ -- $ (29,565) $ (29,565)
=========== =========== ============
See Notes to Consolidated Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands except share amounts)
(Unaudited)
September 12, 2009 February 28, 2009
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 347,794 $ 175,375
Restricted cash 1,992 2,214
Restricted marketable securities 2,887 2,929
Accounts receivable, net of allowance for doubtful accounts of
$8,622 and $8,463 at September 12, 2009 and
February 28, 2009, respectively 175,227 196,537
Inventories 489,072 474,002
Prepaid expenses and other current assets 80,960 67,465
----------- -----------
Total current assets 1,097,932 918,522
----------- -----------
Non-current assets:
Property:
Property owned, net 1,518,830 1,591,250
Property leased under capital leases, net 126,331 132,960
----------- -----------
Property, net 1,645,161 1,724,210
Goodwill 460,741 483,560
Intangible assets, net 219,063 224,838
Other assets 234,729 193,954
----------- -----------
Total assets $ 3,657,626 $ 3,545,084
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,552 $ 5,283
Current portion of obligations under capital leases 14,504 12,290
Accounts payable 280,091 221,073
Book overdrafts 48,922 60,835
Accrued salaries, wages and benefits 144,200 161,054
Accrued taxes 42,022 39,404
Other accruals 241,542 246,596
----------- -----------
Total current liabilities 773,833 746,535
----------- -----------
Non-current liabilities:
Long-term debt 983,196 919,364
Long-term obligations under capital leases 142,785 147,921
Long-term real estate liabilities 329,718 330,196
Deferred real estate income 89,668 95,000
Other financial liabilities 13,720 4,766
Preferred Stock liability 117,250 --
Other non-current liabilities 1,004,443 1,011,409
----------- -----------
Total liabilities 3,454,613 3,255,191
----------- -----------
Series A redeemable preferred stock--no par value, $1,000 redemption value;
authorized - 700,000 shares and none; issued - 57,750 and none at ----------- -----------
Sept. 12, 2009 and Feb. 28, 2009, respectively 42,997 --
----------- -----------
Commitments and contingencies (Note 20)
Stockholders' equity:
Common stock--$1 par value; authorized - 160,000,000 shares; issued and
outstanding - 58,344,210 and 57,674,799 shares
at Sept. 12, 2009 and Feb. 28, 2009, respectively 58,344 57,675
Additional paid-in capital 478,052 464,679
Accumulated other comprehensive loss (103,597) (105,147)
Accumulated deficit (272,783) (127,314)
----------- -----------
Total stockholders' equity 160,016 289,893
----------- -----------
Total liabilities and stockholders' equity $ 3,657,626 $ 3,545,084
=========== ===========
See Notes to Consolidated Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
28 Weeks Ended
------------------------------------------
Sept. 12, 2009 Sept. 6, 2008
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (145,469) $ (16,837)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 135,572 140,824
Nonoperating loss (income) 8,954 (91,492)
Non-cash interest expense 27,393 13,955
Stock compensation expense 4,043 7,005
Asset disposition initiatives 8,998 4,918
Occupancy charges for stores closed in the normal course of business 18,374 7,155
Gain on disposal of owned property and write-down of property, net (3,580) (441)
Gain on disposal of discontinued operations -- (2,822)
Other property impairments 3,739 1,785
Pension withdrawal costs 2,445 --
LIFO reserve 2,166 2,962
Other changes in assets and liabilities:
Decrease (increase) in receivables 21,454 (15,817)
Increase in inventories (17,236) (22,744)
Increase in prepaid expenses and other current assets (19,430) (18,767)
Increase in other assets (15,552) (13,718)
Increase in accounts payable 60,147 50,298
Decrease in accrued salaries, wages and benefits, and taxes (14,282) (22,241)
Decrease in other accruals (8,712) (2,554)
Decrease in other non-current liabilities (46,303) (50,984)
Other operating activities, net (2,184) (1,309)
----------- -----------
Net cash provided by (used in) operating activities 20,537 (30,824)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (50,005) (59,447)
Proceeds from disposal of property 3,311 6,133
Proceeds from sale of joint venture 5,914 --
Decrease in restricted cash 222 1,039
Proceeds from maturities of marketable securities 2,224 7,050
----------- -----------
Net cash used in investing activities (38,334) (45,225)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 253,201 --
Principal payments on long-term debt (163) (161)
Proceeds under revolving lines of credit 39,450 1,378,940
Principal payments on revolving lines of credit (238,333) (1,270,957)
Proceeds under line of credit 378 54,805
Principal payments on line of credit (2,224) (55,020)
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 25
Proceeds from sale-leaseback transaction 3,000 --
Principal payments on capital leases (5,703) (4,248)
(Decrease) increase in book overdrafts (11,913) 35,121
Deferred financing fees (22,648) 1,414
Proceeds from stock options exercised 1 2,201
----------- -----------
Net cash provided by financing activities 190,216 106,385
Effect of exchange rate changes on cash and cash equivalents -- (28)
----------- -----------
Net increase in cash and cash equivalents 172,419 30,308
Cash and cash equivalents at beginning of period 175,375 100,733
----------- -----------
Cash and cash equivalents at end of period $ 347,794 $ 131,041
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 67,971 $ 67,002
=========== ===========
Cash paid during the year for income taxes $ 6,480 $ 1,996
=========== ===========
See Notes to Consolidated Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share amounts)
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
---------------------------------------
The accompanying Consolidated Statements of Operations, Consolidated Statements
of Stockholders' Equity and Comprehensive (Loss) Income, and Consolidated
Statements of Cash Flows for the 12 and 28 weeks ended September 12, 2009 and
September 6, 2008, and the Consolidated Balance Sheets at September 12, 2009 and
February 28, 2009 of The Great Atlantic & Pacific Tea Company, Inc. ("we,"
"our," "us" or "our Company") are unaudited and, in the opinion of management,
contain all adjustments that are of a normal and recurring nature necessary for
a fair statement of financial position and results of operations for such
periods. The consolidated financial statements should be read in conjunction
with the consolidated financial statements and related notes contained in our
Fiscal 2008 Annual Report on Form 10-K. Interim results are not necessarily
indicative of results for a full year.
The consolidated financial statements include the accounts of our Company and
all subsidiaries. All intercompany accounts and transactions have been
eliminated.
Certain reclassifications have been made to prior year amounts to conform to
current year presentation. Refer to Note 2 - Impact of New Accounting
Pronouncements below for prior period reclassifications made upon our
retrospective adoption of Financial Accounting Standards Board ("FASB") Staff
Position ("FSP") Accounting Principles Board ("APB") Opinion No. 14-1 ("FSP APB
14-1").
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 cannot
be converted into more than 19.99% of the common stock outstanding prior to its
issuance without shareholder approval. The currently convertible shares are
recorded within temporary stockholders' equity, and the shares requiring
shareholder approval to become convertible are classified as a liability. Refer
to Note 11 - Redeemable Preferred Stock for additional information relating to
our preferred stock issuance.
Our preferred stock recorded within temporary stockholders' equity 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 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 will be amortized over the period from the date
of issuance to the stated redemption date into "Additional paid-in capital", in
absence of retained earnings. We will need to evaluate whether there is a
potential beneficial conversion feature in the portion of the issuance currently
classified within "Preferred stock liability", upon receiving shareholder
approval for conversion of those shares.
Our "Preferred stock liability" was initially recorded at its fair value, with
the related issuance cost amortization recorded within "Interest expense" over
its life. Dividends relating to preferred stock classified
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
as a liability are also recorded within "Interest expense". The portion of the
issuance 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
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 absence of retained earnings.
2. Impact of New Accounting Pronouncements
Newly Adopted Accounting Pronouncements
---------------------------------------
Convertible Debt
In May 2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt
Instruments that May be Settled in Cash Upon Conversion" - (Accounting Standards
Codification ("ASC") 470-20). FSP APB 14-1 requires that the liability and
equity components of convertible debt instruments that may be settled in cash
upon conversion (including partial cash settlement) be separately accounted for
in a manner that reflects an issuer's nonconvertible debt borrowing rate. FSP
APB 14-1 also requires accretion of the resulting debt discount over the
expected life of the convertible debt. We adopted FSP APB 14-1 during our first
fiscal quarter ended June 20, 2009, as required. Since this standard is required
to be applied retrospectively, financial statements for prior periods have been
adjusted to reflect its application.
Our $255.0 million 6.750% Convertible Senior Notes that were issued in December
2007 are subject to FSP APB 14-1, as our estimated nonconvertible debt borrowing
rate is higher than the current contractual rate on these notes. As a result of
adopting FSP APB 14-1, 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. The adoption of FSP APB 14-1
will also increase our non-cash interest expense in fiscal 2009 by approximately
$4.4 million, and will increase non-cash interest expense in subsequent periods
during which our convertible notes remain outstanding by approximately $18.8
million in total. Upon adopting FSP APB 14-1, we also reclassified $26.4 million
of debt and deferred financing costs to "Additional paid-in capital", net of
deferred taxes.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
As a result of our adoption of FSP APB 14-1, our Consolidated Statements of
Operations for the 12 and 28 weeks ended September 6, 2008 have been adjusted as
follows:
12 Weeks Ended Sept. 6, 2008 28 Weeks Ended Sept. 6, 2008
-------------------------------- --------------------------------
As adjusted in As reported in As adjusted in As reported in
this Quarterly Quarterly this Quarterly Quarterly
Report Report on Report on Report on
On Form 10-Q Form 10-Q Form 10-Q Form 10-Q
------------- ------------- ------------- -------------
Interest expense $ (34,680) $ (33,945) $ (81,606) $ (79,894)
(Loss) income from continuing operations (4,289) (3,554) (1,501) 211
Net loss (18,101) (17,366) (16,837) (15,125)
Per share data
Net loss per share - basic:
Continuing operations $ (0.09) $ (0.07) $ (0.03) 0.00
Discontinued operations (0.28) (0.28) (0.31) (0.31)
------------- ------------ ----------- -------------
Net loss per share - basic $ (0.37) $ (0.35) $ (0.34) $ (0.31)
============= ============ =========== =============
Net loss per share - diluted:
Continuing operations $ (1.70) $ (1.50) $ (2.24) $ (1.96)
Discontinued operations (0.27) (0.25) (0.28) (0.26)
------------- ------------ ----------- -------------
Net loss per share - diluted $ (1.97) $ (1.75) $ (2.52) $ (2.22)
============= ============ =========== =============
As a result of our adoption of FSP APB 14-1, our Consolidated Balance Sheet as
of February 28, 2009 and February 23, 2008 has been adjusted as follows:
As of February 28, 2009 As of February 23, 2008
----------------------------------- ----------------------------------
As adjusted in As reported in As adjusted in As reported in
this Quarterly the 2008 Annual this Quarterly the 2008 Annual
Report Report on Report Report on
On Form 10-Q Form 10-K on Form 10-Q Form 10-K
----------- ----------- ----------- -----------
Assets:
Prepaid and other current assets $ 67,465 $ 66,190 $ 96,788 $ 94,969
Current assets 918,522 917,247 886,245 884,426
Other assets 193,954 195,856 234,439 236,995
Total assets 3,545,084 3,545,711 3,643,119 3,643,856
Liabilities:
Long-term debt 919,364 942,514 732,172 758,886
Total liabilities 3,255,191 3,278,341 3,198,999 3,225,713
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
Total liabilities and stockholders' equity $ 3,545,084 $ 3,545,711 $ 3,643,119 $ 3,643,856
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
As a result of our adoption of FSP APB 14-1, our Consolidated Statement of Cash
Flows for the 28 weeks ended September 6, 2008 has been adjusted as follows:
As adjusted in As reported this
Quarterly Report in Quarterly Report
on Form 10-Q on Form 10-Q
------------ ------------
Cash flows from operating activities:
Net loss $(16,837) $(15,125)
Non-cash interest expense 13,955 12,243
Net cash used in operating activities (30,824) (30,824)
Subsequent Events
In May 2009, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 165, "Subsequent Events" ("SFAS No. 165") - (ASC 855-10). SFAS No.
165 establishes general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. The standard also includes a new required
disclosure of the date through which an entity has evaluated subsequent events.
SFAS No. 165 is effective for interim and annual periods ending after June 15,
2009. We adopted SFAS No. 165 during our first fiscal quarter ended June 20,
2009. Refer to Note 21 - Subsequent Events for related disclosure.
Other than Temporary Impairments
On April 9, 2009, the FASB issued FSP Financial Accounting Standard ("FAS")
115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary
Impairments" ("FSP FAS 115-2 and FAS 124-2") - (ASC 320-10-65-1), which applies
to debt securities classified as available-for-sale and held-to-maturity. This
FSP provides guidance on when the impairment should be considered to be
other-than-temporary, the determination of the amount of the
other-than-temporary impairment to be recognized in earnings and other
comprehensive income, the accounting for debt securities after an
other-than-temporary impairment, and the related disclosure requirements. We
adopted FSP FAS 115-2 and FAS 124-2 during our first fiscal quarter ended June
20, 2009, as required. The adoption of the FSP did not have a material effect on
our Company's consolidated financial statements.
Fair Value of Financial Instruments
In April 2009, the FASB issued FSP No. FAS 107-1 and APB Opinion No. 28-1 ("FSP
FAS 107-1 and APB 28-1") - (ASC 825-10-65-1). FSP FAS 107-1 and APB 28-1 amends
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," and APB
Opinion No. 28, "Interim Financial Reporting," to require interim and annual
disclosures of the fair value of financial instruments, together with the
related carrying amount and how each amount relates to what is reported in the
statement of financial position. FSP FAS 107-1 and APB 28-1 also requires
disclosure of the methods and significant assumptions used to estimate the fair
value of financial instruments. We adopted FSP FAS 107-1 and APB 28-1 during our
first fiscal quarter ended June 20, 2009. Refer to Note 5 - Fair Value
Measurements for related disclosures.
In April 2009, the FASB issued FSP No. 157-4, "Determining Fair Value when the
Volume Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly" ("FSP No. 157-4") - (ASC
820-10-65-4). This FSP provides guidance for determining the fair value of
assets and liabilities that have experienced a significant decrease in the
volume and level of activity in relation to their normal market activity and the
related transactions or quoted prices may not be indicative of fair value, or
not orderly. This FSP does not apply to assets or liabilities for which quoted
prices may be
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
obtained in an active market, or Level 1 inputs. FSP No. 157-4 also expands the
disclosure requirements of SFAS No. 157 to include a discussion of the inputs
and valuation techniques used to measure fair value and to provide disclosure
for all equity and debt securities that are measured at fair value by each major
security type. We adopted FSP No. 157-4 during our first fiscal quarter ended
June 20, 2009, as required. Refer to Note 5 - Fair Value Measurements for
related disclosures.
In February 2008, the FASB issued FSP No. 157-2, "Effective Date of FASB
Statement No. 157" ("FSP No. 157-2") - (ASC 820-10-65-1). FSP No. 157-2 delayed
the effective date of SFAS No. 157 (ASC 820) for all nonrecurring fair value
measurements of nonfinancial assets and nonfinancial liabilities until our first
fiscal quarter ended June 20, 2009. Our Company adopted SFAS No. 157 and FSP No.
157-1 as of February 24, 2008, with the exception of the application of the
statement to nonrecurring nonfinancial assets and nonfinancial liabilities.
Refer to Note 5 - Fair Value Measurements for related disclosure. We adopted the
remaining provision of SFAS No. 157 during our first fiscal quarter ended June
20, 2009, as required. The nonfinancial assets and liabilities recorded in our
Consolidated Balance Sheets include items such as goodwill, long lived assets
and store lease exit costs, which are measured at fair value to test for and
measure impairment, when necessary. Refer to Note 6 - Valuation of Long-Lived
Assets for a summary of impairment charges recorded during the 12 and 28 weeks
ended September 12, 2009.
Intangible Assets
In April 2008, the FASB issued FSP FAS 142-3, "Determining the Useful Life of
Intangible Assets" ("FSP FAS 142-3") - (ASC 350-30-65-1). FSP FAS 142-3 amends
the factors to be considered in determining the useful life of intangible
assets. Its intent is to improve the consistency between the useful life of an
intangible asset and the period of expected cash flows used to measure its fair
value. We adopted FSP FAS 142-3 during our first quarter ended June 20, 2009, as
required. The adoption of this FSP did not have a material impact on our
financial statements and disclosures.
Business Combinations
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS
No. 141R") - (ASC 805). SFAS No. 141R establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, the goodwill acquired,
and any noncontrolling interest in the acquiree. This statement also establishes
disclosure requirements to enable the evaluation of the nature and financial
effect of the business combination. SFAS No. 141R is effective for our fiscal
year ended February 27, 2010. In addition, in April 2009, the FASB issued FSP
No. FAS 141(R) - 1, "Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies" ("FSP FAS 141(R) - 1"),
which clarifies SFAS No. 141R on issues relating to initial recognition and
measurement, subsequent measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business combination. This FSP is
effective for assets or liabilities arising from contingencies in business
combinations with the acquisition date during or after our fiscal 2009. Our
acquisition of Pathmark was not impacted by the provisions of SFAS No. 141R and
FSP FAS 141(R) - 1.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
Codification(TM) ("Codification") and the Hierarchy of Generally Accepted
Accounting Principles - a replacement of FASB
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Statement No. 162" ("SFAS No. 168") - (ASC 105). In June 2009, the FASB also
issued Accounting Standards Update ("ASU") No. 2009-01, "Topic 105 - Generally
Accepted Accounting Principles Amendments Based on Statement of Financial
Accounting Standards No. 168 - The FASB Accounting Standards Codification and
Hierarchy of Generally Accepted Accounting Principles" ("ASU 2009-01"). SFAS No.
168 and ASU 2009-01 establish the Codification as the single official source of
authoritative United States accounting and reporting standards for all
non-governmental entities (other than guidance issued by the SEC). The
Codification changes the referencing and organization on financial standards and
is effective for interim and annual periods ending after September 15, 2009. For
clarity, we have chosen to include the available Codification references in this
quarterly report in addition to pre-Codification accounting standard references.
We will apply the Codification references exclusively to our disclosures
beginning with the third quarter of fiscal 2009. As the Codification is not
intended to change the existing accounting guidance, its adoption will not have
an impact on our financial statements.
In June 2009, the FASB issued FAS 167, "Amendments to FASB Interpretation No.
46(R)" ("SFAS No. 167"), which amends the consolidation guidance applicable to
variable interest entities. This statement is effective beginning in our fiscal
2010. We currently do not expect that the adoption of this statement will have a
material effect on our financial statements and disclosures.
