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 June 19, 2010
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 July 26, 2010, the Registrant had a total of 56,168,776 shares of common
stock - $1 par value outstanding.
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)
16 Weeks Ended
-------------------------------------
June 19, 2010 June 20, 2009
--------------- ----------------
Sales $ 2,564,930 $ 2,790,243
Cost of merchandise sold (1,801,118) (1,945,374)
--------------- ----------------
Gross margin 763,812 844,869
Store operating, general and administrative expense (821,016) (846,705)
Long-lived asset impairment (5,398) -
--------------- ----------------
Loss from operations (62,602) (1,836)
Nonoperating income (loss) 8,277 (1,875)
Interest expense, net (61,142) (54,207)
--------------- ----------------
Loss from continuing operations before income taxes (115,467) (57,918)
Provision for income taxes (140) (386)
--------------- ----------------
Loss from continuing operations (115,607) (58,304)
Discontinued operations:
Loss from operations of discontinued businesses, net of tax of $0 (7,115) (6,856)
Gain on disposal of discontinued operations, net of tax of $0 79 -
--------------- ----------------
Loss from discontinued operations (7,036) (6,856)
--------------- ----------------
Net loss $ (122,643) $ (65,160)
=============== ================
Net loss per share - basic:
Continuing operations $ (2.27) $ (1.10)
Discontinued operations (0.13) (0.13)
--------------- ----------------
Net loss per share - basic $ (2.40) $ (1.23)
=============== ================
Net loss per share - diluted:
Continuing operations $ (4.60) $ (3.36)
Discontinued operations (0.23) (0.28)
--------------- ----------------
Net loss per share - diluted $ (4.83) $ (3.64)
=============== ================
Weighted average number of common shares outstanding
Basic 53,498,121 52,886,956
=============== ================
Diluted 30,524,651 24,782,040
=============== ================
See Notes to Consolidated Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Stockholders' Deficit and Comprehensive Loss
(Dollars in thousands)
(Unaudited)
Additional Accumulated Other Total
Common Stock Paid-in Accumulated Comprehensive Stockholders'
--------------------------
Shares Amount Capital Deficit Loss Deficit
------------ ----------- ----------- ------------ ------------- --------------
16 Weeks Ended June 19, 2010
----------------------------
Balance as of 2/27/2010, as
previously reported 55,868,129 $ 55,868 $ 498,144 $(1,003,812) $ (79,403) $ (529,203)
Retrospective adoption of new
accounting guidance for own
share-lending arrangements - - 28,277 (28,277) - -
Balance as of 2/27/2010, as
adjusted ------------ ----------- ----------- ----------- ------------- --------------
55,868,129 55,868 526,421 (1,032,089) (79,403) (529,203)
Net loss - - - (122,643) - (122,643)
Beneficial conversion feature
accretion on preferred stock - - (1,481) - - (1,481)
Dividends on preferred stock (4,308) - - (4,308)
Preferred stock financing fees
amortization - - (534) - - (534)
Other comprehensive income - - - - 252 252
Stock options exercised 4,834 5 23 - - 28
Other share based awards 250,245 250 (1,111) - - (861)
------------ ----------- ------------ ----------- ------------- --------------
Balance at end of period 56,123,208 $ 56,123 $ 519,010 $(1,154,732) $ (79,151) $ (658,750)
============ =========== =========== =========== ============= ==============
16 Weeks Ended June 20, 2009
----------------------------
Balance as of 2/28/2009, as
previously reported 57,674,799 $ 57,675 $ 464,679 $ (127,314) $ (105,147) $ 289,893
Retrospective adoption of new
accounting guidance for own
share-lending arrangements - - 28,277 (28,277) - -
Balance as of 2/28/2009, as
adjusted ------------ ----------- ----------- ----------- ------------- --------------
57,674,799 57,675 492,956 (155,591) (105,147) 289,893
Net loss - - - (65,160) - (65,160)
Other comprehensive income - - - - 1,378 1,378
Stock options exercised 397 - 1 - - 1
Other share based awards 224,122 224 2,629 - - 2,853
------------ ----------- ----------- ----------- ------------- -----------
Balance at end of period 57,899,318 $ 57,899 $ 495,586 $ (220,751) $ (103,769) $ 228,965
============ =========== =========== =========== ============= ==============
Comprehensive Loss
------------------
16 Weeks Ended
----------------------------------
June 19, 2010 June 20, 2009
---------------- -------------
Net loss $ (122,643) $ (65,160)
---------------- --------------
Net unrealized gain on marketable securities, net of tax of $0 - 519
Pension and other post-retirement benefits, net of tax of $0 252 859
---------------- --------------
Other comprehensive income, net of tax of $0 252 1,378
---------------- --------------
Total comprehensive loss $ (122,391) $ (63,782)
================ ==============
See Notes to Consolidated Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share and per share amounts)
(Unaudited)
June 19, 2010 February 27, 2010
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 170,762 $ 252,426
Restricted cash 1,691 1,993
Accounts receivable, net of allowance for doubtful accounts of $6,731 and
$8,728 at June 19, 2010 and February 27, 2010, respectively 165,117 166,143
Inventories, net 470,772 467,227
Prepaid expenses and other current assets 37,271 43,374
------------- --------------
Total current assets 845,613 931,163
------------- --------------
Non-current assets:
Property:
Property owned, net 1,351,899 1,397,971
Property leased under capital leases, net 80,960 89,599
------------- --------------
Property, net 1,432,859 1,487,570
Goodwill 115,197 115,197
Intangible assets, net 144,413 147,713
Other assets 138,989 145,574
------------- --------------
Total assets $ 2,677,071 $ 2,827,217
============= ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 157,944 $ 191
Current portion of obligations under capital leases 13,487 13,702
Current portion of real estate liabilities 4,250 4,220
Accounts payable 229,828 227,779
Book overdrafts 65,175 60,465
Accrued salaries, wages and benefits 137,635 145,170
Accrued taxes 43,361 31,802
Other accruals 244,923 246,516
------------- --------------
Total current liabilities 896,603 729,845
------------- --------------
Non-current liabilities:
Long-term debt 838,844 990,359
Long-term obligations under capital leases 130,368 136,880
Long-term real estate liabilities 329,064 329,363
Deferred real estate income 85,598 87,061
Other financial liabilities 5,669 13,946