In June 2009, the FASB issued FAS No. 166, "Accounting for Transfers of
Financial Assets - an amendment of FASB Statement No. 140" ("SFAS No. 166").
SFAS No. 166 eliminates the concept of a "qualifying special-purpose entity,"
changes the requirements for derecognizing financial assets, and requires
additional disclosures. This statement will be effective for any financial asset
transfers beginning with our fiscal 2010. We are currently assessing the impact
of SFAS No. 166 on our financial statements.
In June 2009, the FASB Emerging Issues Task Force ("EITF") issued EITF Issue No.
09-1, "Accounting for Own-Share Lending Arrangements in Contemplation of
Convertible Debt Issuance" ("EITF Issue No. 09-1"). The EITF reached a consensus
that a share-lending arrangement entered into on an entity's own shares in
contemplation of a convertible debt offering or other financing is required to
be measured at fair value and recognized as a debt issuance cost in our
Company's financial statements. The debt issuance costs should be amortized
using the effective interest method over the life of the financing arrangement
as interest cost. In addition, the loaned shares should be excluded from the
computations of basic and diluted earnings per share, unless default of the
share-lending arrangement occurs, at which time the loaned shares would be
included in the basic and diluted earnings per share calculation. The EITF also
expanded the disclosure requirements for share-lending arrangements. This issue
will be effective during our first quarter of fiscal 2010. Early adoption is not
permitted. Retrospective application is required for all arrangements
outstanding in the beginning of the fiscal year in which this Issue is initially
applied. We are currently assessing the impact of EITF Issue No. 09-1 on our
financial statements.
In December 2008, the FASB issued FSP FAS 132(R)-1, "Employer's Disclosures
about Postretirement Benefit Plan Assets" ("FSP FAS 132(R)-1") - (ASC
715-20-65-2). FSP FAS 132(R)-1 amends SFAS No. 132 (Revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits", to provide
guidance on an employer's disclosures about plan assets of a defined benefit
pension or other postretirement plan. The expanded disclosure requirements
include: (i) investment policies and strategies, (ii) the major categories of
plan assets, (iii) the inputs and valuation techniques used to measure plan
assets, (iv) the effect of fair value measurements using significant
unobservable inputs (Level 3) on changes in plan
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
assets for the period, and (v) significant concentrations of risk within plan
assets. These disclosure requirements are effective for our fiscal year ended
February 27, 2010.
In August 2009, the FASB issued ASU No. 2009-04, "Accounting for Redeemable
Equity Instruments" ("ASU 2009-04"). ASU 2009-04 represents an update to ASC
section 480-10-S99 "Distinguishing Liabilities from Equity" per EITF Topic D-98
"Classification and Measurement of Redeemable Securities." This update provides
guidance on what type of instruments should be classified as temporary as
opposed to permanent equity, as well as guidance with regard to measurement.
Refer to Note 11 - Redeemable Preferred Stock for a summary of our Preferred
Stock transaction.
In August 2009, the FASB issued ASU No. 2009-05 "Fair Value Measurements and
Disclosures (Topic 820) - Measuring Liabilities at Fair Value" ("ASU 2009-05").
ASU 2009-05 amends Subtopic 820-10 "Fair Value Measurements and Disclosures -
Overall" and provides clarification on the methods to be used in circumstances
in which a quoted price in an active market for the identical liability is not
available. The provisions of ASU 2009-05 are effective for the third quarter of
our fiscal 2009. We believe that our adoption of ASU 2009-05 will not have a
material impact on our financial statements.
3. Cash, Cash Equivalents, Restricted Cash and Restricted Marketable Securities
At September 12, 2009 and February 28, 2009, we had $251.1 million and $2.1
million, respectively, in cash equivalents, which are principally comprised of
various AAA-rated short term money market funds, primarily consisting of
investments in U.S. Treasuries, U.S. government and agency securities and notes,
commercial paper, corporate bonds and other highly rated money market
instruments.
At September 12, 2009 and February 28, 2009, we had $2.0 million and $2.2
million, respectively, in restricted cash held in escrow for services our
Company is required to perform in connection with the sale of our real estate
properties.
At September 12, 2009 and February 28, 2009, our restricted marketable
securities of $2.9 million and $4.9 million, respectively, were held by Bank of
America in the Columbia Fund. These securities are classified as
available-for-sale. On December 6, 2007, Bank of America froze the Columbia Fund
as a result of the increased risk in subprime asset backed securities. During
the 12 weeks ended September 12, 2009 and September 6, 2008, we received
distributions from the Columbia Fund in the amount of $0.8 million and $6.1
million, respectively, at an amount less than 100% of the net asset value of the
fund, resulting in realized losses of $0.1 million and $0.2 million,
respectively. During the 28 weeks ended September 12, 2009 and September 6,
2008, we received distributions from the Columbia Fund in the amount of $2.2
million and $7.1 million, respectively, at an amount less than 100% of the net
asset value of the fund, resulting in realized losses of $0.4 million and $0.2
million, respectively.
During the 12 and 28 weeks ended September 12, 2009, we recorded unrealized
gains of $0.1 million and $0.6 million, respectively, based on the increase in
the ending net asset value of the Columbia Fund at September 12, 2009. The
increase in net asset value is primarily a result of the improved pricing of
certain underlying securities included in the fund. As of February 28, 2009,
there were no investments with unrealized gains or losses.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
During the 12 weeks ended September 6, 2008, we recorded a realized gain of $0.2
million as our realized losses on our redemptions were less than the unrealized
losses previously recorded on these shares. During the 28 weeks ended September
6, 2008, we recorded a realized loss of $0.1 million based on the ending net
asset value of the Columbia Fund as the decline in net asset value was
considered other than temporary at September 6, 2008 and was not expected to be
recovered from future distributions from the fund.
The carrying amount of our cash, cash equivalents, restricted cash and
restricted marketable securities approximates fair value.
At September 12, 2009 At Feb. 28, 2009
-------------------------------------------------------- ----------------
Gross Gross
Amortized Unrealized Unrealized Fair Fair Value/
Costs Gains Losses Value Amortized Cost
------------ ----------- ----------- ----------- ----------------
Classified as:
-------------
Cash $ 96,647 $ -- $ -- $ 96,647 $ 173,299
Cash equivalents - money market funds 251,147 -- -- 251,147 2,076
------------ ----------- ----------- ----------- ----------------
Total cash and cash equivalents 347,794 -- -- 347,794 175,375
------------ ----------- ----------- ----------- ----------------
Restricted cash 1,992 -- -- 1,992 2,214
Restricted marketable securities 2,249 638 -- 2,887 2,929
Restricted marketable securities
included in other assets -- -- -- -- 1,928
------------ ----------- ----------- ----------- ----------------
Total cash, cash equivalents, restricted cash
and restricted marketable securities $ 352,035 $ 638 $ -- $ 352,673 $ 182,446
============ =========== =========== =========== ================
Securities available-for-sale:
-----------------------------
Maturing within one year $ 2,249 $ 2,887 $ 2,929
============ =========== ================
Maturing greater than one year $ -- $ -- $ 1,928
============ =========== ================
4. Goodwill and Other Intangible Assets
The carrying values of our finite-lived intangible assets are reviewed for
possible impairment whenever events or changes in circumstances indicate the
carrying amount of assets may not be recoverable. Our intangible assets that
have finite useful lives are amortized over their estimated useful lives.
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. Our annual impairment assessment of goodwill
and indefinite lived intangible assets for all reporting units was completed in
the fourth quarter of fiscal 2008 and we concluded there was no impairment as of
February 28, 2009.
As disclosed in Form 10-Q for our first quarter ended June 20, 2009, we continue
to monitor actual results and projections for the necessity of a possible
impairment charge. Due to the severity and duration of operating losses within
the Price Impact reporting unit, we have reduced our shorter term internal
revenue and profitability forecasts and revised our operating plans and cash
flow projections. Even though our business outlook has worsened due to the
current economic recession, we determined that a hypothetical decrease in fair
value of over 25% would be required before the Price Impact reporting unit would
have a
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
carrying value in excess of the fair value. Despite unfavorable operating
results within the Price Impact reporting unit, we do not believe the long-term
value of the reporting unit has been reduced to below its carrying value and
therefore, there has not been a triggering event requiring us to perform an
interim goodwill impairment analysis at this time.
The determination of estimated fair value is highly sensitive to our Company's
assumptions. Changes in the judgments and estimates underlying our analysis of
goodwill for possible impairment, including expected future operating cash flows
and discount rate, could decrease the fair value of this and other reporting
units in the future and could result in an impairment of goodwill. We will
continue to monitor events and circumstances in future periods to determine
whether interim impairment testing is warranted for any of our reporting units.
In addition, we will perform our annual goodwill impairment testing during the
fourth quarter of fiscal 2009, based on third quarter financial information. 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 impairment of a significant portion of our goodwill would
negatively affect our Company's reported results of operations and total
capitalization.
Changes in the carrying amount of goodwill by reportable segment during the 28
weeks ended September 12, 2009 are as follows:
Price
Fresh Impact Gourmet Other Total
--------- ----------- ----------- ----------- -----------
Goodwill at February 28, 2009 $ 126,609 $ 338,048 $ 12,720 $ 6,183 $ 483,560
Adjustment to goodwill* (5,792) (16,208) (610) (209) (22,819)
--------- ----------- ----------- ----------- -----------
Goodwill at September 12, 2009 $ 120,817 $ 321,840 $ 12,110 $ 5,974 $ 460,741
========= =========== =========== =========== ===========
-----------------------
*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.
Other intangible assets acquired as part of our acquisition of Pathmark in
December 2007 consisted of the following:
Weighted
Average Gross Accumulated Accumulated
Amortization Carrying Amortization at Amortization at
Period (years) Amount Sept. 12, 2009 Feb. 28, 2009
--------------- -------- --------------- ---------------
Loyalty card customer relationships 5 $ 19,200 $ 5,648 $ 3,376
In-store advertiser relationships 20 14,720 1,302 906
Pharmacy payor relationships 13 75,000 10,207 7,100
Pathmark trademark Indefinite 127,300 -- --
----------- --------------- ---------------
Total $ 236,220 $ 17,157 $ 11,382
=========== =============== ===============
Amortization expense relating to our intangible assets for the 12 and 28 weeks
ended September 12, 2009 2009 was $2.5 million and $5.8 million, respectively.
Amortization expense for the 12 and 28 weeks ended September 6, 2008 was $2.2
million and $5.0 million, respectively.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
The following table summarizes the estimated future amortization expense for our
finite-lived intangible assets:
2009 $ 4,950
2010 10,725
2011 10,725
2012 9,670
2013 6,505
Thereafter 49,188
5. Fair Value Measurements
SFAS No. 157 defines and establishes a framework for measuring fair value and
expands related disclosures. This Statement applies to all assets and
liabilities that are being measured and reported on a fair value basis. Our
Company adopted SFAS No. 157 for our financial assets and financial liabilities
during our fiscal 2008 and for our nonfinancial assets and liabilities during
the first quarter of our fiscal 2009.
SFAS 157 establishes a three-tier fair value hierarchy, which classifies the
inputs used in measuring fair value. These tiers include:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Our Company's Level 1 assets include cash equivalents that are traded in an
active exchange market.
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities. Our Company's Level 2 liabilities include warrants, which
are valued using the Black Scholes pricing model with inputs that are observable
in the market or can be derived principally from or corroborated by observable
market data.
Level 3 - Unobservable inputs that are supported by little or no market activity
and that are financial instruments whose value is determined using pricing
models, discounted cash flows, or similar methodologies, as well as instruments
for which the determination of fair value requires significant judgment or
estimation. Our Company's Level 3 assets include our restricted marketable
securities for which there is limited market activity. In addition, our goodwill
and other indefinite-lived intangible assets, our long-lived assets and closed
store occupancy costs are measured at fair value on a nonrecurring basis using
Level 3 inputs. Refer to Note 6 - Valuation of Long-Lived Assets for information
relating to valuing our long-lived assets.
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.
The following table provides the assets and liabilities carried at fair value
measured on a recurring basis as of September 12, 2009 and February 28, 2009:
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Fair Value Measurements at Sept. 12, 2009 Using
------------------------------------------------
Quoted Prices Significant Other Significant
Total Carrying in Active Observable Unobservable
Value at Markets Inputs Inputs
Sept. 12, 2009 (Level 1) (Level 2) (Level 3)
----------------- ------------- ------------- -------------
Assets:
------
Cash equivalents $ 251,147 $ 251,147 $ -- $ --
Restricted marketable securities 2,887 -- -- 2,887
--------------- ----------- ------------- -------------
Total $ 254,034 $ 251,147 $ -- $ 2,887
=============== =========== ============= =============
Liabilities:
-----------
Series B Warrant $ 13,720 $ -- $ 13,720 $ --
=============== =========== ============= =============
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 Valuation Techniques:
-----------------------------
Financial assets are considered Level 3 when their fair values are determined
using pricing models, discounted cash flows or similar techniques and at least
one significant model assumption or input is unobservable. Level 3 financial
assets include our restricted marketable securities for which there is limited
market activity such that the determination of fair value requires significant
judgment or estimation. At September 12, 2009 and February 28, 2009, these
securities were valued primarily with the assistance of broker pricing models
that incorporate transaction details such as contractual terms, maturity, timing
and amount of future cash inflows, as well as assumptions about liquidity.
As discussed in Note 3 - Cash, Cash Equivalents, Restricted Cash and Restricted
Marketable Securities, on September 12, 2009, we had $2.9 million invested in
the Columbia Fund. Due to market liquidity conditions, cash redemptions from the
Columbia Fund were restricted. As a result of this restriction on cash
redemptions, we did not consider the Columbia Fund to be traded in an active
market with observable pricing on September 12, 2009 and these amounts were
categorized as Level 3.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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 September 12, 2009:
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
------------------
Restricted
Marketable
Securities
------------------
Beginning Balance $ 4,857
Issuances --
Total realized and unrealized (losses) and gains included in:
Losses (1) (381)
Other comprehensive income (2) 638
Settlements (2,227)
-----------------
Ending Balance $ 2,887
=================
--------------------------
(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 still held at
September 12, 2009.
The following table provides the carrying values recorded on our balance sheet
and the estimated fair values of financial instruments as of September 12, 2009
and February 28, 2009.
As of September 12, 2009 As of February 28, 2009
--------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------- ------------ ------------- -------------
Current portion on long-term debt $ 2,552 $ 2,552 $ 5,283 $ 5,283
Long-term debt, net of related discount (1) 983,196 949,720 919,364 675,902
Preferred stock liability 117,250 117,250 -- --
------------------------------------------
(1) The balance 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 FSP APB 14-1, which we adopted during the first quarter of fiscal
2009. Refer to Note 2 - Impact of New Accounting Pronouncements 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.
Our Preferred stock liability was recorded in connection with our preferred
stock issuance in August 2009. We believe that as of September 12, 2009, its
current book value, which is based on the net proceeds received, is the best
indication of its fair value.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
6. Valuation of Long-Lived Assets
We review the carrying values of our long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. Such review is primarily based upon groups of
assets and the undiscounted estimated future cash flows from such assets to
determine if the carrying value of such assets is recoverable from their
respective cash flows. If such review indicates an impairment exists, we measure
such impairment on a discounted basis using a probability weighted approach and
a U.S. Treasury risk-free rate, which is based on the life of the primary asset
within the asset group.
We review assets in stores planned for closure or conversion for impairment upon
determination that such assets will not be used for their intended useful life.
During the 12 and 28 weeks ended September 12, 2009, we recorded impairment
losses on long-lived assets of $2.6 million and $3.7 million, respectively,
related to stores that were or will be closed or converted in the normal course
of business, as compared to $1.0 million and $1.8 million in impairment losses
on property related to stores that were closed or converted in the normal course
of business during the 12 and 28 weeks ended September 6, 2008, respectively.
These amounts were recorded within "Store operating, general and administrative
expense" in our Consolidated Statements of Operations.
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
7. Discontinued Operations
We have had multiple transactions throughout the years which met the criteria
for discontinued operations. These events are described based on the year the
transaction was initiated.
2007 Events
-----------
On May 30, 2007, our Company announced advanced negotiations for the sale of our
non-core stores located within the Greater New Orleans area, including inventory
related to these stores. Our Company ceased sales operations in all stores not
sold as of November 1, 2007. Planned sale transactions for these stores have
been completed.
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.
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.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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.
The operating results for these discontinued businesses are included in our
Consolidated Statements of Operations, under the captions "Loss from operations
of discontinued businesses, net of tax" and "Gain on disposal of discontinued
businesses, net of tax" for the 12 and 28 weeks ended September 12, 2009 and
September 6, 2008, respectively.
Summarized below is a reconciliation of the liabilities related to restructuring
obligations resulting from these activities.
For the 28 Weeks Ended September 12, 2009
-----------------------------------------------------------------------------------
Balance at Interest Balance at
2/28/2009 Accretion (1) Adjustments(2) Utilization(3) 9/12/2009
--------------- -------------- --------------- ------------- ----------
2007 Events
-----------
Occupancy $ 70,583 $ 4,896 $ 10,881 $ (15,511) $ 70,849
Severance 59,239 1,989 37 (2,676) 58,589
--------------- -------------- --------------- ------------- ----------
2007 events total 129,822 6,885 10,918 (18,187) 129,438
2005 Event
---------
Occupancy 60,327 1,750 -- (5,303) 56,774
2003 Events
-----------
Occupancy 18,712 614 545 (1,547) 18,324
--------------- -------------- --------------- ------------- ----------
Total $ 208,861 $ 9,249 $ 11,463 $ (25,037) $ 204,536
=============== ============== =============== ============= ==========
Fiscal 2008
-----------------------------------------------------------------------------------
Balance at Interest Balance at
2/23/2008 Accretion (1) Adjustments(2) Utilization(3) 2/28/2009
--------------- -------------- --------------- ------------- ----------
2007 Events
-----------
Occupancy $ 62,873 $ 9,382 $ 28,959 $ (30,631) $ 70,583
Severance 58,520 2,019 3,730 (5,030) 59,239
--------------- -------------- --------------- ------------- ----------
2007 events total 121,393 11,401 32,689 (35,661) 129,822
2005 Event
----------
Occupancy 66,882 3,324 600 (10,479) 60,327
2003 Events
-----------
Occupancy 21,579 1,230 (902) (3,195) 18,712
--------------- -------------- --------------- ------------- ----------
Total $ 209,854 $ 15,955 $ 32,387 $ (49,335) $ 208,861
=============== ============== =============== ================= ==========
(1) The additions to occupancy and severance represent 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
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
time of the original charge. Interest accretion is recorded as a
component of "Loss from operations of discontinued businesses" on our
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. These
adjustments are recorded as a component of "Loss from operations of
discontinued businesses" on our Consolidated Statements of Operations.
For the 28 weeks ended September 12, 2009
-----------------------------------------
During the 28 weeks ended September 12, 2009, we recorded adjustments
for the 2007 and 2003 events for additional occupancy related costs of
$10.9 million and $0.5 million, respectively, due to changes in our
estimation of such future costs due to continuing deteriorating
conditions in the Midwest real estate market.
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.
(3) Occupancy utilization represents payments made during those periods for
rent, common area maintenance and real estate taxes. Severance
utilization represents payments made to terminated employees during the
period.
Summarized below are the payments made through September 12, 2009 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 $ 30,828 $ 2,650 $ 22,528 $ 56,006
Expected future severance payments 58,589 -- -- 58,589
-------------- --------------- ------------- -------------
Total severance payments expected to be incurred 89,417 2,650 22,528 114,595
-------------- --------------- ------------- -------------
Total occupancy payments made to date 67,368 51,954 31,068 150,390
Expected future occupancy payments,
excluding interest accretion 70,849 56,774 18,324 145,947
-------------- --------------- ------------- -------------
Total occupancy payments expected to be incurred,
excluding interest accretion 138,217 108,728 49,392 296,337
-------------- --------------- ------------- -------------
Total severance and occupancy payments made to date 98,196 54,604 53,596 206,396
Expected future severance and occupancy payments,
excluding interest accretion 129,438 56,774 18,324 204,536
-------------- --------------- ------------- -------------
Total severance and occupancy payments
expected to be incurred, excluding interest accretion $ 227,634 $ 111,378 $ 71,920 $ 410,932
============== =============== ============= =============
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
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
future payments under long term leases and expected future payments for early
withdrawal from multi-employer union pension plans. The expected completion
dates for the 2007, 2005 and 2003 events are 2028, 2022 and 2022, respectively.
Summarized below are the amounts included in our balance sheet captions on our
Company's Consolidated Balance Sheets related to these events:
September 12, 2009
-----------------------------------------------------------------
2007 2005 2003
Events Event Events Total
-------------- --------------- ------------- -------------
Accrued salaries, wages and benefits $ 35 $ -- $ -- $ 35
Other accruals $ 29,127 $ 10,399 $ 3,310 $ 42,836
Other non-current liabilities $ 100,276 $ 46,375 $ 15,014 $ 161,665
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 September 12, 2009 based on current
information and have concluded that they are adequate to cover future costs. We
will continue to monitor the status of the vacant and subsidized properties,
severance and benefits, and pension withdrawal liabilities, and adjustments to
the reserve balances may be recorded in the future, if necessary.
8. Asset Disposition Initiatives
In addition to the events described in Note 7 - Discontinued Operations, there
were restructuring transactions which were not primarily related to our
discontinued operations businesses. These events are referred to based on the
year the transaction was initiated, as described below.
Restructuring charges relate principally to employee severance and occupancy
costs resulting from the closure of facilities and other workforce reductions
attributable to our efforts to reduce costs. The costs of these reductions have
been and will be funded through cash from operations. Occupancy costs represent
facility consolidation and lease termination costs associated with our decision
to consolidate and close duplicative or excess warehouse and office facilities,
unproductive and excess facilities.
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.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
2001 Event
----------
During the third quarter of fiscal 2001, our Company determined that certain
underperforming operations, including 39 stores (30 in the United States and 9
in Canada) and 3 warehouses (2 in the United States and 1 in Canada) should be
closed and/or sold, and certain administrative streamlining should take place.
1998 Event
----------
In May 1998, we initiated an assessment of our business operations in order to
identify the factors that were impacting our performance. As a result of this
assessment, in fiscal 1998 and 1999, we announced a plan to close two warehouse
facilities and a coffee plant in the U.S., a bakery plant in Canada and 166
stores (156 in the United States and 10 in Canada) including the exit of the
Richmond, Virginia and Atlanta, Georgia markets.
Summarized below is a reconciliation of the liabilities related to restructuring
obligations resulting from these activities:
For the 28 Weeks Ended September 12, 2009
-----------------------------------------------------------------------------------
Balance at Interest Balance at
2005 Event 2/28/2009 Accretion (1) Adjustments(2) Utilization(3) 9/12/2009
---------- --------------- -------------- --------------- ----------------- ----------
Occupancy - Continuing Operations $ 1,114 $ 11 $ (1,120) $ (5) $ --
Severance - Continuing Operations 904 -- 46 (160) 790
--------------- -------------- --------------- -------------- ----------
2005 event total 2,018 11 (1,074) (165) 790
2001 Event
----------
Occupancy - Continuing Operations 7,080 251 3 (418) 6,916
Occupancy - Discontinued Operations 11,307 343 4 (1,188) 10,466
--------------- -------------- --------------- -------------- ----------
2001 event total 18,387 594 7 (1,606) 17,382
1998 Event
----------
Occupancy - Continuing Operations 8,696 151 (1,398) (1,989) 5,460
Severance - Continuing Operations 824 -- -- (80) 744
Occupancy - Discontinued Operations 543 13 -- (321) 235
--------------- -------------- --------------- -------------- ----------
1998 event total 10,063 164 (1,398) (2,390) 6,439
--------------- -------------- --------------- ----------------- ----------
Total $ 30,468 $ 769 $ (2,465) $ (4,161) $ 24,611
=============== ============== =============== ================= ==========
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Fiscal 2008
-----------------------------------------------------------------------------------
Balance at Interest Balance at
2005 Event 2/23/2008 Accretion (1) Adjustments(2) Utilization(3) 2/28/2009
---------- --------------- -------------- --------------- ----------------- ----------
Occupancy - Continuing Operations $ 1,231 $ 48 $ (91) $ (74) $ 1,114
Severance - Continuing Operations 1,686 -- -- (782) 904
--------------- -------------- --------------- ----------------- ----------
2005 event total 2,917 48 (91) (856) 2,018
2001 Event
----------
Occupancy - Continuing Operations 6,755 385 1,794 (1,854) 7,080
Occupancy- Discontinued Operations 12,281 688 (166) (1,496) 11,307
--------------- -------------- --------------- ----------------- ----------
2001 event total 19,036 1,073 1,628 (3,350) 18,387
1998 Event
----------
Occupancy - Continuing Operations 6,958 316 4,111 (2,689) 8,696
Severance - Continuing Operations 1,000 -- -- (176) 824
Occupancy - Discontinued Operations 1,093 49 (8) (591) 543
--------------- -------------- --------------- ----------------- ----------
1998 event total 9,051 365 4,103 (3,456) 10,063
--------------- -------------- --------------- ----------------- ----------
Total $ 31,004 $ 1,486 $ 5,640 $ (7,662) $ 30,468
=============== ============== =============== ================= ==========
(1) The additions to occupancy represent the interest accretion on future
occupancy costs which were recorded at present value at the time of the
original charge. These adjustments are recorded to "Store operating,
general and administrative expense" for continuing operations and "Loss
from operations of discontinued operations" for discontinued operations
on our Consolidated Statements of Operations.
(2) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. These adjustments are recorded to
"Store operating, general and administrative expense" for continuing
operations and "Loss from operations of discontinued operations" as
noted for discontinued operations on our Consolidated Statements of
Operations.
For the 28 Weeks Ended September 12, 2009
-----------------------------------------
For the 28 weeks ended September 12, 2009, we recorded an adjustment
eliminating occupancy related costs of $1.1 million due to the
termination of the lease on the one remaining property included in the
2005 Event. We also recorded an adjustment reducing occupancy related
costs by $1.4 million for the 1998 event, 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.
(3) Occupancy utilization represents payments made during those periods for
rent. Severance and benefits utilization represents payments made to
terminated employees during the period.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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 $ 48,875 $ 28,205 $ 30,720 $ 107,800
Expected future severance payments 790 -- 744 1,534
--------------- -------------- --------------- -------------
Total severance payments expected
to be incurred 49,665 28,205 31,464 109,334
--------------- -------------- --------------- -------------
Total occupancy payments made to date 13,856 63,976 117,535 195,367
Expected future occupancy payments,
excluding interest accretion -- 17,382 5,695 23,077
--------------- -------------- --------------- -------------
Total occupancy payments expected
to be incurred, excluding interest
accretion 13,856 81,358 123,230 218,444
--------------- -------------- --------------- -------------
Total severance and occupancy
payments made to date 62,731 92,181 148,255 303,167
Expected future severance and
occupancy payments, excluding
interest accretion 790 17,382 6,439 24,611
--------------- -------------- --------------- -------------
Total severance and occupancy payments
expected to be incurred, excluding
interest accretion $ 63,521 $ 109,563 $ 154,694 $ 327,778
=============== ============== =============== =============
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:
September 12, 2009
---------------------------------------------------------------------
2005 2001 1998
Event Event Event Total
--------------- --------------- --------------- ----------------
Other accruals $ 271 $ 2,817 $ 3,214 $ 6,302
Other non-current liabilities $ 519 $ 14,565 $ 3,225 $ 18,309
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
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
We evaluated the reserve balances as of September 12, 2009 based on current
information and have concluded that they are adequate to cover future costs. We
will continue to monitor the status of the vacant and subsidized properties,
severance and benefits, and pension withdrawal liabilities, and adjustments to
the reserve balances may be recorded in the future, if necessary.
9. Other Accruals
Other accruals are comprised of the following:
At At
Sept. 12, 2009 Feb. 28, 2009
----------------- ---------------
Self-insurance reserves $ 77,377 $ 77,560
Closed store and warehouse reserves 59,862 64,508
Pension withdrawal liabilities 10,461 5,393
GHI contract liability 6,050 5,742
Accrued occupancy related costs for open stores 26,010 27,439
Deferred income 19,065 33,558
Deferred real estate income 5,907 2,558
Accrued audit, legal and other 9,381 11,719
Accrued interest 17,098 9,000
Other postretirement and postemployment benefits 4,153 4,153
Accrued advertising 2,543 1,493
Dividends payable on preferred stock 1,615 -
Other 2,020 3,473
----------- -----------
Total $ 241,542 $ 246,596
=========== ===========
10. Other Non-Current Liabilities
Other non-current liabilities are comprised of the following:
At At
Sept. 12, 2009 Feb. 28, 2009
----------------- ---------------
Unrecognized Tax Benefits $ 156,267 $ 156,267
Self-insurance Reserves 150,271 153,870
Closed Store and Warehouse Reserves 144,502 140,593
Pension Withdrawal Liabilities 91,847 109,714
GHI Contract Liability for Employee Benefits 93,039 85,690
Pension Plan Benefits 108,086 89,842
Other Postretirement and Postemployment Benefits 34,621 34,295
Corporate Owned Life Insurance Liability 57,918 59,529
Deferred Rent Liabilities 55,030 54,047
Deferred Income 75,103 83,128
Unfavorable Lease Liabilities 23,031 30,708
Other 14,728 13,726
----------- -----------
Total $ 1,004,443 $ 1,011,409
=========== ===========
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
11. 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 $162.2 million, after deducting
approximately $12.8 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 provided that prior to
receiving shareholder approval, the Preferred Stock will not be exercisable into
greater than 19.99% of the Common Stock outstanding prior to the issuance of the
Preferred Stock. The 57,750 shares that are currently convertible without
shareholder approval are classified as temporary stockholders' equity 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 require shareholder approval in order to become convertible
are classified as a "Preferred stock liability".
Prior to shareholder approval, the holders of Series A Convertible Preferred
Stock have the right to vote on an as-converted basis provided that the
aggregate number of votes entitled to be cast by the Series A Convertible
Preferred Stock does not exceed 19.99% and the Series A-T Convertible Preferred
Stock does not exceed 1% of the voting power of the common stock outstanding
immediately prior to the issuance of the Series A Convertible Preferred Stock.
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 request our Company to repurchase the Preferred Stock in
cash at 101% 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 is not able to pay the dividends fully in cash. 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%. During the 12 weeks ended September 12,
2009, we accrued Preferred Stock dividends of $1.6 million, $1.1 million of
which has been recorded within "Interest expense" and $0.5 million recorded
within "Additonal paid-in capital". In addition, during the 12 weeks ended
September 12, 2009, we recorded $0.2 million of deferred financing fees
amortization, $0.1 million of which was recorded within "Interest expense" and
$0.1 million recorded within "Additional paid-in capital".
The portion of the issuance recorded within "Preferred stock liability" is
recorded at fair value, with the related issuance cost amortization recorded
within "Interest expense".
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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. This embedded beneficial conversion feature
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. During the 12 weeks ended
September 12, 2009, we accreted $0.2 million relating to the beneficial
conversion feature through "Additional paid-in capital".
Certain features of the Preferred Stock constitute derivatives separate from the
Preferred Stock; however, at issuance, those features had little or no value and
are not expected to have significant value for the foreseeable future.
12. Indebtedness and Other Financial Liabilities
Series A and B Warrants
-----------------------
As part of the acquisition of Pathmark on December 3, 2007, we issued 4,657,378
and 6,965,858 roll-over stock warrants in exchange for Pathmark's 2005 Series A
and Series B warrants, respectively. The Series A warrants were exercised on May
7, 2008 at a price of $18.36; the Series B warrants are exercisable at $32.40
and expire on June 9, 2015. The Tengelmann stockholders have the right to
approve any issuance of common stock under these warrants upon exercise
(assuming Tengelmann's outstanding interest is at least 25% and subject to
liquidity impairments defined within the Tengelmann Stockholder Agreement). In
addition, Tengelmann has the ability to exercise a "Put Right" whereby it has
the ability to require our Company to purchase our common stock held by
Tengelmann to settle these warrants. Based on 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.
On May 7, 2008, the 4,657,378 Series A warrants were exercised by Yucaipa
Corporate Initiatives Fund I, L.P., Yucaipa American Alliance Fund I, L.P. and
Yucaipa American Alliance (Parallel) Fund I, L.P. We opted to settle the Series
A warrants in cash totaling $45.7 million rather than issuing additional common
shares. Included in "Nonoperating income" on our Consolidated Statements of
Operations for the 12 and 28 weeks ended September 6, 2008, is a loss of nil and
$1.2 million, respectively, for the Series A warrants through the settlement
date of May 7, 2008 and a gain of $48.8 million and $76.0 million, respectively,
for Series B warrants market value adjustments. "Nonoperating income" for the 12
and 28 weeks ended September 12, 2009 includes a loss of $7.1 million and $9.0
million, respectively, relating to market value adjustments for Series B
warrants. The value of the Series B warrants as of September 12, 2009 and
February 28, 2009 was $13.7 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 for
the Series B warrants:
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Sept. 12, 2009 February 28, 2009
-------------- -----------------
Expected life 5.74 years 6.28 years
Volatility 65.6% 61.3%
Dividend yield range 0% 0%
Risk-free interest rate 2.29% 2.69%
Public Debt Obligations
-----------------------
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. 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.
As of December 18, 2007, our Company did not have sufficient authorized shares
to provide for all potential issuances of common stock. Therefore, our Company
accounted for the conversion features as freestanding instruments. The notes
were recorded with a discount equal to the value of the conversion features at
the transaction date and will be accreted through "Interest expense" to the par
value of the notes over the life of the notes. The value of the conversion
features was 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 was marked to
market each balance sheet date. On June 26, 2008, at a special meeting of
stockholders, the number of shares of common stock we have the authority to
issue was increased to 160,000,000, based on a majority vote by our
stockholders. During the 12 and 28 weeks ended September 6, 2008, we recorded a
loss of $1.7 million and a gain of $9.4 million, respectively, in "Nonoperating
income" on our Consolidated Statements of Operations for the conversion features
of the 5.125% convertible senior notes. During the 12 and 28 weeks ended
September 6, 2008, the gain that was recorded in "Nonoperating income" in our
Consolidated Statement of Operations for the conversion features of the 6.750%
convertible senior notes was nil and $5.1 million, respectively. Based on an
increase in available shares 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 to "Additional
paid-in-capital" on our Consolidated Statements of Stockholder's Equity and
Comprehensive (Loss) Income as of June 26, 2008. The following assumptions and
estimates were used in the Black-Scholes model:
As of
June 26, 2008
-------------
Expected life 3.0 years
Volatility 33.4%
Dividend yield range 0%
Risk-free interest rate range 3.11%
The $255.0 million aggregate principal amount of the 6.750% Convertible Senior
Notes due 2012 is subject to the provisions of FSP APB 14-1, which we adopted
during our first quarter ended June 20, 2009 (refer to
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Note 2 - Impact of New Accounting Pronouncements). We estimate that our
effective interest rate for similar debt without the conversion feature is
approximately 12.000%. During the 12 weeks ended September 12, 2009 and
September 6, 2008, we recognized additional non-cash interest expense of $1.0
million and $0.7 million, respectively, relating to our adoption of FSP APB
14-1. During the 28 weeks ended September 12, 2009 and September 6, 2008, we
recognized additional non-cash interest expense of $2.2 million and $1.7
million, respectively, relating to our adoption of FSP APB 14-1. The net
carrying value of outstanding debt as of September 12, 2009 and February 28,
2009 was $219.7 million and $215.1 million, respectively, net of unamortized
discount of $35.3 million and $39.9 million, respectively. As of September 12,
2009, our remaining unamortized discount will be recognized as follows:
Remainder of 2009 $ 4,187
2010 9,884
2011 11,139
2012 10,140
-----------
$ 35,350
===========
Senior Secured Notes
--------------------
On August 4, 2009, we completed a $260.0 million offering 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 September 12, 2009, the carrying
value of the notes was $253.3 million. The proceeds from this offering and our
preferred stock offering on August 4, 2009 (Refer to Note 11 - 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 outside the United States, only to non-U.S. investors pursuant to Regulation
S. 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 the usual and customary covenants found in
secured notes, including, among other things, restrictions on the incurrence of
additional indebtedness, asset sales, liens and restricted payments.