Other non-current liabilities 914,907 936,209
------------- --------------
Total liabilities 3,201,053 3,223,663
------------- --------------
Series A redeemable preferred stock - no par value, $1,000 redemption value;
------------- --------------
authorized - 700,000 shares; issued - 175,000 shares 134,768 132,757
------------- --------------
Commitments and contingencies (Refer to Note 17)
Stockholders' equity (deficit):
Common stock - $1 par value; authorized - 160,000,000 shares; issued and
outstanding - 56,123,208 and 55,868,129 shares at June 19, 2010
and February 27, 2010, respectively 56,123 55,868
Additional paid-in capital 519,010 526,421
Accumulated other comprehensive loss (79,151) (79,403)
Accumulated deficit (1,154,732) (1,032,089)
-------------- --------------
Total stockholders' deficit (658,750) (529,203)
-------------- --------------
Total liabilities and stockholders' deficit $ 2,677,071 $ 2,827,217
============== ==============
See Notes to Consolidated Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
16 Weeks Ended
---------------------------------------
June 19, 2010 June 20, 2009
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (122,643) $ (65,160)
Adjustments to reconcile net loss to net cash used in
operating activities (see next page) 82,782 95,620
Other changes in assets and liabilities:
Decrease in receivables 4,139 19,948
(Increase) decrease in inventories (4,401) 4,063
Decrease (increase) in prepaid expenses and other current assets 1,209 (8,579)
Decrease (increase) in other assets (1,224) (2,213)
Increase in accounts payable 1,584 6,307
Increase (decrease) in accrued salaries, wages and benefits, and taxes 2,059 (12,326)
Decrease in other accruals (652) (20,803)
Decrease in other non-current liabilities (21,089) (21,029)
Other operating activities, net (29) 1,214
----------- -----------
Net cash used in operating activities (58,265) (2,958)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (19,668) (27,009)
Proceeds from disposal of property 1,677 2,219
Proceeds from sale of joint venture - 5,914
Decrease in restricted cash 302 78
Proceeds from maturities of marketable securities - 1,373
----------- -----------
Net cash used in investing activities (17,689) (17,425)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 800 -
Principal payments on long-term borrowings (69) (93)
Proceeds under revolving lines of credit - 33,150
Principal payments on revolving lines of credit - (63,150)
Proceeds under line of credit - 308
Principal payments on line of credit - (1,373)
Proceeds from long-term real estate liabilities - 170
Principal payments on long-term real estate liabilities (383) (351)
Proceeds from sale-leaseback transaction - 3,000
Principal payments on capital leases (3,775) (3,374)
Increase (decrease) in book overdrafts 4,710 (3,719)
Deferred financing fees (21) (64)
Dividends paid on preferred stock (7,000) -
Proceeds from stock options exercised 28 1
----------- -----------
Net cash used in financing activities (5,710) (35,495)
----------- -----------
Net decrease in cash and cash equivalents (81,664) (55,878)
Cash and cash equivalents at beginning of period 252,426 175,375
----------- -----------
Cash and cash equivalents at end of period $ 170,762 $ 119,497
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 42,680 $ 44,354
=========== ===========
Cash paid during the year for income taxes $ 117 $ 4,292
=========== ===========
See Notes to Consolidated Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Cash Flows - Continued
(Dollars in thousands)
(Unaudited)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
---------------------------------------------------------------------------
16 Weeks Ended
---------------------------------------
June 19, 2010 June 20, 2009
------------- -------------
Depreciation and amortization $ 70,379 $ 77,788
Impairment of long-lived assets 5,890 1,056
Nonoperating (income) loss (8,277) 1,875
Non-cash interest expense 12,785 12,877
Stock compensation (income) expense (861) 2,853
Pension withdrawal costs - 2,445
Employee benefit related costs 1,965 -
LIFO adjustment 856 1,238
Asset disposition initiatives in the normal course of business - (809)
Asset disposition initiatives relating to discontinued operations 4 (203)
Non-cash occupancy charges for stores closed in the normal course of business 466 1,260
Loss (gain) on disposal of owned property and write-down of property, net 1,025 (3,256)
Gain on disposal of discontinued operations (79) -
Amortization of deferred real estate income (1,371) (1,504)
------------ -----------
Total non-cash adjustments to net loss $ 82,782 $ 95,620
=========== ===========
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. Basis of Presentation
The accompanying Consolidated Statements of Operations, Consolidated Statements
of Stockholders' Deficit and Comprehensive Loss, and Consolidated Statements of
Cash Flows for the 16 weeks ended June 19, 2010 and June 20, 2009, and the
Consolidated Balance Sheets at June 19, 2010 and February 27, 2010 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 2009 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")
Accounting Standards Update ("ASU") relating to accounting for share lending
agreements entered into in contemplation of a convertible debt issuance.
During the first quarter of fiscal 2010, our operating results were
significantly below those for the prior year and our expectations. Therefore, to
improve our performance and to meet our liquidity needs over the next twelve
months, including the debt maturity of $165.0 million on June 15, 2011, our
Company announced a comprehensive operational and revenue-driven turnaround
strategy and is pursuing several new financing initiatives. Financing
initiatives include incremental financing through our bank facility,
sale-leaseback transactions and the sale of certain non-core assets. However,
the completion of all or a portion of these efforts cannot be assured nor can we
be assured that such efforts will be sufficient to meet our liquidity needs. In
addition, the availability and cost of financing to our Company could be
adversely affected if our results of operations do not improve, by future
changes in our credit ratings, or by a decline in capital market conditions.
Significant Accounting Policies
-------------------------------
A summary of our significant accounting policies may be found in our Annual
Report on Form 10-K for the year ended February 27, 2010. There have been no
significant changes in these policies during the 16 weeks ended June 19, 2010.