Credit Agreement
----------------
On December 3, 2007, we entered into a new $675.0 million Credit Agreement with
Banc of America Securities LLC and Bank of America, N.A., as the co-lead
arranger. On December 27, 2007, in order to facilitate the syndication of the
Credit Agreement under current market conditions, we entered into an Amended and
Restated Credit Agreement, whereby a portion of the revolving commitments was
converted into a $50.0 million term loan tranche, which was collaterized by
certain real estate assets at an increased margin rate. On July 23, 2009, our
Company amended the Amended and Restated Credit Agreement in connection with the
private offering of senior secured notes and the sale of preferred stock. The
amended agreement increases the applicable margins on credit advances, reduces
commitments by $20.0 million, reduces the collateral advance and provides for
certain other amendments. Subject to borrowing base requirements, the amended
Credit Agreement provides for a five-year term loan of $82.9 million, the
previously issued five year term loan of $50.0 million and a five-year revolving
credit facility of $522.1 million enabling us to borrow funds and issue letters
of credit on a revolving basis. The Credit Agreement
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
includes a $100.0 million accordion feature, which provides us with the ability
to increase commitments from $655.0 million to $755.0 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, owned real
estate and certain Pathmark leaseholds. The Pathmark leaseholds are removed as
eligible collateral throughout fiscal 2009, which resulted in a reduction in
borrowing availability of $25.0 million on March 1, 2009 and $25.0 million on
June 1, 2009 and will result in reductions of an additional $23.0 million on
December 1, 2009, for a total reduced borrowing availability of approximately
$73.0 million. Borrowings under the Credit Agreement bear interest based on
LIBOR or Prime interest rate pricing. Subject to certain conditions, we are
permitted to pay cumulative cash dividends on common shares, as well as make
bond repurchases. This agreement expires in December 2012.
As of September 12, 2009, there were $132.9 million of loans and $199.6 million
in letters of credit outstanding under this agreement. As of September 12, 2009,
after reducing availability for borrowing base requirements, we had $231.5
million available under the Credit Agreement. In addition, we have invested cash
available to reduce borrowings under this Credit Agreement or to use for future
operations of $251.2 million as of September 12, 2009.
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 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 6.750% Notes. The
financing warrants were valued at $36.8 million at the issuance date. At the
issuance date, our Company did not have sufficient authorized shares to provide
for all potential issuances of common stock. Therefore, the financing warrants
were accounted for as freestanding derivatives, required to be settled in cash
until sufficient shares are available and are recorded as a long-term liability
in the Consolidated Balance Sheet. On June 26, 2008, at a special meeting of
stockholders, the number of shares of common stock we have the authority to
issue was increased to 160,000,000 based on a majority vote by our stockholders.
Thus, the financing warrants were marked to market through June 26, 2008
utilizing the Black-Scholes option pricing model. These financing warrants are
no longer classified as a liability as of June 26, 2008. During the 12 and 28
weeks ended September 6, 2008, we recorded a loss of $4.2 million and a gain of
$2.3 million, respectively, relating to these warrants, which was included in
"Nonoperating income" on our Consolidated Statements of Operations. The
following assumptions and estimates were used in the Black-Scholes model:
At June 26, 2008
---------------------
Expected life 3.3 years - 4.8 years
Volatility 33.4%
Dividend yield range 0%
Risk-free interest rate range 3.11% - 3.54%
We understand that on or about October 3, 2008, Lehman Brothers OTC Derivatives,
Inc. or "LBOTC" who accounts for 50% of the call option and financing warrant
transactions filed for bankruptcy protection, which is an event of default under
such transactions. We are carefully monitoring the developments
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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.
13. Interest Expense
Interest expense is comprised of the following:
For the 12 weeks ended For the 28 weeks ended
-------------------------------- -------------------------------
Sept. 12, 2009 Sept. 6, 2008(1) Sept. 12, 2009 Sept. 6, 2008(1)
-------------- ------------- -------------- -------------
$675 million Credit Agreement $ 3,208 $ 4,932 $ 9,378 $ 10,301
Related Party Promissory Note, due Aug. 18, 2011 137 8 320 8
11.375% Senior Secured Notes, due Aug. 1, 2015 3,565 -- 3,565 --
9.125% Senior Notes, due December 15, 2011 270 270 630 630
5.125% Convertible Senior Notes,
due June 15, 2011 1,951 1,946 4,553 4,541
6.750% Convertible Senior Notes,
due December 15, 2012 3,972 3,961 9,268 9,243
9.375% Notes, due August 1, 2039 4,280 4,315 10,124 10,068
Capital Lease Obligations and
Real Estate Liabilities 11,964 10,975 28,047 28,054
Dividends on Preferred Stock Liability 1,082 -- 1,082 --
Self Insurance and GHI Interest 3,446 1,913 8,128 4,464
GHI Discount Rate Adjustment and
COLI Non-cash Interest 8,443 777 14,087 1,812
Amortization of Deferred Financing Fees
and Discounts 6,073 5,312 13,306 12,141
Other 168 271 319 344
------------ ------------ ------------ -----------
Total $ 48,559 $ 34,680 $ 102,807 $ 81,606
============ ============ ============ ===========
(1) The interest expense associated with the 6.750% convertible senior notes
increased by $0.7 million and $1.7 million, respectively, from the amounts
reported in our Form 10-Q for the 12 and 28 weeks ended September 6, 2008 as a
result of the retrospective application of FSP APB 14-1, which we adopted during
the first quarter of fiscal 2009. Refer to Note 2 - Impact of New Accounting
Pronouncements for additional information.
14. Earnings 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
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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.
The following table contains common share equivalents, which were not included
in the loss per share calculations as their effect would be antidilutive:
12 Weeks Ended 28 Weeks Ended
-------------------------------- ------------------------------
Sept. 12, 2009 Sept. 6, 2008 Sept. 12, 2009 Sept. 6, 2008
--------------- ------------- -------------- -------------
Stock options 2,608,718 1,767,767 2,174,533 1,751,110
Warrants 686,277 686,277 686,277 686,277
Performance restricted stock units 512,578 524,843 657,242 524,843
Restricted stock units 1,440,176 -- 808,262 --
Financing warrant 11,278,988 11,278,988 11,278,988 11,278,988
Preferred stock 11,590,600 -- 11,590,600 --
Convertible debt 3,553,806 3,553,806 8,086,769 3,553,806
The portion of our August 2009 preferred stock issuance recorded within
"Preferred stock liability" is not included in our Company's earnings (loss) per
share calculation or the above table due to the fact that the related shares are
not legally convertible without prior shareholder approval.
The following table sets forth the calculation of basic and diluted earnings per
share:
12 Weeks Ended 28 Weeks Ended
-------------------------------- ------------------------------
Sept. 12, 2009 Sept. 6, 2008 Sept. 12, 2009 Sept. 6, 2008
--------------- ------------- -------------- -------------
Loss from continuing operations $ (62,159) $ (4,289) $ (120,463) $ (1,501)
Preferred stock dividends (533) -- (533) --
Beneficial conversion feature amortization (178) -- (178) --
-------------- ------------- -------------- -------------
Loss from continuing operations - basic (62,870) (4,289) (121,174) (1,501)
Adjustments for convertible debt (1) (25,573) (35,846) (11,971) (44,085)
Adjustments on Other financial liabilities (2) 7,080 (48,846) 8,955 (75,964)
-------------- ------------- -------------- -------------
Loss from continuing operations-diluted $ (81,363) $ (88,981) $ (124,190) $ (121,550)
============== ============= ============== =============
Weighted average common shares outstanding 58,124,672 57,654,527 57,947,659 57,627,273
Share lending agreement (3) (4,927,944) (8,134,002) (4,927,944) (8,134,002)
-------------- ------------- -------------- -------------
Common shares outstanding-basic 53,196,728 49,520,525 53,019,715 49,493,271
Effect of dilutive securities:
Convertible debt (1) 7,725,182 7,725,182 3,192,219 7,725,182
Convertible financial liabilities (2) (34,307,444) (4,975,613) (35,167,204) (2,972,222)
-------------- ------------- -------------- -------------
Common shares outstanding-diluted 26,614,466 52,270,094 21,044,730 54,246,231
============== ============= ============== =============
(1) We have debt instruments with a bifurcated conversion feature that were
recorded at a significant discount. (Refer to Note 12 - 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 always consider the combined impact of the numerator and
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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.
(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 12
- Indebtedness and Other Financial Liabilities). These warrants are
marked-to-market on our income statement. 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 always
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) We have 8,134,002 loaned shares under our share lending agreements, which
are considered issued and outstanding. However, the obligation of the
financial institutions to return the borrowed shares has been accounted for
as 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. For the 12 and 28 weeks ended September 12, 2009
and September 6, 2008, weighted average common shares relating to share
lending agreement of 4,927,944 and 8,134,002, respectively, were excluded
from the computation of earnings per share.
15. Retirement Plans and Benefits
Defined Benefit Plans
We provide retirement benefits to certain non-union and union employees under
various defined benefit plans. Our defined benefit pension plans are
non-contributory and benefits under these plans are generally determined based
upon years of service and, for salaried employees, compensation. We fund these
plans in amounts consistent with the statutory funding requirements. We use our
fiscal year end as the measurement date.
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, our Company signed a Transfer Agreement, pursuant
to which our Company agreed to pay UFCW $0.7 million, representing the amount of
the mass withdrawal liability owed to UFCW, including benefit payments from July
2007 through July 2009, which has already been accrued in our Consolidated
Financial Statements. The remainder of our mass withdrawal liability will be
settled by transferring the existing pension benefit liabilities relating to our
employees and retirees from UFCW to the A&P Pension Plan. On July 29, 2009, the
A&P Pension Plan has been amended for the transfer of the UFCW pension benefit
obligation effective July 1, 2009.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
The components of net pension cost were as follows:
For the 12 Weeks Ended For the 28 Weeks Ended
--------------------------------- ---------------------------------
Sept. 12, Sept. 6, Sept. 12, Sept. 6,
2009 2008 2009 2008
--------------- --------------- --------------- ---------------
Service cost $ 1,545 $ 1,960 $ 3,568 $ 3,494
Interest cost 6,819 6,279 15,638 13,869
Expected return on plan assets (5,708) (7,496) (13,319) (16,562)
Amortization of:
Net prior service cost 68 63 159 137
Actuarial loss 1,090 27 2,525 63
Special termination benefits 250 -- 650 --
--------------- -------------- --------------- -------------
Net pension cost $ 4,064 $ 833 $ 9,221 $ 1,001
=============== ============== =============== =============
Contributions
As of September 12, 2009, we contributed approximately $3.5 million to our
defined benefit plans. We plan to contribute approximately $3.5 million to our
plans during the remainder of fiscal 2009.
Postretirement Plans
We provide postretirement health care and life insurance benefits to certain
union and non-union employees. We recognize the cost of providing postretirement
benefits during employees' active service periods. We use our fiscal year end as
the measurement date for our postretirement benefits. The components of net
postretirement benefits cost (income) were as follows:
For the 12 Weeks Ended For the 28 Weeks Ended
--------------------------------- ---------------------------------
Sept. 12, Sept. 6, Sept. 12, Sept. 6,
2009 2008 2009 2008
--------------- --------------- --------------- ---------------
Service cost $ 117 $ 234 $ 273 $ 546
Interest cost 449 529 1,048 1,234
Amortization of:
Prior service credit (310) (311) (725) (725)
Actuarial gain (189) -- (441) --
--------------- -------------- --------------- -------------
Net postretirement benefits cost $ 67 $ 452 $ 155 $ 1,055
=============== ============== =============== =============
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. Effective August 29, 2008, GHI, the Fund, and our
Company entered into a series of agreements which collectively provided that:
(i) GHI withdrew from the Fund; (ii) our Pathmark Pension Plan would be amended
to become a multiple employer plan to provide for the participation in the plan
by certain GHI employees; and (iii) the Fund liabilities allocable to GHI and a
portion of the Fund assets would be transferred to the Pathmark Pension Plan. As
a result, pension assets attributable to GHI's employees of $13.6 million were
transferred from
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
the Fund in January 2009 and combined with the existing Pathmark Pension Plan's
assets. Since the assets in the Pathmark Pension Plan are available to pay
pension benefits of both our Company's employees and GHI's employees servicing
our Pathmark stores, the transferred assets are treated as pension plan assets.
However, since GHI's employees covered by this plan are not employees of our
Company, our obligation to fund their pension benefits is accounted for as a
separate contractual obligation at its fair value.
As of September 12, 2009 and February 28, 2009, the fair value of our
contractual obligation to GHI's employees was $99.1 million and $91.4 million,
respectively, using discount rates of 5.750% and 7.000%, 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 Sheets. 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. During the 12
and 28 weeks ended September 12, 2009, we recognized service costs of $0.2
million and $0.4 million, respectively, and interest expense of $9.0 million and
$15.4 million, respectively, representing interest accretion and the impact of
the lower discount rate used to value this obligation, resulting from a decline
in the published zero-coupon AA corporate bond yields. During the 28 weeks ended
September 12, 2009, benefit payments of $8.1 million were made by the Pathmark
Pension Plan.
16. Stock Based Compensation
During the 12 and 28 weeks ended September 12, 2009, compensation expense
related to share-based incentive plans was $1.2 million and $4.1 million, after
tax, respectively, compared to $2.1 million and $7.0 million, after tax, during
the 12 and 28 weeks ended September 6, 2008, respectively. Included in
share-based compensation expense recorded during the 12 and 28 weeks ended
September 12, 2009 was $0.4 million and $0.8 million, respectively, related to
expensing of stock options, $0.4 million and $0.5 million, respectively,
relating to expensing of restricted stock units, $0.2 million and $2.4 million,
respectively, relating to expensing of performance restricted stock units, and
$0.2 million and $0.4 million, respectively, relating to expensing of common
stock granted to our Board of Directors at the Annual Meeting of Stockholders.
Included in share-based compensation expense recorded during the 12 and 28 weeks
ended September 6, 2008 was $0.2 million and $0.8 million, respectively, related
to expensing of stock options, $1.8 million and $5.9 million, respectively,
relating to expensing of restricted stock, and $0.1 million and $0.3 million,
respectively, relating to expensing of common stock granted to our Board of
Directors at the Annual Meeting of Stockholders. We did not capitalize any of
our stock based compensation costs during the 12 and 28 weeks ended September
12, 2009 and the 12 and 28 weeks ended September 6, 2008.
At September 12, 2009, we had two stock-based compensation plans, the 2008 Long
Term Incentive and Share Award Plan and the 2004 Non-Employee Director
Compensation Plan. The general terms of each plan are reported in our Fiscal
2008 Annual Report on Form 10-K.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Stock options
-------------
The following is a summary of the stock option activity during the 28 weeks
ended September 12, 2009:
Weighted Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term (years) Value
------------ ---------- ---------------- -------------
Outstanding at February 28, 2009 1,551,934 $ 23.77
Granted 1,010,319 4.01
Canceled or expired (69,813) 26.70
Exercised (477) 3.86
------------ ----------
Outstanding at September 12, 2009 2,491,963 $ 15.68 5.7 $ 3.5
============ ========== ============== =============
Exercisable at:
September 12, 2009 1,325,506 $ 23.06 2.3 $ 0.3
============== =============
Nonvested at:
September 12, 2009 1,166,457 $ 7.30 9.5 $ 3.2
============== =============
Fair values for each stock option grant were estimated using a Black-Scholes
valuation model which utilized assumptions as detailed in the following table
for expected life based upon historical option exercise patterns, historical
volatility and risk-free rate based on the U.S. Treasury constant maturities in
effect at the time of grant. Our stock options have a contractual term of 10
years. The following assumptions were in place for grants that occurred during
the 28 weeks ended September 12, 2009 and September 6, 2008:
28 Weeks Ended 28 Weeks Ended
Sept. 12, 2009 Sept. 6, 2008
------------------ --------------
Expected life 7 years 7 years
Volatility 126% 52%
Risk-free interest rate 0.05% 2.96%
The weighted average grant date fair value of stock options granted during the
28 weeks ended September 12, 2009 and September 6, 2008 was $3.63 and $14.64,
respectively. Options granted during fiscal 2009 vest 33% during each of the
fiscal years 2009, 2010 and 2011. Options granted during fiscal 2008 vest 25% on
each anniversary date of issuance over a four year period. As of September 12,
2009, approximately $4.7 million, after tax, of total unrecognized compensation
expense related to unvested stock option awards will be recognized over a
weighted average period of 2.5 years.
The total intrinsic value of options exercised during 28 weeks ended September
12, 2009 and September 6, 2008 was nil and $0.5 million, respectively.
The amount of cash received from the exercise of stock options during the 28
weeks ended September 12, 2009 was not significant.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Restricted Stock Units
----------------------
During the first quarter of fiscal 2009, our Company granted 1,440,176 shares of
time-vested restricted stock awards to certain eligible employees, with a total
grant date fair value of $5.8 million, which is based on the fair market value
of our Company's common stock at the date of grant. One-fourth of these awards
will vest at the end of fiscal 2009 and three-fourths will vest at the end of
fiscal 2011, subject to meeting the appropriate eligibility and service
conditions. As of September 12, 2009, approximately $4.1 million, net of tax, of
total unrecognized compensation expense relating to these restricted stock units
is expected to be recognized through fiscal 2012.
The following is a summary of the restricted stock units activity during the 28
weeks ended September 12, 2009:
Weighted
Average
Grant Date
Shares Fair Value
------------- -------------
Nonvested at February 28, 2009 -- $ --
Granted 1,440,176 4.01
Canceled or expired -- --
Vested -- --
------------- -------------
Nonvested at September 12, 2009 1,440,176 $ 4.01
============= =============
Performance Restricted Stock Units
The following is a summary of the performance restricted stock units activity
during the 28 weeks ended September 12, 2009:
Weighted
Average
Grant Date
Shares Fair Value
------------- -------------
Nonvested at February 28, 2009 1,815,537 $ 26.17
Granted 1,439,673 4.01
Canceled or expired (226,875) 26.53
Vested (585,795) 15.97
------------- -------------
Nonvested at September 12, 2009 2,442,540 $ 15.52
============= =============
Performance restricted stock units are granted at the fair market value of our
Company's common stock at the date of grant, adjusted by an estimated forfeiture
rate.
During the 28 weeks ended September 12, 2009, our Company granted 1,439,673
shares of performance restricted stock units to selected employees for a total
grant date fair value of $5.8 million. Approximately $4.6 million of
unrecognized fair value compensation expense relating to these performance
restricted stock units, and those issued in the previous years is expected to be
recognized through fiscal 2011, based on estimates of attaining vesting
criteria.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Performance restricted stock units issued during fiscal 2009 are earned based on
our Company achieving certain operating targets in fiscal 2009. One-third of
these awards are scheduled to vest at the end of fiscal 2009 and two-thirds are
scheduled to vest at the end of fiscal 2010, subject to meeting the appropriate
eligibility and service conditions. During the 12 weeks ended September 12,
2009, our Company reversed the stock compensation expense for our fiscal 2009
performance restricted stock units grant recorded during the first quarter of
fiscal 2009, due to our determination that the related performance conditions
will not be achieved.
On May 21, 2009, our Board of Directors modified the terms of the performance
restricted stock units granted in fiscal 2007 under our executive and
non-executive Closing & Integration Incentive Plan ("CLIIP"), 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 such that earned units will vest as follows: one-third in July
2009, one-third in July 2010 and one-third in July 2011. Vesting of earned units
for executives will occur on December 3, 2010. All vesting remains subject to
the other terms and conditions of the CLIIP. Additionally, on July 16, 2009, the
Board determined that 100% of the restricted stock units had been earned under
the CLIIP. In connection with this decision, we reversed $0.4 million of
previously recognized expense for the ancillary shares during the 12 weeks ended
September 12, 2009.
As a result of the foregoing modification and Board determination, our Company
will incur an additional incremental compensation cost of $1.5 million, of which
$0.2 million and $0.5 million has been recorded during the 12 and 28 weeks ended
September 12, 2009, respectively, and is being recognized over the remainder of
the new vesting period.
The total fair value of units that vested during the 28 weeks ended September
12, 2009 and 28 weeks ended September 6, 2008 was $3.0 million and $12.1
million, respectively.
17. Income Taxes
The income tax provisions recorded for the 12 and 28 weeks ended September 12,
2009 and September 6, 2008 reflect our estimated expected annual tax rates
applied to our respective financial results.
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 the amount expected to be realized. For the 12
and 28 weeks ended September 12, 2009, the valuation allowance decreased by $2.1
million and increased by $21.8 million, respectively, to reflect generation of
additional operating losses, offset by an adjustment to the valuation allowance
that was released in connection with the original purchase price allocation for
Pathmark. For the 12 and 28 weeks ended September 6, 2008, the valuation
allowance increased by $33.2 million and $79.8 million, respectively, to reflect
the increase in deferred income tax assets recorded relating to the purchase
price allocation adjustment relating to our acquisition of Pathmark Stores,
Inc., as
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
well as generation of additional net operating losses. To the extent that our
operations generate sufficient taxable income in future periods, we will reverse
the income tax valuation allowance. 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.
Our Company is subject to U.S. federal income tax, as well as income tax in
multiple state and foreign jurisdictions. As of September 12, 2009, 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.
As of September 12, 2009, there have been no changes to our Company's uncertain
tax position disclosures as discussed in Note 14 of our Company's Fiscal 2008
Annual Report on Form 10-K. At this time, we estimate that the amount of our
gross unrecognized tax positions may decrease by up to approximately $154.0
million within the next 12 months, primarily due to the settlement of ongoing
audits and lapses of statutes of limitations in certain jurisdictions. Any
decrease in our Company's gross unrecognized tax positions would require a
re-evaluation of our Company's valuation allowance maintained on our net
deferred tax asset and, therefore, is not expected to affect our effective tax
rate.
For the 12 and 28 weeks ended September 12, 2009 and September 6, 2008, no
amounts were recorded for interest and penalties within "Provision for income
taxes" in our Consolidated Statements of Operations.
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 the 28 weeks ended September 12,
2009, for a total refund of $4.1 million to date.
The effective tax rate on continuing operations of 3.1% and 31.9% for the 12
weeks ended September 12, 2009 and September 6, 2008, respectively, and 1.3% and
263.0% for the 28 weeks ended September 12, 2009 and September 6, 2008,
respectively, varied from the statutory rate of 35%, primarily due to the
recording of state and local income taxes, the recording of additional valuation
allowance and the impact of the Pathmark financing.
As of September 12, 2009, we had $548.5 million in federal Net Operating Loss
("NOL") carryforwards that expire between 2023 and 2029, some of which are
subject to an annual limitation. The federal NOL carryforwards include $7.4
million related to the excess tax deductions relating to stock option plans that
have yet to reduce income taxes payable. Upon utilization of these
carryforwards, the associated tax benefits of approximately $2.6 million will be
recorded in "Additional paid-in capital". In addition, our Company had state
loss carryforwards of $5.6 million that expire during fiscal 2009 and
approximately $1.0 billion that will expire between fiscal 2010 and fiscal 2029.
Our Company's general business credits consist of federal and state work
incentive credits, which expire between fiscal 2010 and fiscal 2029, some of
which are subject to an annual limitation.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
At September 12, 2009 and February 28, 2009, we had a net current deferred tax
asset which is included in "Prepaid expenses and other current assets" on our
Consolidated Balance Sheets of $31.9 million and $36.9 million, respectively, a
net non-current deferred tax asset which is included in "Other Assets" on our
Consolidated Balance Sheets of $93.8 million and $65.9 million, respectively,
and a non-current tax liability for uncertain tax positions which is included in
"Other non-current liabilities" and "Other assets" on our Consolidated Balance
Sheets of $162.8 million as of both dates.
18. Operating Segments
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Our chief operating decision maker is our President and
Chief Executive Officer.
During the second quarter of fiscal 2008, our chief operating decision maker
changed the manner by which our results are evaluated; therefore, our reportable
segments have been revised to be consistent with the way we currently manage our
business. Accordingly, we have revised our segment reporting to report in four
reportable segments: Fresh, Price Impact, Gourmet and Other. The Other segment
includes our Food Basics and Liquor businesses. The criteria necessary to
classify the Midwest and Greater New Orleans areas as discontinued were
satisfied in fiscal 2007 and these operations have been presented as such in our
Consolidated Statements of Operations for all periods presented. Refer to Note 7
- Discontinued Operations for further discussion. Prior year information has
been restated to conform to current year presentation.
The accounting policies for these segments are the same as those described in
the summary of significant accounting policies included in our Fiscal 2008
Annual Report. We measure segment performance based upon segment income (loss).
Reconciling amounts between segment income (loss) and income (loss) from
operations include corporate-level activity not specifically attributed to a
segment, which includes (i) the purchase of all merchandise (including the
design and production of private label merchandise sold in our retail stores),
(ii) real estate management and (iii) information technology, finance and other
corporate administrative personnel, as well as, other reconciling items
primarily attributed to nonrecurring activities.
Assets and capital expenditures are not allocated to segments for internal
reporting presentations.
Interim information on segments is as follows:
Sales by Category
-------------------------------------------------------------------
For the 12 weeks ended For the 28 weeks ended
-------------------------------- --------------------------------
Sept. 12, 2009 Sept. 6, 2008 Sept. 12, 2009 Sept. 6, 2008
Grocery (1) $ 1,429,161 $ 1,502,879 $ 3,368,761 $ 3,538,728
Meat (2) 391,877 419,488 918,648 969,243
Produce (3) 244,023 260,269 567,895 597,330
--------------- -------------- --------------- --------------
Total $ 2,065,061 $ 2,182,636 $ 4,855,304 $ 5,105,301
=============== ============== =============== ==============
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
(1) The grocery category includes grocery, frozen foods, dairy, general
merchandise/health and beauty aids, liquor and pharmacy.
(2) The meat category includes meat, deli, bakery and seafood.
(3) The produce category includes produce and floral.
For the 12 weeks ended For the 28 weeks ended
-------------------------------- --------------------------------
Sept. 12, 2009 Sept. 6, 2008 Sept. 12, 2009 Sept. 6, 2008
--------------- -------------- --------------- --------------
Sales
Fresh $ 1,042,713 $ 1,118,794 $ 2,429,453 $ 2,580,627
Price Impact** 898,655 947,792 2,137,878 2,249,981
Gourmet 56,010 56,717 141,391 141,745
Other 67,683 59,333 146,582 132,948
--------------- -------------- --------------- --------------
Total sales $ 2,065,061 $ 2,182,636 $ 4,855,304 $ 5,105,301
=============== ============== =============== ==============
Segment income (loss)
Fresh 32,768 29,044 74,009 65,235
Price Impact (15,313) (2,926) (17,088) 17,454
Gourmet 3,311 2,475 11,430 9,890
Other 734 641 1,657 1,305
--------------- -------------- --------------- --------------
Total segment income 21,500 29,234 70,008 93,884
Corporate (15,515) (22,961) (61,751) (71,424)
Reconciling items* (14,551) (17,796) (18,659) (31,892)
--------------- -------------- --------------- --------------
(Loss) from continuing operations (8,566) (11,523) (10,402) (9,432)
Nonoperating income (loss) (7,079) 42,895 (8,954) 91,492
Interest expense (1) (48,559) (34,680) (102,807) (81,606)
Interest and dividend income 51 57 92 467
--------------- -------------- --------------- --------------
(Loss) income from continuing operations
before income taxes $ (64,153) $ (3,251) $ (122,071) $ 921
=============== ============== =============== ==============
(1) The interest expense associated with the 6.750% Convertible Senior Notes
increased by $0.7 million and $1.7 million, respectively, from the amounts
reported in our Form 10-Q for the 12 and 28 weeks ended September 6, 2008 as a
result of the retrospective application of FSP APB 14-1, which we adopted during
the first quarter of fiscal 2009. Refer to Note 2 - Impact of New Accounting
Pronouncements for additional information.
The following table presents our segment depreciation and amortization:
For the 12 weeks ended For the 28 weeks ended
-------------------------------- --------------------------------
Sept. 12, 2009 Sept. 6, 2008 Sept. 12, 2009 Sept. 6, 2008
--------------- -------------- --------------- --------------
Segment depreciation and amortization
Fresh $ 19,152 $ 21,116 $ 45,446 $ 49,769
Price Impact** 22,925 23,406 53,483 53,568
Gourmet 2,148 2,387 5,049 5,570
Other 1,015 853 2,235 1,981
--------------- -------------- --------------- --------------
Total segment depreciation and
amortization - continuing operations 45,240 47,762 106,213 110,888
Corporate 12,544 13,035 29,359 29,936
--------------- -------------- --------------- --------------
Total company depreciation and
amortization $ 57,784 $ 60,797 $ 135,572 $ 140,824
=============== ============== =============== ==============
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
* Reconciling items for the 12 and 28 weeks ended September 12, 2009, which
are not included in segment income primarily include: (i) losses on real
estate activity of $11.5 million and $9.2 million, respectively, (ii) net
restructuring and other costs of $2.2 million and $4.8 million,
respectively,(iii) pension withdrawal costs of nil and $2.4 million,
respectively, and (iv) LIFO reserve adjustments of $0.9 million and $2.2
million, respectively. Reconciling items for the 12 and 28 weeks ended
September 6, 2008 include: (i) Pathmark integration and other restructuring
costs of $10.6 million and $22.6 million, respectively, (ii) LIFO reserve
adjustments of $1.5 million and $3.0 million, respectively, and (iii) real
estate related activity of $5.6 million and $6.4 million, respectively.
** Includes results from Fresh stores that have been subsequently converted to
Price Impact stores.
19. Related Party Transactions
On August 4, 2009, the 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 additional Yucaipa directors 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 affiliates 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.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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.
20. 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 replaces and supersedes three (3) separate
wholesale supply agreements under which the parties had been previously
operating. The term of the agreement is ten and one-half (10-1/2) years, which
includes a six-month "ramp-up" period during which the parties will transition
to the new contractual terms and conditions. The agreement provides that the
actual costs of performing the services shall be reimbursed to C&S on an
"open-book" or "cost-plus" basis, whereby the parties will negotiate annual
budgets that will be reconciled against actual costs on a periodic basis. The
parties will also annually negotiate services specifications and performance
standards that will govern warehouse operations. The agreement defines the
parties' respective responsibilities for the procurement and purchase of
merchandise intended for use or resale at our Company's stores, as well as the
parties' respective remuneration for warehousing and procurement/purchasing
activities. In consideration for the services it provides under the agreement,
C&S will be paid an annual fee and will have incentive income opportunities
based upon our cost savings and increases in retail sales volume. The contract
provides that we will purchase virtually all of our warehoused inventory from
C&S. Although there are a limited number of distributors that can supply our
stores, we believe that other suppliers could provide similar product on
comparable terms. However, a change in suppliers could cause a delay in
distribution and a possible loss of sales which would affect our results
adversely.
Lease Related
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
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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.
Other
-----
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 September 12, 2009, 196 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 $608.7 million, which could be partially or totally offset by
reassigning or subletting these leases.
Legal Proceedings
Antitrust Class Action Litigation
---------------------------------
In connection with a settlement reached in the VISA/MasterCard antitrust class
action litigation, our Company is entitled to a portion of the settlement fund
that will be distributed to class members. Pursuant to our review of our
historical records as well as estimates provided by the Claims Administrator, we
recorded a pre-tax recovery of $2.2 million as a credit to "Store operating,
general and administrative expense" in our Statements of Consolidated Operations
during fiscal 2008. During fiscal 2009, we will continue to work with the Claims
Administrator to ensure that any additional monies owed to our Company in
connection with this litigation are received. This process may result in
additional recoveries being recorded in future periods.
LaMarca et al v. The Great Atlantic & Pacific Tea Company, Inc et al.
---------------------------------------------------------------------
("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.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements -- Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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.
21. Subsequent Events
Our Company concluded that there were no subsequent events that have occurred
from September 12, 2009 through October 20, 2009, the date of filing of this
Quarterly Report on Form 10-Q.
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
INTRODUCTION
------------
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations is intended to help the reader understand the financial
position, operating results, and cash flows of The Great Atlantic & Pacific Tea
Company, Inc. It should be read in conjunction with our consolidated financial
statements and the accompanying notes ("Notes"). It discusses matters that
Management considers relevant to understanding the business environment,
financial position, results of operations and our Company's liquidity and
capital resources. These items are presented as follows:
o Basis of Presentation - a discussion of our Company's results during the 12
and 28 weeks ended September 12, 2009 and September 6, 2008.
o Overview - a general description of our business; 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
remainder of fiscal 2009 to assist in understanding the business.
o Results of Operations and Liquidity and Capital Resources - a discussion of
results for the 12 weeks ended September 12, 2009 compared to the 12 weeks
ended September 6, 2008; results for the 28 weeks ended September 12, 2009
compared to the 28 weeks ended September 6, 2008; current and expected
future liquidity; and the impact of various market risks on our Company.
o Critical Accounting Estimates - a discussion of significant estimates made
by Management.
o Market Risk - a discussion of the impact of market changes on our
consolidated financial statements.
BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements of The Great Atlantic &
Pacific Tea Company, Inc. for the 12 and 28 weeks ended September 12, 2009 and
September 6, 2008 are unaudited and, in the opinion of management, contain all
adjustments that are of a normal and recurring nature necessary for a fair
statement of financial position and results of operations for such periods. The
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes contained in our Fiscal 2008
Annual Report to Stockholders on Form 10-K. Interim results are not necessarily
indicative of results for a full year.
The consolidated financial statements include the accounts of our Company and
all subsidiaries.
OVERVIEW
--------
The Great Atlantic & Pacific Tea Company, Inc., based in Montvale, New Jersey,
operates conventional supermarkets, combination food and drug stores and
discount food stores in 8 U.S. states and the District of Columbia. Our
Company's business consists strictly of our retail operations, which totaled 432
stores as of September 12, 2009.
For the 28 weeks ended September 12, 2009, we operated in four reportable
segments: Fresh, Price Impact, Gourmet and Other. The Other segment includes our
Food Basics and Liquor businesses. 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 the 12 and 28 weeks ended September 12, 2009 and
September 6, 2008.
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
OPERATING RESULTS
-----------------
This quarter was challenging for our Company as the retail market continued to
experience one of the most difficult economic environments in recent history.
Consumers have continued to trade down to less expensive products, which
resulted in increased competition and, as a result, our Company invested more in
value driven pricing programs and offerings. In addition, the rate of inflation
has decreased significantly with deflation in several categories. As a result,
our comparable store sales, which include stores that have been in operation for
at least one full fiscal year and replacement stores, declined by 3.8% this
quarter.
Our business operates in four formats, which enable us to service customers in
every market we serve, with the following operating results:
Fresh
(A&P, Waldbaum's and SuperFresh)
Our Fresh format continues to deliver strong year-over-year improvement in
segment income, primarily driven by the higher gross margin rate in the second
quarter of fiscal 2009 due to negotiated cost reductions with our vendors,
partially offset by a decline in sales.
Price Impact
(Pathmark and Pathmark Sav-A-Center)
Our Price Impact format continued to experience a year-over-year decline in
segment income, which was driven by negative comparable store sales and lower
gross margins, primarily resulting from higher promotional spending and
reduction in everyday prices to stay competitive. Our consumers have been very
value focused in this difficult economic environment and have continued to take
advantage of our promotions, requiring us to invest more in value driven
programs in order to stay competitive. Although, in the shorter term, this has
negatively impacted our earnings, we believe that this strategic investment
well-positions us to generate long-term growth over time and once the overall
economy improves.
Our eight stores that have been converted from the Fresh segment to the Price
Impact format are performing very well because converted stores retain the more
favorable A&P legacy cost structure, while taking advantage of the higher sales
per square foot generated by the traditional Pathmark locations.
Gourmet
(The Food Emporium)
Our Gourmet stores located in Manhattan continue to generate segment income
growth despite the economic crisis, primarily due to an increased gross margin
rate. We attribute this growth to the premium locations of our Gourmet stores
and product offering selective to the neighborhood.
Other
(Food Basics, Best Cellars and A&P Liquors)
The businesses comprising our Other format continued to perform well with a
year-over-year increase in segment income due to positive comparable store sales
and improved gross margin rate. The businesses within our Other segment
traditionally perform well during recessionary economic times.
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
OUTLOOK
-------
The current economic indicators including rising unemployment, increasing price
competition and deflation have continued to create an even more challenging
economic environment. These factors are having an increasingly negative impact
on our operations. As a result, our Company has undertaken substantial business
optimization initiatives designed to mitigate this downward pressure and improve
our performance while taking advantage of the best practices between the legacy
A&P and the acquired Pathmark businesses. The following key areas have been
identified as business improvement opportunities:
Improved private label penetration
Private label penetration tends to increase during recessionary times. Our
programs under this initiative are expected to increase gross margins
offsetting more promotional investment. Our expansive private label
program, which includes our Green Way organic product line, is a critical
component of our long-term strategy and will enable us to continue to meet
our customer's needs, while addressing their financial constraints with
products comparable in quality to their national brand equivalents. Our
private label penetration has improved by over 17% from last year in terms
of overall sales.