2. Impact of New Accounting Pronouncements
Newly Adopted Accounting Pronouncements
---------------------------------------
Share Lending Arrangements. In June 2009, the FASB issued new guidance on
accounting for one's own-share lending arrangements entered into in
contemplation of a convertible debt issuance or other financing, which requires
share lending arrangements to be measured at fair value and recognized as a debt
issuance cost, and amortized using the effective interest method over the life
of the financing arrangement as interest cost. The loaned shares are excluded
from basic and diluted earnings per share, unless a default occurs. When a
default becomes probable, expense equal to the fair value of the unreturned
loaned shares, net of any probable recoveries, must be recognized. This guidance
is effective beginning with our fiscal 2010,
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
with retrospective application required. The fair values of our share lending
agreements with the Bank of America and Lehman Europe were immaterial at
inception. Our share lending arrangement with Lehman Europe, who is a party to a
3,206,058 share lending agreement with our Company, is subject to this default
provision guidance as a result of their September 15, 2008 bankruptcy filing. In
connection with Lehman Europe's default, during the first quarter of fiscal
2010, we recorded a retrospective adjustment of $28.3 million to our third
quarter of fiscal 2008 financial statements by charging "Store operating,
general and administrative expense" and crediting "Additional paid-in-capital",
which represents the fair value of the unreturned shares at September 15, 2008.
This expense is reflected in our Consolidated Balance Sheets as of February 27,
2010 and June 19, 2010 as an adjustment to opening "Accumulated deficit" and
"Additional paid-in capital". We have been including the loaned shares in our
Company's basic and diluted earnings per share since September 15, 2008.
Variable Interest Entities. In June 2009, the FASB issued new accounting
guidance relating to consolidation of variable interest entities ("VIEs"), which
amends the current accounting guidance for determining whether an entity is a
VIE and defining the primary beneficiary. This guidance also requires additional
disclosures relating to involvement with a VIE. We adopted this guidance during
the first quarter of our fiscal 2010. The adoption of this guidance did not have
a material effect on our Consolidated Financial Statements and disclosures.
Fair Value Measurements. In January 2010, the FASB issued new accounting
guidance requiring additional disclosures about the different classes of assets
and liabilities measured at fair value, valuation techniques and inputs used,
the activity in Level 3 fair value measurements, and the transfers between
Levels 1 and 2. It also clarified guidance around disaggregation and disclosures
of inputs and valuation techniques for Level 2 and Level 3 fair value
measurements. The current guidance is effective beginning with the first quarter
of our fiscal 2010, except for the new disclosures relating to the Level 3
reconciliation, which are effective for the first quarter of our fiscal 2011.
Refer to Note 4 - Fair Value Measurements for our Company's fair value
measurements and disclosures.
3. 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 that
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.
Goodwill
During the first quarter of fiscal 2010, our operating results for our Fresh and
Pathmark segments were significantly below those for the prior year and our
expectations. These declines led to revised short-term and long-term operating
forecasts that were significantly lower than previously expected as of the end
of fiscal 2009. All of this resulted in substantially decreased fair values from
the fair values we used in conjunction with our annual test conducted during the
fourth quarter of fiscal 2009. Accordingly, during the first quarter of fiscal
2010, we concluded that an interim triggering event had occurred requiring us to
test the goodwill of the A&P and Waldbaum's reporting units, representing the
remaining goodwill balance within our Fresh reportable segment, for impairment.
(The Pathmark reporting unit does not have goodwill.) We determined that a
triggering event did not occur for the reporting units comprising our Gourmet
and Other reportable segments, as the operating results of these reporting units
have been largely consistent with our expectations.
As a result, we performed an evaluation to determine whether any portion of the
remaining $65.6 million and $31.5 million goodwill balance attributable to the
A&P and Waldbaum's reporting units, respectively, had been impaired. We
performed the first step of the goodwill impairment testing by estimating the
fair value of the A&P and Waldbaum's reporting units using a net present value
methodology, which included assumptions for reduced short-term revenue and cash
flow from operations based on recent trends, partially offset by an estimate for
improvements expected to be delivered by fiscal 2011, and a perpetual growth
rate for cash flow in the terminal year of approximately 1.5%. We assumed a
market-based weighted average cost of capital of 11.0% to discount the cash
flows and a blended tax rate of 42.0%. Our analysis showed that goodwill was not
impaired. The fair value of the A&P reporting unit exceeded its carrying value
by approximately 50%; whereas, the Waldbaum's reporting unit exceeded its
carrying value by approximately 10%. We may need to perform an impairment test
in future quarters for our Waldbaum's reporting units if long-term projected
cash flows from operations decrease by 20 basis points or if other key
assumptions used in our fair value calculation change.
We believe that our estimates are appropriate based on our current trends.
However, we can provide no assurance that we will not be required to make
adjustments to goodwill in the future due to market conditions or other factors
related to our performance, including a decline in our forecasted results
resulting from changes in projected on-going profitability, our capital
investment budgets or changes in our interest rates.
The carrying amount of our goodwill was $115.2 million at June 19, 2010 and
February 27, 2010. Our goodwill allocation by segment at June 19, 2010 and
February 27, 2010 was as follows:
Fresh Pathmark Gourmet Other Total
--------- -------- ------- ------ ---------
Goodwill $120,817 $321,840 $12,110 $5,974 $460,741
Accumulated impairment losses (23,704) (321,840) - - (345,544)
-------- -------- ------- ------ --------
$ 97,113 $ - $12,110 $5,974 $115,197
Intangible Assets, net
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 June 19, 2010 Feb. 27, 2010
-------------- ------ ------------------ ----------------
Pathmark trademark Indefinite $ 60,900 $ - $ -
Loyalty card customer relationships 5 19,200 8,894 7,595
In-store advertiser relationships 20 14,720 1,868 1,642
Pharmacy payor relationships 13 75,000 14,645 12,870
----------- ------------ --------------
Total $ 169,820 $ 25,407 $ 22,107
=========== ============ ==============
During the first quarter of fiscal 2010, based on the magnitude of unexpected
operating losses and changes in management's forecasts for our Pathmark
reporting unit, we determined that there was an interim triggering event
requiring us to evaluate the intangible assets of the Pathmark reporting unit
for possible impairment.
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 fair value of the Pathmark trademark using the
relief-from-royalty method. The fair value of the Pathmark trademark
exceeded its carrying value, resulting in no impairment. We believe that our
estimates are appropriate based on our current trends. However, we can provide
no assurance that we will not be required to make adjustments to the carrying
value of the Pathmark trademark in future periods if revenues differ from our
current projections. We will perform our annual trademark impairment testing
during the fourth quarter of fiscal 2010. We currently estimate that the fair
value of our trademark would decrease by approximately $20 million for each 100
basis point increase in the discount rate and by approximately $6 million for
each 10% decline in revenue from our current projections.