Store Conversions
We are completing an evaluation of each neighborhood marketplace in which
our stores operate and are assessing the best opportunities for our four
formats within these neighborhoods. We are prioritizing the most
cost-beneficial use of funds to convert stores from existing formats to the
format that will best serve the neighborhood marketplace and return
improved results.
Operating expenses
We plan to reduce our operating expenses by targeting the following areas:
o Grocery Stock Losses - Stock losses tend to increase in periods of
economic downturn. To combat this trend, we are continuing the rollout
of our formal program to reduce stock losses, especially targeting our
Price Impact business, which has the highest stock losses. We have
implemented a formal program to reduce losses, including conducting
internal theft and stock loss awareness training, increasing amount of
security in high risk stores, upgrading in-store security cameras and
implementing technology to reduce bottom of the basket losses. We are
also planning strategic structural changes, such as reducing the amount
of products subject to high theft, which should reduce future losses.
o Trucking and Warehousing Costs - We continue to work with C&S and GHI to
further reduce our costs by streamlining deliveries and optimizing
trucking routes.
o Productive labor - We are improving labor productivity by optimizing our
formats and utilizing a variety of labor optimization processes.
While these initiatives have been designed to improve the results of our
operations, they are based on our management's assumptions in light of the
currently available information and cannot guarantee future performance. Our
future performance is subject to uncertainties and other risk factors that could
have a negative impact on our business and cause actual results to differ
materially from our expectations. Refer to Part II. - Item 1A for a description
of our Risk Factors.
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
This year marks our Company's historic 150th anniversary. We believe that our
strong strategic position in the Northeast, our successful format strategy and
our resolve to implement strategic changes, positions us to effectively manage
the challenging economic environment and remain cautiously optimistic in our
long-term prospects. The US retail market continues to face one of the most
difficult and challenging years as our customers have experienced lower
disposable income. We expect that our customers will continue to be challenged
in 2010 and we are adjusting our strategy accordingly.
On August 4, 2009, we consummated the issuance and sale of 175,000 shares of
8.0% Cumulative Convertible Preferred Stock, for net proceeds of approximately
$162.2 million. In addition, on August 4, 2009, we completed a $260 million
offering of 11.375% senior secured notes due 2015 to qualified institutional
buyers at 97.385% of its principal amount. We believe that these transactions
will allow us to better manage our liquidity through this recessionary economic
environment.
We believe that our present cash resources and the available borrowings from our
$655.0 million Amended Credit Agreement and other sources are sufficient to meet
our needs for the next twelve months. Based on information available to us, as
of our filing date, we have no indication that the financial institutions acting
as lenders under our $655.0 million Amended Credit Agreement would be unable to
fulfill their commitments. However, given the current economic environment and
credit market crisis, there is no assurance that this may not change in the
foreseeable future.
RESULTS 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. The discussion and analysis that follows focuses on
continuing operations. All amounts are in millions, except share and per share
amounts.
12 WEEKS ENDED SEPTEMBER 12, 2009 COMPARED TO THE 12 WEEKS ENDED
----------------------------------------------------------------
SEPTEMBER 6, 2008
------------------
OVERALL
-------
Sales for the second quarter of fiscal 2009 were $2,065.1 million, compared with
$2,182.6 million for the second quarter of fiscal 2008 due primarily due to a
3.8% decrease in comparable store sales, which include stores that have been in
operation for at least one full fiscal year and replacement stores. Loss from
continuing operations increased from $4.3 million for the first quarter of
fiscal 2008 to a loss from continuing operations of $62.2 million for the second
quarter of fiscal 2009, primarily due to a $50.0 million decline in nonoperating
income associated with the fair value adjustments for our Series A and Series B
warrants, our convertible senior notes, and our financing warrants, as well as
$9.0 million of interest expense recorded during the second quarter of fiscal
2009 in connection with our GHI contractual obligation, and $4.9 million of
interest expense recorded in connection with our senior secured notes and
preferred stock issuances in August 2009. Loss from discontinued operations of
$13.8 million for the second quarter of fiscal 2008 increased to a loss from
discontinued operations of $18.1 million for the second quarter of fiscal 2009
primarily due to higher occupancy related costs for closed stores recorded
during the second quarter of fiscal 2009. Net loss per share - basic and diluted
for the second quarter of fiscal 2009 was $(1.52) and $(3.74), respectively,
compared to net loss per share - basic of $(0.37) and net loss per share -
diluted of $(1.97) for the second quarter of fiscal 2008.
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
12 Weeks 12 Weeks
Ended Ended Favorable
Sept. 12, 2009 Sept. 6, 2008 (Unfavorable) % Change
-------------- ------------- ------------- ----------
(in millions, except percentages)
Sales $ 2,065.1 $ 2,182.6 $ (117.5) (5.4)%
(Decrease) increase in comparable
store sales (3.8)% 2.8% NA NA
Loss from continuing operations $ (62.2) $ (4.3) $ (57.9) >100%
Loss from discontinued operations $ (18.1) $ (13.8) $ (4.3) (31.2)%
Net loss $ (80.3) $ (18.1) $ (62.2) >100%
Net loss per share - basic $ (1.52) $ (0.37) $ (1.15) >100%
Net loss per share - diluted $ (3.74) $ (1.97) $ (1.77) 89.8%
Average weekly sales per supermarket were approximately $417,000 for the second
quarter of fiscal 2009 versus $428,000 for the corresponding period of the prior
year, a decrease of 2.6%, 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
-----
For the 12 weeks ended
-------------------------------
Sept. 12, 2009 Sept. 6, 2008
-------------- -------------
(in thousands)
Fresh $ 1,042,713 $ 1,118,794
Price Impact* 898,655 947,792
Gourmet 56,010 56,717
Other 67,683 59,333
-------------- -------------
Total sales $ 2,065,061 $ 2,182,636
============== =============
-------------------
* Includes sales from Fresh stores that have been subsequently converted to
Price Impact stores.
Sales decreased from $2,182.6 million for the 12 weeks ended September 6, 2008
to $2,065.1 million for the 12 weeks ended September 12, 2009, primarily due to
a decrease in comparable stores sales and the absence of sales due to store
closures, partially offset by sales from new stores. The decrease in sales in
our Fresh segment of $76.1 million was primarily related to the decline in the
comparable store sales of $46.8 million and the absence of sales due to store
closures of $29.3 million. The decrease in sales in our Price Impact segment of
$49.1 million was primarily due to a decline in comparable store sales of $31.7
million and the absence of sales due to store closures of $28.9 million,
partially offset by an increase in sales from new stores of $11.5 million. Sales
generated by our Gourmet segment decreased by $0.7 million, primarily due to a
decline in comparable store sales. The sales increase of $8.4 million, or 14.1%,
in our Other segment, representing Discount and Liquor, was primarily driven by
sales generated by new stores of $8.3 million.
GROSS MARGIN
------------
Gross margin of $623.4 million increased 34 basis points as a percentage of
sales to 30.19% for the second quarter of fiscal 2009 from gross margin of
$651.5 million or 29.85% for the second quarter of fiscal 2008, as lower margins
from our Price Impact segment were offset by improved margins from our Fresh and
Gourmet segments.
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
The following table details the dollar impact of items affecting the gross
margin dollar (decrease) increase from the second quarter of fiscal 2008 to the
second quarter of fiscal 2009 (in millions):
Sales Volume Gross Margin Rate Total
------------ ----------------- ----------------
Total Company $ (35.1) $ 6.9 $ (28.2)
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
---------------------------------------------------
Our Store operating, general and administrative ("SG&A") expense was $631.9
million or 30.60% as a percentage of sales for the second quarter of fiscal
2009, as compared to $663.1 million or 30.38% as a percentage of sales for the
second quarter of fiscal 2008.
Included in SG&A for the second quarter of fiscal 2009 are (i) net real
estate related costs of $11.5 million, or 56 basis points and (ii) net
restructuring and other costs of $2.2 million, or 10 basis points.
SG&A for the second quarter of fiscal 2008 included (i) Pathmark integration and
other restructuring related costs of $11.0 million, or 50 basis points, and (ii)
net losses on real estate activity of $5.6 million, or 26 basis points.
Excluding the items listed above, SG&A as a percentage of sales increased by 32
basis points during the second quarter of fiscal 2009 as compared to the second
quarter of fiscal 2008, primarily due to lower sales leverage on fixed costs,
including increased labor costs of 41 basis points and increased general
operating costs of 14 basis points, partially offset by decreased occupancy
related costs of 17 basis points, primarily due to the successful progress with
our utility improvement programs, and a decrease in corporate and banner
administrative expenses of 11 basis points.
During the 12 weeks ended September 12, 2009 and September 6, 2008, we recorded
impairment losses on long-lived assets due to closure or conversion of stores in
the normal course of business of $2.7 million and $1.0 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 the potential for impairment of assets that are
held and used.
SEGMENT INCOME (LOSS)
---------------------
For the 12 weeks ended
----------------------------------
Sept. 12, 2009 Sept. 6, 2008
-------------- -------------
(in thousands)
Fresh $ 32,768 $ 29,044
Price Impact* (15,313) (2,926)
Gourmet 3,311 2,475
Other 734 641
-------------- -------------
Total segment income $ 21,500 $ 29,234
============== =============
-------------------
* Includes results from Fresh stores that have been subsequently converted to
Price Impact stores.
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
Segment income decreased $7.7 million from $29.2 million for the 12 weeks ended
September 6, 2008 to $21.5 million for the 12 weeks ended September 12, 2009.
The increase in segment income of $3.7 million from our Fresh segment was
primarily driven by an increase in the gross margin rate due to negotiated cost
reductions, as well as reduced labor and occupancy costs, partially offset by a
decline in sales. Our Price Impact segment experienced a decline in segment
income of $12.4 million, which was attributable to lower sales and gross
margins, primarily resulting from reductions in everyday prices to stay
competitive and higher promotional spending for this segment, partially offset
by reduced productive labor, transportation costs and utility expenses. Segment
income from our Gourmet business increased by $0.8 million, primarily as a
result of an improved gross margin rate, partially offset by a reduction in
sales. The increase in segment income of $0.1 million from our Other segment,
representing Discount and Liquor, was primarily driven by improved sales,
partially offset by increased operating costs. Refer to Note 18 - Operating
Segments for further discussion of our reportable operating segments.
NONOPERATING INCOME (LOSS)
--------------------------
During the second quarter of fiscal 2009 and 2008, we recorded unfavorable fair
value adjustments of $7.1 million and favorable fair value adjustments of $42.9
million, respectively, relating to our Series B warrants acquired in connection
with our purchase of Pathmark, the conversion features related to our 5.125%
convertible senior notes and our 6.750% convertible senior notes, and our
financing warrants issued in connection with our convertible senior notes.
INTEREST EXPENSE
----------------
Interest expense of $48.6 million for the first quarter of fiscal 2009 increased
from the prior year expense of $34.7 million, primarily due to (i) $9.0 million
of interest expense recorded during the second quarter of fiscal 2009, to
reflect the impact of the lower discount rate used to revalue our GHI
contractual obligation during the quarter, which is derived each period from
published zero-coupon AA corporate bond yields, as well as interest accretion
relating to this obligation, (ii) $3.7 million of interest expense relating to
our $260 million offering of 11.375% senior secured notes due 2015 that were
issued in August 2009 and (iii) $1.2 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 due to the fact that it
cannot be converted to common stock without shareholder approval.
During the second quarter of fiscal 2009 and 2008, we recorded additional
non-cash interest expense of $1.0 million and $0.7 million, respectively,
relating to our $255.0 million aggregate principal amount of the 6.750%
Convertible Senior Notes that were issued in December 2007, as a result of our
adoption of FSP APB Opinion No. 14-1, "Accounting for Convertible Debt
Instruments that May be Settled in Cash Upon Conversion" during the first
quarter of fiscal 2009.
INCOME TAXES
------------
The benefit from income taxes from continuing operations for the second quarter
of fiscal 2009 was $2.0 million, compared to the provision for income taxes of
$1.0 million for the second quarter of fiscal 2008. Consistent with prior year,
we continue to record a valuation allowance against our net deferred tax assets.
The effective tax rates on continuing operations of 3.1% and 31.9% for the 12
weeks ended September 12, 2009 and September 6, 2008, respectively, varied from
the statutory rate of 35%, primarily due to the recording of state and local
income taxes, the recording of additional valuation allowance and the impact of
the Pathmark financing.
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
DISCONTINUED OPERATIONS
-----------------------
The loss from operations of discontinued businesses, net of tax, for the second
quarter of fiscal 2009 of $18.1 million decreased from a loss from operations of
discontinued businesses, net of tax, of $14.0 million for the second quarter of
fiscal 2008, primarily due to higher occupancy related expenses recorded during
the second quarter of fiscal 2009.
28 WEEKS ENDED SEPTEMBER 12, 2009 COMPARED TO THE 28 WEEKS ENDED
----------------------------------------------------------------
SEPTEMBER 6, 2008
-----------------
OVERALL
-------
Sales for the 28 weeks ended September 12, 2009 were $4,855.3 million, compared
with $5,105.3 million for the 28 weeks ended September 6, 2008 due primarily to
a 3.6% decrease in comparable store sales, which include stores that have been
in operation for at least one full fiscal year and replacement stores. Loss from
continuing operations increased from $1.5 million for the 28 weeks ended
September 6, 2008 to a loss from continuing operations of $120.5 million for the
28 weeks ended September 12, 2009, primarily due to a $100.4 million decline in
nonoperating income associated with the fair value adjustments for our Series A
and Series B warrants, our convertible senior notes, and our financing warrants,
as well as $15.4 million of interest expense recorded during the 28 weeks ended
September 12, 2009 in connection with our GHI contractual obligation, and $4.9
million of interest expense relating to our senior secured notes and preferred
stock issuances in August 2009. Loss from discontinued operations increased from
$15.3 million for the 28 weeks ended September 6, 2008 to a loss from
discontinued operations of $25.0 million for the 28 weeks ended September 12,
2009, primarily due to higher occupancy related costs for closed stores recorded
during the 28 weeks ended September 12, 2009, as well as the absence of the $2.6
million settlement gain recorded during the 28 weeks ended September 6, 2008
relating to our sale of the Eight O'Clock Coffee business. Net loss per share -
basic and diluted for the 28 weeks ended September 12, 2009 was $(2.76) and
$(7.09), respectively, compared to net loss per share - basic of $(0.34) and net
loss per share - diluted of $(2.52) for the 28 weeks ended September 6, 2008.
28 Weeks 28 Weeks
Ended Ended Favorable
Sept. 12, 2009 Sept. 6 2008 (Unfavorable) % Change
-------------- ------------ ------------- ----------
(in millions, except percentages)
Sales $ 4,855.3 $ 5,105.3 $ (250.0) (4.9)%
(Decrease) increase in comparable
store sales (3.6)% 3.0% NA NA
Loss from continuing operations $ (120.5) $ (1.5) $ (119.0) >100%
Loss from discontinued operations $ (25.0) $ (15.3) $ (9.7) (63.4)%
Net loss $ (145.5) $ (16.8) $ (128.7) >100%
Net loss per share - basic $ (2.76) $ (0.34) $ (2.42) >100%
Net loss per share - diluted $ (7.09) $ (2.52) $ (4.57) >100%
Average weekly sales per supermarket were approximately $419,100 for the 28
weeks ended September 12, 2009 versus $429,100 for the corresponding period of
the prior year, a decrease of 2.3%, 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.
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
SALES
-----
For the 28 weeks ended
---------------------------------
Sept. 12, 2009 Sept. 6, 2008
-------------- -------------
(in thousands)
Fresh $ 2,429,453 $ 2,580,627
Price Impact* 2,137,878 2,249,981
Gourmet 141,391 141,745
Other 146,582 132,948
-------------- -------------
Total sales $ 4,855,304 $ 5,105,301
============== =============
-------------------
* Includes sales from Fresh stores that have been subsequently converted to
Price Impact stores.
Sales decreased from $5,105.3 million for the 28 weeks ended September 6, 2008
to $4,855.3 million for the 28 weeks ended September 12, 2009, primarily due to
a decrease in comparable stores sales and the absence of sales due to store
closures, partially offset by sales from new stores. The decrease in sales in
our Fresh segment of $151.2 million was primarily related to a decline in the
comparable store sales of $100.2 million and the absence of sales due to store
closures of $51.0 million. The decrease in sales in our Price Impact segment of
$112.1 million was primarily due to a decline in comparable store sales of $78.9
million and the absence of sales due to store closures of $50.0 million,
partially offset by an increase in sales from new stores of $16.8 million. Sales
generated by our Gourmet segment decreased by $0.4 million, primarily due to a
decline in comparable store sales. The sales increase of $13.6 million, or
10.3%, in our Other segment, representing Discount and Liquor, was primarily
driven by increased sales generated by our Discount business, primarily due to
sales from new stores of $7.9 million and increased comparable store sales of
$5.9 million.
GROSS MARGIN
------------
Gross margin of $1,468.2 million increased 17 basis points as a percentage of
sales to 30.24% for the 28 weeks ended September 12, 2009 from gross margin of
$1,535.1 million or 30.07% for the 28 weeks ended September 6, 2008, as lower
margins from our Price Impact segment were offset by improved margins from our
Fresh and Gourmet segments.
The following table details the dollar impact of items affecting the gross
margin dollar (decrease) increase from the 28 weeks ended September 6, 2008 to
the 28 weeks ended September 12, 2009 (in millions):
Sales Volume Gross Margin Rate Total
------------------ ----------------- ------------
Total Company $ (75.2) $ 8.3 $ (66.9)
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
---------------------------------------------------
Our SG&A expense was $1,478.6 million or 30.45% as a percentage of sales for the
28 weeks ended September 12, 2009, as compared to $1,544.6 million or 30.25% as
a percentage of sales for the 28 weeks ended September 6, 2008.
Included in SG&A for the 28 weeks ended September 12, 2009 are (i) net real
estate costs of $9.2 million, or 19 basis points, (ii) net restructuring and
other costs of $4.8 million, or 10 basis points, and (iii) pension withdrawal
costs of $2.4 million, or 5 basis points.
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
SG&A for the 28 weeks ended September 6, 2008 included (i) Pathmark integration
and other restructuring related costs of $25.1 million, or 49 basis points, and
(ii) net losses on real estate activity of $6.4 million, or 13 basis points.
Excluding the items listed above, SG&A as a percentage of sales increased by 48
basis points during the 28 weeks ended September 12, 2009 as compared to the 28
weeks ended September 6, 2008, primarily due to lower sales leverage on fixed
costs, including increased labor costs of 47 basis points and increased general
operating costs of 13 basis points, partially offset by a decrease in corporate
and banner administrative expenses of 14 basis points.
During the 28 weeks ended September 12, 2009 and September 6, 2008, we recorded
impairment losses on long-lived assets due to closure or conversion of stores in
the normal course of business of $3.7 million and $1.8 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 the potential for impairment of assets that are
held and used.
SEGMENT INCOME (LOSS)
---------------------
For the 28 weeks ended
---------------------------------
Sept. 12, 2009 Sept. 6, 2008
-------------- -------------
(in thousands)
Fresh $ 74,009 $ 65,235
Price Impact* (17,088) 17,454
Gourmet 11,430 9,890
Other 1,657 1,305
-------------- -------------
Total segment income $ 70,008 $ 93,884
============== =============
-------------------
* Includes results from Fresh stores that have been subsequently converted to
Price Impact stores.
Segment income decreased $23.9 million from $93.9 million for the 28 weeks ended
September 6, 2008 to $70.0 million for the 28 weeks ended September 12, 2009.
The increase in segment income of $8.8 million from our Fresh segment was
primarily driven by an increase in the gross margin rate due to negotiated cost
reductions, as well as reduced labor and occupancy costs, partially offset by a
decline in sales. Our Price Impact segment experienced a decline in segment
income of $34.5 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,
supply and logistics, and utility costs. Segment income from our Gourmet
business improved by $1.5 million, primarily as a result of an improved gross
margin rate, partially offset by a reduction in sales. The increase in segment
income of $0.4 million in our Other segment, representing Discount and Liquor,
is primarily driven by improved sales and gross margins rates from our Discount
business. Refer to Note 18 - Operating Segments for further discussion of our
reportable operating segments.
NONOPERATING INCOME (LOSS)
--------------------------
During the 28 weeks ended September 12, 2009 and September 6, 2008, we recorded
unfavorable fair value adjustments of $9.0 million and favorable fair value
adjustments of $91.5 million, respectively, relating to
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
our Series B warrants acquired in connection with our purchase of Pathmark, the
conversion features related to our 5.125% convertible senior notes and our
6.750% convertible senior notes, and our financing warrants issued in connection
with our convertible senior notes.
INTEREST EXPENSE
----------------
Interest expense of $102.8 million for the 28 weeks ended September 12, 2009
increased from the prior year expense of $81.6 million, primarily due to $15.4
million of interest expense recorded during the 28 weeks ended September 12,
2009, to reflect the impact of the lower discount rate used to revalue our GHI
contractual obligation at September 12, 2009, which is derived each period from
published zero-coupon AA corporate bond yields, as well as interest accretion
relating to this obligation. During the 28 weeks ended September 12, 2009, we
also recorded $3.7 million of interest expense relating to our $260 million
offering of 11.375% senior secured notes due 2015 that were issued in August
2009. In addition, during the 28 weeks ended September 12, 2009, we recorded
$1.2 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 due to the fact that it cannot be converted to
common stock without shareholder approval.
During the 28 weeks ended September 12, 2009 and September 6, 2008, we recorded
additional non-cash interest expense of $2.3 million and $1.7 million,
respectively, relating to our $255 million aggregate principle amount of the
6.750% Convertible Senior Notes that were issued in December 2007, as a result
of our adoption of FSP APB Opinion No. 14-1, "Accounting for Convertible Debt
Instruments that May be Settled in Cash Upon Conversion" during the first
quarter of fiscal 2009.
INCOME TAXES
------------
The benefit from income taxes from continuing operations for the 28 weeks ended
September 12, 2009 was $1.6 million, compared to the provision for income taxes
of $2.4 million for 28 weeks ended September 6, 2008. Consistent with prior
year, we continue to record a valuation allowance against our net deferred tax
assets.
The effective tax rates on continuing operations of 1.3% and 263.0% for the 28
weeks ended September 12, 2009 and September 6, 2008, respectively, varied from
the statutory rate of 35%, primarily due to the recording of state and local
income taxes, the recording of additional valuation allowance and the impact of
the Pathmark financing.
DISCONTINUED OPERATIONS
-----------------------
The loss from operations of discontinued businesses, net of tax, for the 28
weeks ended September 12, 2009 of $25.0 million decreased from a loss from
operations of discontinued businesses, net of tax, of $18.2 million for the 28
weeks ended September 6, 2008, primarily due to higher occupancy related
expenses recorded during the 28 weeks ended September 12, 2009. The gain on
disposal of discontinued operations of $2.8 million, net of tax, recorded during
the 28 weeks ended September 6, 2008, primarily related to the sale of our Eight
O'Clock Coffee business in fiscal 2003. This gain was a result of the settlement
of a contingent note and the value and payment was based upon certain elements
of the future performance of the Eight O'Clock Coffee business and was not
originally recorded in the gain during fiscal 2003.
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
CASH FLOWS
----------
The following table presents excerpts from our Consolidated Statement of Cash
Flows (in thousands):
28 weeks ended
-------------------------------------
Sept. 12, 2009 Sept. 6, 2008
-------------- -------------
Net cash provided by (used in) operating activities $ 20,537 $ (30,824)
-------------- -------------
Net cash used in investing activities $ (38,334) $ (45,225)
-------------- -------------
Net cash provided by financing activities $ 190,216 $ 106,385
-------------- -------------
Net cash provided by operating activities of $20.5 million for the 28 weeks
ended September 12, 2009 primarily reflected our net loss of $145.5 million,
adjusted for net non-cash net charges of $208.1 million. In addition, cash
provided by operating activities reflected (i) an increase in accounts payable
of $60.1 million and (ii) a decrease in accounts receivable of $21.5 million,
partially offset by (iii) a decrease in other non-current liabilities of $46.3
million, (iv) an increase in prepaid expense and other current assets of $19.4
million, (v) an increase in inventories of $17.2 million, (vi) a decrease in
accrued salaries, wages, benefits and taxes of $14.3 million and (vii) an
increase in other assets of $15.6 million. Refer to Working Capital below for
discussion of changes in working capital items. Net cash used in operating
activities of $30.8 million for the 28 weeks ended September 6, 2008 primarily
reflected our net loss of $16.8 million, adjusted for non-cash charges of $83.8
million. Further, cash was provided by an increase in accounts payable of $50.3
million mainly due to the timing of payments partially offset by an increase in
inventories of $22.7 million, an increase in prepaid expenses and other current
assets of $18.8 million, an increase in other assets of $13.7 million, a
decrease in accrued salaries, wages and benefits, and taxes of $22.2 million, a
decrease in other non-current liabilities of $51.0 million primarily due to
payments on closed locations.
Net cash used in investing activities of $38.3 million for the 28 weeks ended
September 12, 2009 primarily reflected property expenditures totaling $50.0
million, which included 4 additions, 5 remodels and 4 conversions, partially
offset by proceeds from the sale of our joint venture of $5.9 million, proceeds
from disposal of property of $3.3 million and proceeds from maturities of
restricted marketable securities of $2.2 million. For the remainder of fiscal
2009, we plan to focus our capital expenditures on enlarging and remodeling
supermarkets and converting supermarkets to more optimal formats. Net cash used
in investing activities of $45.2 million for the 28 weeks ended September 6,
2008 primarily reflected property expenditures totaling $59.4 million, which
included 2 new liquor stores, 3 major remodels, 1 major enlargement, 4 Pathmark
Price Impact remodels and 3 Starbucks remodels partially offset by proceeds from
disposal of property of $6.1 million and proceeds from maturities of restricted
marketable securities of $7.1 million.
Net cash provided by financing activities of $190.2 million for the 28 weeks
ended September 12, 2009 primarily reflected proceeds from issuance of long-term
debt of $253.2 million, proceeds from issuance of preferred stock of $175.0
million, partially offset by net principal payments on our revolving lines of
credit of $198.9 million and deferred financing fees of $22.6 million. Net cash
provided by financing activities of $106.4 million for the 28 weeks ended
September 6, 2008 primarily reflected net proceeds under our revolving lines of
credit of $108.0 million, proceeds from a promissory note of $10.0 million, an
increase in book overdrafts of $35.1 million, partially offset by the settlement
of Series A warrants of $45.7 million.
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
We operate under an annual operating plan which is reviewed and approved by our
Board of Directors and incorporates the specific operating initiatives we expect
to pursue and the anticipated financial results of our Company. Our plan for
fiscal 2009 has been approved and we believe that our present cash resources,
including 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.
Profitability, cash flow, asset sale proceeds and timing can be impacted by
certain external factors such as unfavorable economic conditions, competition,
labor relations and fuel and utility costs which could have a significant impact
on cash generation. If our profitability and cash flow do not improve in line
with our plans or if they do not otherwise provide sufficient resources to
operate effectively, we anticipate that we would be able to modify the operating
plan, by reducing capital investments and through other contingency actions.
However, there is no assurance that we will be successful in generating such
resources.
WORKING CAPITAL
---------------
We had working capital of $324.1 million at September 12, 2009, compared to
working capital of $172.0 million at February 28, 2009. We had cash and cash
equivalents aggregating $347.8 million at September 12, 2009, compared to $175.4
million at February 28, 2009. The increase in working capital was primarily
attributable to the following:
o An increase in cash and cash equivalents, as detailed in our Consolidated
Statements of Cash Flows, primarily attributable to our August 4, 2009
issuance of Redeemable Preferred Stock and Senior Secured Notes, which are
described below, partially offset by repayments of a portion of our
variable debt
o An increase in inventories due to seasonality
o An increase in prepaid expenses and other current assets, primarily due to
an increase in prepaid rent due to the timing of payments
Partially offset by the following:
o An increase in accounts payable, net of book overdrafts due to an increase
in inventories and the timing of payments
o A decrease in accounts receivable, primarily related to timing
REDEEMABLE PREFERRED STOCK
--------------------------
On August 4, 2009, our Company consummated the issuance and sale of 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 $162.2 million, after
deducting approximately $12.8 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 provided that prior to
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
receiving shareholder approval, the Preferred Stock will not be exercisable into
greater than 19.99% of the Common Stock outstanding prior to the issuance of the
Preferred Stock. The currently convertible shares are recorded within temporary
stockholders' equity 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 shares requiring shareholder approval to become
convertible are classified as a "Preferred stock liability".
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.
The holders of the Preferred Stock are entitled to an 8.0% dividend, payable
quarterly in arrears in cash or additional shares of Preferred Stock, if our
Company is not able to pay the dividends fully in cash. 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%. During the 12 weeks ended September 12,
2009, we accrued Preferred Stock dividends of $1.6 million, $1.1 million of
which has been recorded within "Interest expense" and $0.5 million recorded
within "Additional paid-in capital". In addition, during the 12 weeks ended
September 12, 2009, we recorded $0.2 million of deferred financing fees
amortization, $0.1 million of which was recorded within "Interest expense" and
$0.1 million recorded within "Additional paid-in capital".
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. This embedded beneficial conversion feature
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. During the 12 weeks ended
September 12, 2009, we accreted $0.2 million relating to the beneficial
conversion feature through "Additional paid-in capital".
LINE OF CREDIT
--------------
On January 16, 2008, we entered into a secured line of credit agreement with
Blue Ridge Investments, L.L.C. This agreement enables us to borrow funds on a
revolving basis of up to $32.7 million, or up to the value of the investment in
the Columbia Fund. Each borrowing bears interest at a rate per annum equal to
the BBA Libor Daily Floating Rate plus 0.10%. Our weighted-average interest
rates on this line of credit were 0.4% and 2.6% during the second quarter of
fiscal 2009 and 2008, respectively. At September 12, 2009 and February 28, 2009,
we had borrowings outstanding under this line of credit agreement of $3.2
million and $5.0 million, respectively. This agreement had an original
expiration of December 31, 2008. However, on November 26, 2008, this agreement
was extended to expire on December 31, 2009. These loans are collateralized by a
first priority perfected security interest in our ownership interest in the
Columbia Fund. Refer to Note 3 to our Consolidated Financial Statements - Cash,
Cash Equivalents, Restricted Cash and Restricted Marketable Securities, for
further discussion on the Columbia Fund.
CREDIT AGREEMENT
----------------
On December 3, 2007, we entered into a new $675.0 million Credit Agreement with
Banc of America Securities LLC and Bank of America, N.A., as the co-lead
arranger. On December 27, 2007, in order to facilitate the syndication of the
Credit Agreement under current market conditions, we entered into an Amended and
Restated Credit Agreement, whereby a portion of the revolving commitments was
converted
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
into a $50.0 million term loan tranche, which was collaterized by certain real
estate assets at an increased margin rate. On July 23, 2009, our Company amended
the Amended and Restated Credit Agreement in connection with the private
offering of senior secured notes and the sale of preferred stock. The amended
agreement increases the applicable margins on credit advances, reduces
commitments by $20.0 million, reduces the collateral advance and provides for
certain other amendments. Subject to borrowing base requirements, the amended
Credit Agreement provides for a five-year term loan of $82.9 million, the
previously issued five year term loan of $50.0 million and a five-year revolving
credit facility of $522.1 million enabling us to borrow funds and issue letters
of credit on a revolving basis. The Credit Agreement includes a $100.0 million
accordion feature, which provides us with the ability to increase commitments
from $655.0 million to $755.0 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, owned real estate and certain Pathmark
leaseholds. The Pathmark leaseholds are removed as eligible collateral
throughout fiscal 2009, which resulted in a reduction in borrowing availability
of $25.0 million on March 1, 2009 and $25.0 million on June 1, 2009 and will
result in reductions of an additional $23.0 million on December 1, 2009, for a
total reduced borrowing availability of approximately $73.0 million. Borrowings
under the Credit Agreement bear interest based on LIBOR or Prime interest rate
pricing. Subject to certain conditions, we are permitted to pay cumulative cash
dividends on common shares, as well as make bond repurchases. This agreement
expires in December 2012.
As of September 12, 2009, there were $132.9 million of loans and $199.6 million
in letters of credit outstanding under this agreement. As of September 12, 2009,
after reducing availability for borrowing base requirements, we had $231.5
million available under the Credit Agreement. In addition, we have invested cash
available to reduce borrowings under this Credit Agreement or to use for future
operations of $251.2 million as of September 12, 2009.
Based on information available to us, as of our filing date, we have no
indication that the financial institutions acting as lenders under our Credit
Agreement would be unable to fulfill their commitments.
RELATED PARTY PROMISSORY NOTE
-----------------------------
On September 2, 2008, our Company issued a three year, unsecured promissory note
in the amount of $10 million to Erivan Karl Haub. Erivan Haub is the father of
Christian W. E. Haub, our Executive Chairman, and is a limited partner of
Tengelmann which owns an interest in our Company's stock. The principal is due
in a lump sum payment on August 18, 2011 and bears interest at a rate of 6% per
year, payable in twelve equal quarterly payments of $0.15 million over the term
of the note. During the 12 and 28 weeks ended September 12, 2009 we paid $0.2
million and $0.5 million, respectively, of interest on this note and we recorded
interest expense of $0.1 million and $0.3 million, respectively.
PUBLIC DEBT OBLIGATIONS
-----------------------
As of September 12, 2009, we had outstanding notes of $584.3 million, which
consisted of $12.8 million of 9.125% Senior Notes due December 15, 2011, $151.8
million of 5.125% Convertible Senior Notes due June 15, 2011, $219.7 million of
6.750% Convertible Senior Notes due December 15, 2012 and $200.0 million of
9.375% Notes due August 1, 2039. Interest is payable quarterly on the 9.375%
Notes and semi-annually on the 9.125%, 6.750% and 5.125% Notes. The 9.375% Notes
are now callable at par ($25 per bond) and the 9.125% Senior 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
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
contains among other provisions, covenants restricting the incurrence of secured
debt. The 9.375% Notes are effectively subordinated to the Credit Agreement and
do not contain cross default provisions. All covenants and restrictions for the
9.125% Senior Notes were eliminated in connection with the cash tender offer in
fiscal 2005. Our notes are not guaranteed by any of our subsidiaries.
On December 18, 2007, we completed a public offering and issued $165 million
5.125% Convertible Senior Notes due 2011 and $255 million 6.750% Convertible
Senior Notes due 2012. 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.
As of December 18, 2007, our Company did not have sufficient authorized shares
to provide for all potential issuances of common stock. Therefore, our Company
accounted for the conversion features as freestanding instruments. The
convertible senior 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
stockholders, the number of shares of common stock we have the authority to
issue was increased to 160,000,000, based on a majority vote by our
stockholders. During the 12 and 28 weeks ended September 6, 2008, we recorded a
loss of $1.7 million and a gain of $9.4 million, respectively, in "Nonoperating
income" on our Consolidated Statements of Operations for the conversion features
of the 5.125% convertible senior notes. During the 12 and 28 weeks ended
September 6, 2008, the gain that was recorded in "Nonoperating income" in our
Consolidated Statement of Operations for the conversion features of the 6.750%
convertible senior notes was nil and $5.1 million, respectively. Based on an
increase in available shares 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 to "Additional
paid-in-capital" on our Consolidated Statements of Stockholder's Equity and
Comprehensive (Loss) Income as of June 26, 2008.
The $255.0 million aggregate principal amount of the 6.750% Convertible Senior
Notes due 2012 is subject to the provisions of FASB Staff Position ("FSP")
Accounting Principles Board ("APB") Opinion No. 14-1 ("FSP APB 14-1"),
"Accounting for Convertible Debt Instruments that May be Settled in Cash Upon
Conversion." ("FSP APB 14-1"), which we adopted during our first quarter ended
June 20, 2009. We estimate that our effective interest rate for similar debt
without the conversion feature is approximately 12%. During the 12 weeks ended
September 12, 2009 and September 6, 2008, we recognized additional non-cash
interest expense of $1.0 million and $0.7 million, respectively, relating to our
adoption of FSP APB 14-1. During the 28 weeks ended September 12, 2009 and
September 6, 2008, we recognized additional non-cash interest expense of $2.2
million and $1.7 million, respectively, relating to our adoption of FSP APB
14-1. The net carrying value of outstanding debt as of September 12, 2009 and
February 28, 2009 was $219.7 million and $215.1 million, respectively, net of
unamortized discount of $35.3 million and
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
$39.9 million, respectively. As of September 12, 2009, our remaining unamortized
discount will be recognized as follows (in thousands):
Remainder of 2009 $ 4,187
2010 9,884
2011 11,139
2012 10,140
-------------
$ 35,350
=============
SENIOR SECURED NOTES
--------------------
On August 4, 2009, we completed a $260.0 million offering 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. The proceeds from this offering and our
preferred stock offering on August 4, 2009, which is discussed above, 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 outside the United States, only to non-U.S. investors pursuant to Regulation
S. 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 the usual and customary covenants found in
secured notes, including, among other things, restrictions on the incurrence of
additional indebtedness, asset sales, liens and restricted payments.