We also evaluated the expected undiscounted cash flows of the Pathmark reporting
unit compared to the net book value of the reporting unit, noting no impairment
of our amortizable intangible assets. We believe that our estimates are
appropriate based on our current assumptions. However, we may be required to
record future impairment charges if our results in future periods differ
materially from our current projections.
Amortization expense relating to our intangible assets for the first quarter of
fiscal 2010 and 2009 was $3.3 million during each period.
The following table summarizes the estimated future amortization expense for our
finite-lived intangible assets:
2010 $ 7,425
2011 10,725
2012 9,670
2013 6,505
2014 6,505
Thereafter 42,683
4. Fair Value Measurements
The accounting guidance for fair value measurement defines and establishes a
framework for measuring fair value. Inputs used to measure fair value are
classified based on the following three-tier fair value hierarchy:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Directly or indirectly observable inputs other than Level 1 quoted
prices in active markets. Our Level 2 liabilities include warrants, which are
valued using the Black Scholes pricing model with inputs that are observable or
can be derived from or corroborated by observable market data. In addition, our
investments in money market funds, which are considered cash equivalents, are
classified as Level 2, as they are valued based on their reported Net Asset
Value (NAV).
Level 3 - Unobservable inputs that are supported by little or no market activity
whose value is determined using pricing models, discounted cash flows, or
similar methodologies, as well as instruments for which the determination of
fair value requires significant judgment or estimation.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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 June 19, 2010 and February 27, 2010:
Fair Value Measurements at June 19, 2010 Using
-----------------------------------------------
Quoted Prices Significant Other Significant
Total Carrying in Active Observable Unobservable
Value at Markets Inputs Inputs
June 19, 2010 (Level 1) (Level 2) (Level 3)
----------------- ------------- ------------- ------------
Assets:
-------
Cash equivalents $ 71,855 $ - $ 71,855 $ -
================= ============= ============= ============
Liabilities:
------------
Series B Warrant $ 5,669 $ - $ 5,669 $ -
================= ============= ============= ============
Fair Value Measurements at Feb. 27, 2010 Using
------------------------------------------------
Quoted Prices Significant Other Significant
Total Carrying in Active Observable Unobservable
Value at Markets Inputs Inputs
Feb. 27, 2010 (Level 1) (Level 2) (Level 3)
----------------- ------------- ------------- ------------
Assets:
-------
Cash equivalents $ 158,695 $ - $ 158,695 $ -
================= ============= ============= ============
Liabilities:
------------
Series B Warrant $ 13,946 $ - $ 13,946 $ -
================= ============= ============= ============
There were no transfers in and out of Level 1 and Level 2 fair value
measurements during the 16 weeks ended June 19, 2010.
Level 3 Valuations
------------------
We did not have any financial assets or liabilities classified as Level 3 within
the fair value hierarchy as of June 19, 2010 and February 27, 2010.
Nonfinancial Assets and Liabilities Measured on a Nonrecurring Basis. Fair value
measurements of our nonfinancial assets and nonfinancial liabilities on a
nonrecurring basis using Level 3 inputs are primarily used in the impairment
analyses of our goodwill and other indefinite-lived intangible assets, our
long-lived assets and closed store occupancy costs. Refer to Note 3 - Goodwill
and Other Intangible Assets for further information relating to the carrying
value of our goodwill and other intangible assets. Long-lived assets and closed
store occupancy costs were measured at fair value on a nonrecurring basis using
Level 3 inputs, as unobservable inputs were used to measure their fair value.
Refer to Note 5 - Valuation of Long-Lived Assets, Note 14 - Discontinued
Operations and Note 15 - Asset Disposition Initiatives for more information
relating to the valuation of these assets and liabilities.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Long-Term Debt
--------------
The following table provides the carrying values recorded on our balance sheet
and the estimated fair values of financial instruments as of June 19, 2010 and
February 27, 2010:
At June 19, 2010 At February 27, 2010
--------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------- ------------- ------------- -------------
Current portion of long-term debt $ 157,944 $ 157,018 $ 191 $ 191
Long-term debt, net of related discount 838,844 756,915 990,359 962,040
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.
5. Valuation of Long-Lived Assets
We review the carrying values of our long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable.
Impairments due to closure or conversion in the normal course of business
We review assets in stores planned for closure or conversion for impairment upon
determination that such assets will not be used for their intended useful life.
During the 16 weeks ended June 19, 2010 and June 20, 2009, we recorded
impairment losses on long-lived assets of $0.5 million and $1.1 million,
respectively, related to stores that were closed or converted in the normal
course of business. These amounts were recorded within "Store operating, general
and administrative expense" in our Consolidated Statements of Operations.
Impairments due to unrecoverable assets
During the 16 weeks ended June 19, 2010, as a result of experiencing cash flow
losses within certain stores, we determined that a triggering event had occurred
that required us to test the related long-lived assets for potential impairment.
The carrying value was not recoverable from their undiscounted future cash
flows. As a result, we recorded an impairment charge of $5.4 million to
partially write down these stores' long-lived assets, which primarily consist of
favorable leases and capital leases, with a carrying amount of $40.5 million to
their fair value of $35.1 million. These impairment charges, $4.5 million of
which related to Pathmark and $0.9 million of which related to SuperFresh, were
recorded within "Long-lived asset impairment" in our Consolidated Statements of
Operations.
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense. We will continue to monitor our operating results in
future periods to determine whether additional impairment testing is warranted
for any of our stores experiencing operating losses. We may have to record
additional impairments of long-lived assets in the future.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
6. Other Accruals
Other accruals at June 19, 2010 and February 27, 2010 were comprised of the
following:
At At
June 19, 2010 Feb. 27, 2010
------------- -------------
Self-insurance reserves $ 72,605 $ 74,221
Deferred taxes 5,058 3,295
Closed store and warehouse reserves 58,897 62,189
Pension withdrawal liabilities 10,461 10,461
GHI Contractual Liability 8,087 8,066
Accrued occupancy related costs for open stores 24,734 26,952
Deferred income 26,585 26,534
Deferred real estate income 2,684 2,775
Accrued audit, legal and other 9,576 8,758
Accrued interest 19,628 12,509
Other postretirement and postemployment benefits 2,674 2,674
Accrued advertising 1,043 1,911
Dividends payable on preferred stock 290 2,982
Other 2,601 3,189
----------- -----------
Total $ 244,923 $ 246,516
=========== ===========
7. Other Non-Current Liabilities
Other non-current liabilities at June 19, 2010 and February 27, 2010 were
comprised of the following:
At At
June 19, 2010 Feb. 27, 2010
----------------- -------------
Deferred taxes $ 9,603 $ 11,367
Self-insurance Reserves 205,304 208,419
Closed Store and Warehouse Reserves 178,131 187,911
Pension Withdrawal Liabilities 88,012 89,495
GHI Contractual Liability for Employee Benefits 87,771 87,703
Pension Plan Benefits 111,194 109,549
Other Postretirement and Postemployment Benefits 36,286 36,091
Corporate Owned Life Insurance Liability 59,342 60,436
Deferred Rent Liabilities 58,454 57,963
Deferred Income 63,446 68,250
Unfavorable Lease Liabilities 5,101 5,391
Other 12,263 13,634
----------- -----------
Total $ 914,907 $ 936,209
=========== ===========
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
8. Indebtedness and Other Financial Liabilities
Our debt obligations at June 19, 2010 and February 27, 2010 consisted of the
following:
At At
June 19, 2010 Feb. 27, 2010
------------- -------------
5.125% Convertible Senior Notes, due June 15, 2011 $ 157,677 $ 155,333
Related Party Promissory Note, due August 18, 2011 10,000 10,000
9.125% Senior Notes, due December 15, 2011 12,840 12,840
6.750% Convertible Senior Notes, due December 15, 2012 226,741 223,838
11.375% Senior Secured Notes, due August 4, 2015 253,928 253,668
9.375% Notes, due August 1, 2039 200,000 200,000
Borrowings under Credit Agreement 132,900 132,900
Other 2,702 1,971
----------- -----------
996,788 990,550
Less current portion of long-term debt (157,944)* (191)
----------- ------------
Long-term debt $ 838,844 $ 990,359
=========== ===========
* Primarily represents our obligation relating to the $165.0 million 5.125%
Convertible Senior Notes, due June 15, 2011, which is recorded at a discount.
Credit Agreement
----------------
On July 23, 2009, we entered into an amended $655.0 million Credit Agreement
("Credit Agreement") with Banc of America Securities LLC and Bank of America,
N.A., as the co-lead arranger ("Credit Agreement") in connection with our
private offering of senior secured notes and the sale of preferred stock. The
Credit Agreement expires in December 2012. Subject to borrowing base
requirements, the Credit Agreement provides for a term loan of $82.9 million, a
term loan of $50.0 million and a revolving credit facility of $522.1 million
enabling us to borrow funds and issue letters of credit on a revolving basis.
The Credit Agreement also provides for an increase in commitments of up to an
additional $100.0 million, subject to agreement of new and existing lenders. Our
obligations under the Credit Agreement are secured by certain assets of our
Company, including, but not limited to, inventory, certain accounts receivable,
pharmacy scripts and certain owned real estate. Borrowings under the Credit
Agreement bear interest based on LIBOR or Prime interest rate pricing. The terms
of this agreement restrict our ability to pay cash dividends on common shares.
Subject to certain conditions, we are permitted to make bond repurchases and may
do so from time to time in the future.
At June 19, 2010, there were $132.9 million of loans and $200.8 million in
letters of credit outstanding under the Credit Agreement. At June 19, 2010,
after reducing availability for borrowing base requirements, we had $183.0
million available under the Amended Credit Agreement. In addition, we have
invested cash available to reduce borrowings under this Credit Agreement or to
use for future operations of $70.3 million as of June 19, 2010. The remainder of
our cash is in-transit or is used in our stores for operations.
Warrants
--------
Our Series B warrants issued as part of the acquisition of Pathmark on December
3, 2007, are exercisable at $32.40 and expire on June 9, 2015. The Tengelmann
stockholders have the right to approve any issuance of common stock under these
warrants upon exercise (assuming Tengelmann's outstanding interest is at least
25% and subject to liquidity impairments defined within the Tengelmann
Stockholder Agreement). In
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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.
The value of the Series B warrants as of June 19, 2010 and February 27, 2010 was
$5.7 million and $13.9 million, respectively, and is included in "Other
financial liabilities" on our Consolidated Balance Sheets. Our "Nonoperating
income (loss)" for the 16 weeks ended June 19, 2010 and June 20, 2009 was
comprised of gains of $8.3 million and losses of $1.9 million, respectively,
relating to the market value adjustment for the Series B warrants. The following
assumptions and estimates were used in the Black-Scholes model used to value the
Series B warrants:
June 19, 2010 February 27, 2010
------------- -----------------
Expected life 4.97 years 5.28 years
Volatility 69.6% 68.6%
Dividend yield range 0% 0%
Risk-free interest rate 2.04% 2.30%
Call Option and Financing Warrants
----------------------------------
On or about October 3, 2008, Lehman Brothers OTC Derivatives, Inc. or "LBOTC,"
which accounts for 50% of our call option and financing warrant transactions,
filed for bankruptcy protection, which is an event of default under such
transactions. We are carefully monitoring the developments affecting LBOTC,
noting the impact of the LBOTC bankruptcy effectively reduced conversion prices
for 50% of our convertible senior notes to their stated prices of $36.40 for the
5.125% Notes and $37.80 for the 6.750% Notes. In the event we terminate these
transactions, or they are canceled in bankruptcy, or LBOTC otherwise fails to
perform its obligations under such transactions, we would have the right to
monetary damages in the form of an unsecured claim against LBOTC in an amount
equal to the present value of our cost to replace these transactions with
another party for the same period and on the same terms.
9. Redeemable Preferred Stock
On August 4, 2009, our Company issued 60,000 shares of 8.0% Cumulative
Convertible Preferred Stock, Series A-T, without par value, to affiliates of
Tengelmann Warenhandelsgesellschaft KG ("Tengelmann") and 115,000 shares of 8.0%
Cumulative Convertible Preferred Stock, Series A-Y, without par value, to
affiliates of Yucaipa Companies LLC ("Yucaipa"), together referred to as the
"Preferred Stock," for approximately $162.8 million, after deducting
approximately $12.2 million in closing and issuance costs. Each share of the
Preferred Stock has an initial liquidation preference of one thousand dollars,
subject to adjustment.