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 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 6.750% 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 until
sufficient shares are available and are recorded as a long-term liability in the
Consolidated Balance Sheet. On June 26, 2008, at a special meeting of
stockholders, the number of shares of common stock we have the authority to
issue was increased to 160,000,000 based on a majority vote by our stockholders.
Thus, the financing warrants were marked to market through June 26, 2008
utilizing the Black-Scholes option pricing model. These financing warrants are
no longer classified as a liability as of June 26, 2008. During the 12 and 28
weeks ended September 6, 2008, we recorded a loss of $4.2 million and a gain of
$2.3 million, respectively, relating to these warrants, which was included in
"Nonoperating income" on our Consolidated Statements of Operations.
We understand that on or about October 3, 2008, Lehman Brothers OTC Derivatives,
Inc. or "LBOTC" who accounts for 50% of the call option and financing warrant
transactions filed for bankruptcy protection, which is an event of default under
such transactions. We are carefully monitoring the developments affecting LBOTC,
noting the impact of the LBOTC bankruptcy effectively reduced conversion prices
for 50% of our convertible senior notes to their stated prices of $36.40 for the
5.125% Notes and $37.80 for the
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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.
SERIES A AND SERIES B WARRANTS
------------------------------
As part of the acquisition of Pathmark on December 3, 2007, we issued 4,657,378
and 6,965,858 roll-over stock warrants in exchange for Pathmark's 2005 Series A
and Series B warrants, respectively. The Series A warrants were exercised on May
7, 2008 at a price of $18.36; the Series B warrants are exercisable at $32.40
and expire on June 9, 2015. The Tengelmann stockholders have the right to
approve any issuance of common stock under these warrants upon exercise
(assuming Tengelmann's outstanding interest is at least 25% and subject to
liquidity impairments defined within the Tengelmann Stockholder Agreement). In
addition, Tengelmann has the ability to exercise a "Put Right" whereby it has
the ability to require A&P to purchase A&P stock held by Tengelmann to settle
these warrants. Based on the rights provided to Tengelmann, A&P does not have
sole discretion to determine whether the payment upon exercise of these warrants
will be settled in cash or through issuance of an equivalent portion of A&P
shares. Therefore, these warrants are recorded as liabilities and
marked-to-market each reporting period based on A&P's current stock price.
On May 7, 2008, the 4,657,378 Series A warrants were exercised by Yucaipa
Corporate Initiatives Fund I, L.P., Yucaipa American Alliance Fund I, L.P. and
Yucaipa American Alliance (Parallel) Fund I, L.P. We opted to settle the Series
A warrants in cash totaling $45.7 million rather than issuing additional common
shares. Included in "Nonoperating income" on our Consolidated Statements of
Operations for the 12 and 28 weeks ended September 6, 2008, is a loss of nil and
$1.2 million, respectively, for the Series A warrants through the settlement
date of May 7, 2008 and a gain of $48.8 million and $76.0 million, respectively,
for Series B warrants market value adjustments. "Nonoperating income" for the 12
and 28 weeks ended September 12, 2009 includes a loss of $7.1 million and $9.0
million, respectively, relating to market value adjustments for Series B
warrants. The value of the Series B warrants as of September 12, 2009 and
February 28, 2009 was $13.7 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 for
the Series B warrants:
Sept. 12, 2009 February 28, 2009
-------------- -----------------
Expected life 5.74 years 6.28 years
Volatility 65.6% 61.3%
Dividend yield range 0% 0%
Risk-free interest rate 2.29% 2.69%
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 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, using available funds, in lieu
of the delivery of loaned shares, to settle its obligation. On June 26, 2008,
our stockholders approved a loan of up to an additional 1,577,569 shares of our
Company's common stock pursuant to the share lending agreement.
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
These financial institutions will sell the "borrowed shares" to investors to
facilitate hedging transactions relating to the issuance of our 5.125% and
6.750% Senior Convertible Notes. Pursuant to these agreements, we loaned
8,134,002 shares of our stock of which 6,300,752 shares were sold to the public
on December 18, 2007 in a public offering. We did not receive any proceeds from
the sale of the borrowed shares. We received a nominal lending fee from the
financial institutions pursuant to the share lending agreements.
Any shares we loan are considered issued and outstanding. Investors that
purchase borrowed shares are entitled to the same voting and dividend rights as
any other holders of our common stock; however, the financial institutions will
not have such rights pursuant to the share lending agreements. The obligation of
the financial institutions to return the borrowed shares has been accounted for
as a prepaid forward contract and, accordingly, shares underlying this contract,
except as described below, are removed from the computation of basic and
dilutive earnings per share. On a net basis, this transaction will have no
impact on earnings per share, with the exception of the below.
On September 15, 2008, Lehman and certain of its subsidiaries, including, Lehman
Europe filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the
United States Bankruptcy Court and/or commenced equivalent proceedings in
jurisdictions outside of the United States (collectively, the "Lehman
Bankruptcy"). Lehman Europe is party to a 3,206,058 share lending agreement with
our Company. Due to the circumstances of the Lehman Bankruptcy, we have recorded
these loaned shares as issued and outstanding effective September 15, 2008, for
purposes of computing and reporting our Company's basic and diluted weighted
average shares and earnings per share.
OTHER
-----
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 September 12, 2009, 196 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 $608.7 million, which could be partially or totally offset by
reassigning or subletting these leases.
Our existing corporate rating with Moody's Investors Service ("Moody's") is B3
with a negative outlook. Our senior unsecured debt is rated Caa1, our senior
secured notes are rated B3 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 lenders 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-.
Future rating changes could affect the availability and cost of financing to our
Company.
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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. A
summary of our critical accounting policies may be found in the Management
Discussion and Analysis included in our Annual Report on Form 10-K for the year
ended February 28, 2009. There have been no significant changes in these
policies during the 28 weeks ended September 12, 2009.
CAUTIONARY NOTE
---------------
This Form 10-Q 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: various operating factors and general
economic conditions, competitive practices and pricing in the food industry
generally and particularly in our principal geographic 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 capital markets which may affect our cost of capital or
the ability to access capital; supply or quality control problems with our
vendors; regulatory compliance; and changes in economic conditions, which may
affect the buying patterns of our customers. Refer to PART II. ITEM 1A - Risk
Factors included in this quarterly report on Form 10-Q.
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
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 September 12, 2009, we do not have cash flow
exposure due to rate changes on any of our debt securities with an aggregate
book value of $849.7 million, because they are at fixed interest rates ranging
from 2.0% to 11.375%. However, we do have cash flow exposure on our committed
and uncommitted lines of credit of $136.1 million due to our variable floating
rate pricing. Accordingly, during the 12 weeks and 28 weeks ended September 12,
2009, a presumed 1% change in the variable floating rate would have impacted
interest expense by $0.5 million and $1.5 million, respectively. A presumed 1%
change in the variable floating rate during the 12 and 28 weeks ended September
6, 2008 would have impacted interest expense by $0.7 million and $1.3 million,
respectively.
Foreign Exchange Risk
---------------------
As of September 12, 2009, we did not have exposure to foreign exchange risk as
we did not hold any significant assets denominated in foreign currency.
ITEM 4 - Controls and Procedures
We have established and maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our Company's
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to our Company's management, including our
President and Chief Executive Officer and Senior Vice President, Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
We carried out an evaluation, under the supervision and with the participation
of our Company's management, including our Company's President and Chief
Executive Officer along with our Company's Senior Vice President, Chief
Financial Officer, of the effectiveness of the design and operation of our
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15(b). Based upon the foregoing, our Company's President and Chief Executive
Officer along with our Company's Senior Vice President, Chief Financial Officer,
concluded that our Company's disclosure controls and procedures were effective
as of the period covered by this report.
There have been no changes during our Company's fiscal quarter ended September
12, 2009 in our Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, our Company's
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1 - Legal Proceedings
Refer to Note 20 - Commitments and Contingencies - Legal Proceedings in our
Notes to Consolidated Financial Statements for a discussion of our legal
proceedings.
ITEM 1A - Risk Factors
Various risk factors could have a negative effect on our Company's business,
financial position, cash flows and results of operations. These risk factors
include, among others, the following:
Risks Relating to Our Business
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:
o food price deflation or inflation,
o softness in local and national economies,
o increases in commodity prices,
o the availability of favorable credit and trade terms,
o changes in business plans, operations, results and prospects,
o potential delays in the development, construction or start-up of
planned projects, and
o other economic conditions that may affect consumer buying habits.
Any one or more of these economic conditions can affect our retail sales, the
demand for products we distribute to our retail customers, our operating costs
and other aspects of our business. Failure to achieve sufficient levels of cash
flow at reporting units could result in impairment charges on goodwill and/or
long-lived assets.
Changes in the general business and economic conditions in our markets,
including the rate of inflation, population growth, the rising prices of oil and
gas, the nature and extent of continued consolidation in the food industry and
employment and job growth in the markets in which we operate, may affect our
ability to hire and train qualified employees to operate our stores. This would
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 our profit goals will be affected by, among other things:
o 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,
o our ability to achieve productivity improvements and reduce shrink
in our stores,
o our success in generating efficiencies in our supporting
activities, and
o our ability to eliminate or maintain a minimum level of supply
and/or quality control problems with our vendors.
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:
o the prices at which we are able to sell products at our retail
locations,
o sales volume, and
o 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. A decrease in
the rate of inflation 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 efforts to offset the
effects of alternate distribution channels and eligibility changes will be
successful.
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 such as war and terrorism.
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, and may also adversely affect our future
growth and expansion. 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.
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 a significant amount of our saleable
inventory, including groceries and perishables, from one supplier, C&S. During
the twelve months ended February 28, 2009, products supplied from C&S accounted
for over 69% of our Company's supermarket inventory purchases. Our agreement
with C&S is for a term of ten years, during which we expect to acquire a
substantial portion of our saleable inventory from C&S. 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.
Our renovation and expansion plans may not be successful, and though we plan to
convert the remaining conventional stores to one of our three new formats, we
may not have the funds to do so.
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 one of our three new
formats. We have reduced our planned capital expenditures for fiscal 2009, which
relate primarily to opening new supermarkets under the optimal format based on
local demographics, opening new liquor stores, and converting certain A&P
conventional banner stores to the optimal format based on local demographics.
Our capital expenditures 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.
We may be adversely affected by fluctuating utility and fuel costs.
Fluctuating fuel costs may adversely affect our operating costs since we incur
the cost of fuel in connection with the transportation of goods from our
warehouse and distribution facilities to our stores. In addition, operations at
our stores are sensitive to rising utility fuel costs due to the amount of
electricity and gas required to operate our stores. In the event of rising fuel
costs, we may not be able to recover rising utility and fuel costs through
increased prices charged to our customers. 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.
Current economic conditions have been, and may continue to be volatile.
As a result of concern about the stability of the capital markets and the
strength of counterparties, many financial institutions have reduced and, in
some cases, ceased to provide funding to borrowers. Based on information
available to us, 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.
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 issuance of convertible preferred stock. 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.
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.
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.
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 law 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.
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.
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.
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.
The majority of our operating costs are attributed to labor costs and,
therefore, 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 46,200 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 28, 2009, 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 ten labor agreements covering
approximately 4,300 employees in fiscal 2009. 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
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.
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 $48.2 million, $34.4 million and $32.1 million to multi-employer
pension plans in fiscal 2008, fiscal 2007 and fiscal 2006, 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.
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.
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.
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 September 12, 2009, 196 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 $608.7 million as of September 12, 2009, 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.
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.
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.
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 we acquire.
These liabilities could materially and adversely affect our business and
financial condition.
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. Our indebtedness could have important
consequences to you. For example, it could:
o 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,
o 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,
o impair our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes,
o diminish our ability to withstand a downturn in our business, the
industry in which we operate or the economy generally,
o limit our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate, and
o 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 financing or sell assets on satisfactory
terms, or at all.
In addition, at September 12, 2009, we had $136.1 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.
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
issued preferred stock, these additional securities may have dividend or
liquidation preferences senior to our common stock. If we issued convertible
preferred shares, a subsequent conversion may dilute the current common
stockholders' interest. Issuance of such preferred stock could adversely affect
the price of our common stock.
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds
An unregistered sale of 8.0% Cumulative Convertible Preferred Stock was made on
August 4, 2009 to Tengelmann and Yucaipa, as more fully disclosed in a Current
Report on Form 8-K filed on August 5, 2009. The net proceeds from this sale were
used to repay a portion of the Company's variable debt and are further
anticipated to be used for working capital and other general corporate purposes.
ITEM 3 - Defaults Upon Senior Securities
None
ITEM 4 - Submission of Matters to a Vote of Security Holders
None
ITEM 5 - Other Information
None
ITEM 6 - Exhibits
(a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 By-Laws of The Great Atlantic & Pacific Tea Company,
Inc. as Amended and Restated on August 4, 2009
(incorporated by reference to Item 9.01 of Form 8-K
filed on August 5, 2009) (File No. 1-4141)
4.1 Articles Supplementary of 8% Cumulative
Convertible Preferred Stock Series A-T, A-Y, B-T
and B-Y of The Great Atlantic & Pacific Tea
Company, Inc. (incorporated by reference to Item
9.01 of Form 8-K filed on August 5, 2009) (File
No. 1-4141)
4.2 Form of 8% Cumulative Convertible Preferred Stock
Certificate (included in Exhibit 4.1)
(incorporated by reference to Item 9.01 of Form
8-K filed on August 5, 2009) (File No. 1-4141)
4.3 Indenture, dated as of August 4, 2009, among The
Great Atlantic & Pacific Tea Company, Inc., the
guarantors named therein and Wilmington Trust
Company, as trustee (incorporated by reference to
Item 9.01 of Form 8-K filed on August 5, 2009)
(File No. 1-4141)
4.4 Form of 11 3/8% Senior Secured Notes due 2015
(included in Exhibit 4.3) (incorporated by reference
to Item 9.01 of Form 8-K filed on August 5, 2009)
(File No. 1-4141)
10.1 Amended and Restated Tengelmann Stockholder
Agreement, dated as of August 4, 2009, by and
among The Great Atlantic & Pacific Tea Company,
Inc. and Tengelmann Warenhandelsgesellschaft KG
(incorporated by reference to Item 9.01 of Form
8-K filed on August 5, 2009) (File No.
1-4141)
10.2 Amended and Restated Yucaipa Stockholder
Agreement, dated as of August 4, 2009, by and
among The Great Atlantic & Pacific Tea Company,
Inc., Yucaipa American Alliance Fund II, LP,
Yucaipa American Alliance (Parallel) Fund II, LP,
Yucaipa Corporate Initiatives Fund I, LP, Yucaipa
American Alliance Fund I, LP and Yucaipa American
Alliance (Parallel) Fund I, LP (collectively, the
"Stockholders") and Yucaipa American Alliance
Fund II, LLC, as Stockholder Representative
(incorporated by reference to Item 9.01 of Form
8-K filed on August 5, 2009) (File No.
1-4141)
10.3 Registration Rights Agreement, dated as of August 4,
2009, among The Great Atlantic & Pacific Tea Company,
Inc., the guarantors named therein and Banc of America
Securities LLC (incorporated by reference to Item 9.01
of Form 8-K filed on August 5, 2009) (File No. 1-4141)
10.4 Intercreditor Agreement, dated as of August 4, 2009,
among Bank of America, N.A., as First Lien Agent,
Wilmington Trust Company, as Second Lien Agent, The
Great Atlantic & Pacific Tea Company, Inc. and the
subsidiaries of The Great Atlantic & Pacific Tea
Company, Inc. party thereto (incorporated by reference
to Item 9.01 of Form 8-K filed on August 5, 2009)
(File No. 1-4141)
10.5 Form of Director Indemnification Agreement
(incorporated by reference to Item 9.01 of Form
8-K filed on August 5, 2009) (File No. 1-4141)
10.6 Security Agreement, dated as of August 4, 2009,
among The Great Atlantic & Pacific Tea Company,
Inc., the subsidiaries from time to time party
thereto, and Wilmington Trust Company, as
collateral agent (incorporated by reference to
Item 9.01 of Form 8-K filed on August 5, 2009)
(File No.
1-4141)
10.7 Investment Agreement, dated as of July 23, 2009, by
and among the Company, Erivan Karl Haub, Christian
Wilhelm Erich Haub, Karl-Erivan Warder Haub, Georg
Rudolf Otto Haub and Emil Capital Partners, LLC, as
investor representative and other signatories thereto
(incorporated by reference to Item 9.01 of Form 8-K
filed on July 24, 2009) (File No. 1-4141).
10.8 Investment Agreement, dated as of July 23, 2009, by
and among the Company, Yucaipa American Alliance Fund
II, LP and Yucaipa American Alliance (Parallel) Fund
II, LP and, solely with respect to Section 3.02 and
3.05, Yucaipa Corporate Initiatives Fund I, LP,
Yucaipa American Alliance Fund I, LP and Yucaipa
American Alliance (Parallel) Fund I, LP, and, solely
with respect to Section 5.05, Yucaipa American
Alliance Fund II, LLC as investors' representative
(incorporated by reference to Item 9.01 of Form 8-K
filed on July 24, 2009) (File No. 1-4141).
10.9 Second Amendment to the Amended and Restated
Credit Agreement, dated July 23, 2009, by and
among the Company and the other Borrowers party
thereto, as Borrowers, and the Lenders party
thereto, and Bank of America, N.A., as
Administrative Agent and Collateral Agent.
(incorporated by reference to Item 9.01 of Form
8-K filed on July 24, 2009) (File No. 1-4141).
31.1* Certification of the Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Certification of the Chief Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32* Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
* Filed with this 10-Q
The Great Atlantic & Pacific Tea Company, Inc.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
Date: October 20, 2009 By: /s/ Melissa E. Sungela
------------------------------------------------------
Melissa E. Sungela, Vice President,
Corporate Controller
(Chief Accounting Officer and Duly Authorized Officer)