The Preferred Stock issuance was classified within temporary stockholders equity
in our Consolidated Balance Sheets as of June 19, 2010 and February 27, 2010.
Holders of Preferred Stock are entitled to an 8.0% dividend, payable quarterly
in arrears in cash or in additional shares of Preferred Stock if our
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Company does not meet the liquidity levels required to pay the dividends. If our
Company makes a dividend payment in additional shares of Preferred Stock, the
Preferred Stock shall be valued at the liquidation preference of the Preferred
Stock and the dividend rate will be 8.0% plus 1.5%. During the 16 weeks ended
June 19, 2010, we accrued Preferred Stock dividends of $4.3 million and paid
Preferred Stock cash dividends of $7.0 million. In addition, during the 16 weeks
ended June 19, 2010, we recorded deferred financing fees amortization of $0.5
million and accreted $1.5 million relating to the embedded beneficial conversion
features within "Additional paid-in capital".
In connection with our Preferred Stock issuance, we were required to register
all of the shares of common stock beneficially owned by Tengelmann and Yucaipa,
including the shares issuable upon conversion of the convertible preferred
stock, no later than February 6, 2010. Such filing was not made by the required
date. According to our shareholder agreements with Tengelmann and Yucaipa, we
are required to pay liquidated damages for each day we are in default, at a rate
equivalent to 1% of the value of the related shares per year. This default was
cured upon filing the required registration statement on May 6, 2010. Tengelmann
and Yucaipa have agreed to waive the liquidated damages due to them for failure
to timely file the registration statement, the amount of which was not material.
10. Stock Based Compensation
At June 19, 2010, 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 2009 Annual
Report on Form 10-K.
The components of our compensation (income) expense related to stock-based
incentive plans were as follows:
For the 16 Weeks Ended
------------------------------
June 19, 2010 June 20, 2009
------------- -------------
Stock options (368) 373
Restricted stock units 231 115
Performance restricted stock units (973) 2,171
Common stock granted to Directors 249 194
-------------- -------------
Total stock-based compensation (income) expense * $ (861) $ 2,853
============== =============
-------------------------------
* The stock compensation income recorded during the 16 weeks ended June 19, 2010
primarily relates to increased forfeitures.
There were no stock-based grants during the 16 weeks ended June 19, 2010.
Stock options. As of June 19, 2010, approximately $2.6 million, after tax, of
total unrecognized compensation expense related to unvested stock option awards,
will be recognized over a weighted average period of 2.0 years.
Restricted Stock. The total fair value of restricted stock units that vested
during the 16 weeks ended June 19, 2010 was $1.3 million. As of June 19, 2010,
approximately $3.2 million, net of tax, of total unrecognized compensation
expense relating to restricted stock units granted during fiscal 2009, is
expected to be recognized through fiscal 2013.
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. None of the previously granted performance
restricted stock units vested during the 16 weeks ended June 19, 2010, since the
related performance conditions have not been achieved. We are currently not
recognizing stock compensation expense for any of our non-integration related
grants due to our determination that the related performance conditions will not
be achieved. As of June 19, 2010, we expect to recognize approximately $1.6
million of unrecognized fair value compensation expense for performance
restricted stock units granted under our fiscal 2007 executive and non-executive
Integration Programs, through fiscal 2011, based on estimates of attaining
vesting criteria.
11. Retirement Plans and Benefits
Defined Benefit Plans
The components of our net pension cost were as follows:
For the 16 Weeks Ended
--------------------------------
June 19, 2010 June 20, 2009
-------------- -------------
Service cost $ 2,158 $ 2,023
Interest cost 8,929 8,819
Expected return on plan assets (8,853) (7,611)
Amortization of:
Net prior service cost 81 91
Actuarial loss 585 1,435
Special Termination benefits 50 400
----------- ---------
Net pension cost $ 2,950 $ 5,157
=========== =========
As of June 19, 2010, we contributed approximately $2.2 million to our defined
benefit plans. We plan to contribute approximately $4.8 million to our plans
during the remainder of fiscal 2010.
Postretirement Plans
The components of our net postretirement benefits cost were as follows:
For the 16 Weeks Ended
-------------------------------
June 19, 2010 June 20, 2009
------------- -------------
Service cost $ 201 $ 156
Interest cost 571 599
Amortization of:
Prior service credit (264) (415)
Actuarial gain (150) (252)
----------- ---------
Net postretirement benefits cost $ 358 $ 88
=========== =========
In March 2010, the Patient Protection and Affordable Care and the Health Care
and Education Affordability Reconciliation Acts (the "Healthcare Reform") were
signed into law. The Healthcare Reform legislation made a number of significant
changes that are expected to increase our healthcare related postretirement
benefit costs in the future, which include the elimination of lifetime maximums
on healthcare benefits, a requirement to provide healthcare coverage for
children up to the age of 26, and the imposition of an exercise tax on high cost
healthcare plans. In June 2010, we performed a preliminary analysis to quantify
the potential impact of the major provisions of the Healthcare Reform using
census data and other assumptions consistent with the calculation of our
postretirement obligation as of February 27, 2010. Based on this analysis, we
determined that the impact of the healthcare legislation is expected to be below
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
5% of our Accumulated Postretirement Benefit Obligation, which was not deemed
significant enough to require remeasurement during the first quarter of our
fiscal 2010. Our current estimates are subject to change due to changes in
actuarial assumptions and further clarifications provided by additional
regulatory guidance expected to be released later this year and in future years.
We will perform a comprehensive valuation and will reflect the impact of the
Healthcare Reform on our postretirement benefits obligation during the fourth
quarter of our fiscal 2010.
GHI Contractual Obligation
As of June 19, 2010 and February 27, 2010, the fair value of our contractual
obligation to Grocery Hauler Inc.'s (GHI's) employees was $95.9 million and
$95.8 million, respectively, using discount rates of 5.500% and 5.750%,
respectively, which were derived from the published zero-coupon AA corporate
bond yields. Our contractual obligation relates to pension benefits for GHI's
employees and 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 16 weeks ended June 19, 2010 and June 20, 2009, we
recognized service costs of $0.2 million during each period, and interest
expense of $4.4 million and $6.4 million, respectively, representing interest
accretion on this obligation, as well as the impact of the lower discount rates
used to value this obligation, resulting from declines in the published
zero-coupon AA corporate bond yields during each period. During the 16 weeks
ended June 19, 2010, benefit payments of $4.6 million were made by the Pathmark
Pension Plan.
Multi-employer Union Pension Plans
We participate in various multi-employer pension plans which are administered
jointly by management and union representatives. During the fourth quarter of
fiscal 2008, we made a standard withdrawal from one of our multi-employer
pension plans, to limit our pension benefit obligation to our employees, as we
believed that this plan was likely to have funding challenges and would require
higher contributions in the future, and recorded standard withdrawal liability
of $28.9 million. During the first quarter of fiscal 2010, we received
preliminary information indicating that the trustees of the multi-employer
pension plan have voted to go into a mass withdrawal. Formal notification has
not been received. Based on the preliminary information, we may have a potential
additional withdrawal obligation of up to $50 million payable over a period of
up to 25 years in the future. This preliminary estimate is subject to change due
to the uncertainty as to the number of participants that will be subject to mass
withdrawal and the finalization of asset values and calculations by the
multi-employer pension plan.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
12. Interest Expense, net
Interest expense is comprised of the following:
For the 16 Weeks Ended
------------------------------
June 19, 2010 June 20, 2009
------------- -------------
$655.0 million Credit Agreement $ 4,005 $ 6,170
Related Party Promissory Note, due August 2, 2011 187 183
11.375% Senior Secured Notes, due August 1, 2015 9,150 -
9.125% Senior Notes, due December 15, 2011 360 360
5.125% Convertible Senior Notes, due June 15, 2011 2,601 2,602
6.750% Convertible Senior Notes, due December 15, 2012 5,295 5,296
9.375% Notes, due August 1, 2039 5,815 5,844
Capital Lease Obligations and Real Estate Liabilities 15,442 16,083
Self Insurance and GHI Interest 5,119 4,682
GHI discount rate adjustment and COLI non-cash interest 3,889 5,645
Amortization of Deferred Financing Fees and Discounts 8,734 7,233
Other 575 150
----------- -----------
Total Interest Expense 61,172 54,248
Interest income (30) (41)
----------- ------------
Interest expense, net $ 61,142 $ 54,207
=========== ===========
13. Income Taxes
During the 16 weeks ended June 19, 2010 and June 20, 2009, our valuation
allowance increased by $48.6 million and $23.9 million, respectively, to reflect
generation of additional operating losses. 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 June 19, 2010, with a few
exceptions, we remain subject to examination by federal, state and local tax
authorities for tax years 2004 through 2008. With a few exceptions, we are no
longer subject to federal, state or local examinations by tax authorities for
tax years 2003 and prior. At June 19, 2010 and February 27, 2010, we had
unrecognized tax benefits of $1.4 million, which were recorded within deferred
tax liabilities in "Other accruals". We do not expect that the amount of our
gross unrecognized tax positions will change significantly in the next 12
months. Any future decrease in our Company's gross unrecognized tax positions
would require a reevaluation of our Company's valuation allowance maintained on
our net deferred tax asset and, therefore, is not expected to affect our
effective tax rate. Our Company classifies interest and penalty expense related
to unrecognized tax benefits within "Benefit from (provision for) income taxes"
in our Consolidated Statements of Operations. For the 16 weeks ended June 19,
2010 and June 20, 2009, no amounts were recorded for interest and penalties
within "Provision for income taxes" in our Consolidated Statements of
Operations.
The effective tax rate on continuing operations of 0.1% and 0.7%,
respectively, for the 16 weeks ended June 19, 2010 and June 20, 2009,
respectively, varied from the statutory rate of 35%, primarily due to state and
local income taxes, the increase in our valuation allowance and the impact of
the Pathmark financing.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
At June 19, 2010, we had federal Net Operating Loss ("NOL") carryforwards of
$773.8 million, which will expire between fiscal 2023 and 2030, some of which
are subject to an annual limitation. The federal NOL carryforwards include $7.4
million related to the excess tax deductions for stock option plans that have
yet to reduce income taxes payable. Upon utilization of these carryforwards, the
associated tax benefits of approximately $2.6 million will be recorded in
"Additional paid-in capital". In addition, we had state loss carryforwards of
$1.0 billion that will expire between fiscal 2010 and fiscal 2030. Our Company's
general business credits consist of federal and state work incentive credits,
which expire between fiscal 2010 and fiscal 2030, some of which are subject to
an annual limitation.
At June 19, 2010 and February 27, 2010, we had net current deferred tax
liabilities of $5.1 million and $3.3 million, respectively, which were included
in "Other Accruals" in our Consolidated Balance Sheets and non-current deferred
tax liabilities of $9.6 million and $11.4 million, respectively, which were
recorded in "Other non-current liabilities" in our Consolidated Balance Sheets.
14. 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.
Summarized below is a reconciliation of the liabilities related to restructuring
obligations resulting from these activities.
For the 16 Weeks Ended June 19, 2010
-------------------------------------------------------------------------------------
Balance at Interest Balance at
2/27/2010 Accretion (1) Adjustments(2) Utilization(3) 6/19/2010
--------------- --------------- --------------- -------------- ---------------
2007 Events
-----------
Occupancy $ 96,909 $ 2,334 $ - $ (6,518) $ 92,725
Pension withdrawal 58,015 1,107 - (1,779) 57,343
--------------- -------------- --------------- -------------- ---------------
2007 events total 154,924 3,441 - (8,297) 150,068
2005 Event
----------
Occupancy 58,974 983 - (3,009) 56,948
2003 Events
-----------
Occupancy 22,494 420 - (1,127) 21,787
--------------- -------------- --------------- -------------- ---------------
Total $ 236,392 $ 4,844 $ - $ (12,433) $ 228,803
=============== ============== =============== =============== ===============
(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 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 business" on our Consolidated Statements of Operations.
(3) Occupancy utilization represents payments made during those periods
for rent, common area maintenance and real estate taxes. Pension
withdrawal utilization represents payments made to the union pension
fund 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:
2007 Events 2005 Event 2003 Events Total
--------------- --------------- -------------- ----------------
Total severance payments made to date $ 34,866 $ 2,650 $ 22,528 $ 60,044
Expected future pension withdrawal payments 57,343 - - 57,343
-------------- --------------- ------------- ---------------
Total severance and pension withdrawal payments
expected to be incurred 92,209 2,650 $ 22,528 117,387
-------------- --------------- ------------- ---------------
Total occupancy payments made to date 87,098 60,220 33,874 181,192
Expected future occupancy payments,
excluding interest accretion 92,725 56,948 21,787 171,460
-------------- --------------- ------------- ---------------
Total occupancy payments expected to be incurred,
excluding interest accretion 179,823 117,168 55,661 352,652
-------------- --------------- -------------- ---------------
Total severance and occupancy payments made to date 121,964 62,870 56,402 241,236
Expected future pension withdrawal and occupancy payments,
excluding interest accretion 150,068 56,948 21,787 228,803
-------------- --------------- ------------- ---------------
Total severance, pension withdrawal and occupancy payments
expected to be incurred, excluding interest accretion $ 272,032 $ 119,818 $ 78,189 $ 470,039
============== =============== ============= ===============
Payments to date were primarily for occupancy related costs such as rent, common
area maintenance, real estate taxes, lease termination costs, severance, and
benefits. The remaining obligation relates to expected future payments under
long term leases and expected future payments for early withdrawal from
multi-employer union pension plans. The expected completion dates for the 2007,
2005 and 2003 events are 2028, 2022 and 2022, respectively.
Summarized below are the amounts included in our balance sheet captions on our
Company's Consolidated Balance Sheets related to these events:
June 19, 2010
-----------------------------------------------------------------
2007 Events 2005 Event 2003 Events Total
--------------- --------------- --------------- ---------------
Other accruals $ 26,142 $ 10,280 $ 3,396 $ 39,818
Other non-current liabilities $ 123,926 $ 46,668 $ 18,391 $ 188,985
February 27, 2010
-----------------------------------------------------------------
2007 Events 2005 Event 2003 Events Total
--------------- --------------- --------------- ---------------
Other accruals $ 28,528 $ 10,773 $ 3,490 $ 42,791
Other non-current liabilities $ 126,396 $ 48,201 $ 19,004 $ 193,601
We evaluated the reserve balances as of June 19, 2010 based on current
information and have concluded that they are adequate to cover future costs. We
will continue to monitor the status of the vacant and subsidized properties,
severance and benefits, and pension withdrawal liabilities, and adjustments to
the reserve balances may be recorded in the future, if necessary.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
15. Asset Disposition Initiatives
In addition to the events described in Note 14 - 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.
Summarized below is a reconciliation of the liabilities related to restructuring
obligations resulting from these activities:
For the 16 Weeks Ended June 19, 2010
-------------------------------------------------------------------------------------
Balance at Interest Balance at
2005 Event 2/27/2010 Accretion (1) Adjustments(2) Utilization(3) 6/19/2010
---------- --------------- --------------- --------------- -------------- ---------------
Continuing Operations
Health benefits $ 687 $ - $ - $ (91) $ 596
--------------- -------------- --------------- -------------- ---------------
2005 event total 687 - - (91) 596
2001 Event
----------
Continuing Operations
Occupancy 6,324 127 593 (366) 6,678
Discontinued Operations
Occupancy 10,009 177 - (426) 9,760
--------------- -------------- --------------- -------------- ---------------
2001 event total 16,333 304 593 (792) 16,438
1998 Event
----------
Continuing Operations
Occupancy 4,098 27 - (397) 3,728
Pension withdrawals and health benefits 666 - - (41) 625
Discontinued Operations
Occupancy 13 - - - 13
--------------- -------------- --------------- -------------- ---------------
1998 event total 4,777 27 - (438) 4,366
--------------- -------------- --------------- -------------- ---------------
Total $ 21,797 $ 331 $ 593 $ (1,321) $ 21,400
=============== ============== =============== ============== ===============
(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 businesses" 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 businesses" for
discontinued operations on our Consolidated Statements of Operations.
For the 16 Weeks Ended June 19, 2010
------------------------------------
For the 16 weeks ended June 19, 2010, we recorded an adjustment for
additional occupancy related costs of $0.6 million for the 2001 event
due to the timing of real estate tax income received from subtenants
of two properties.
(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 Event 2001 Event 1998 Event Total
--------------- --------------- --------------- --------------
Total severance payments made to date $ 49,086 $ 28,205 $ 30,839 $ 108,130
Expected future severance payments 596 - 625 1,221
--------------- -------------- --------------- -------------
Total severance payments expected
to be incurred 49,682 28,205 31,464 109,351
--------------- -------------- --------------- -------------
Total occupancy payments made to date 13,856 66,574 119,589 200,019
Expected future occupancy payments,
excluding interest accretion - 16,438 3,741 20,179
--------------- -------------- --------------- -------------
Total occupancy payments expected
to be incurred, excluding interest
accretion 13,856 83,012 123,330 220,198
--------------- -------------- --------------- -------------
Total severance and occupancy
payments made to date $ 62,942 $ 94,779 $ 150,428 $ 308,149
Expected future severance and
occupancy payments, excluding
interest accretion 596 16,438 4,366 21,400
--------------- -------------- --------------- -------------
Total severance and occupancy payments
expected to be incurred, excluding
interest accretion $ 63,538 $ 111,217 $ 154,794 $ 329,549
=============== ============== =============== =============
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:
June 19, 2010
---------------------------------------------------------------------
2005 Event 2001 Event 1998 Event Total
--------------- --------------- --------------- ----------------
Other accruals $ 319 $ 2,897 $ 2,470 $ 5,686
Other non-current liabilities $ 277 $ 13,541 $ 1,896 $ 15,714
February 27, 2010
---------------------------------------------------------------------
2005 Event 2001 Event 1998 Event Total
--------------- --------------- --------------- ----------------
Other accruals $ 336 $ 2,992 $ 2,235 $ 5,563
Other non-current liabilities $ 351 $ 13,341 $ 2,542 $ 16,234
We evaluated the reserve balances as of June 19, 2010 based on current
information and have concluded that they are adequate to cover future costs. We
will continue to monitor the status of the vacant and
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
subsidized properties, severance and benefits, and pension withdrawal
liabilities, and adjustments to the reserve balances may be recorded in the
future, if necessary.
16. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing income (loss) available
to common shareholders by the weighted average shares outstanding for the
reporting period. Diluted earnings (loss) per share reflects all potential
dilution, using either the treasury stock method or the "if-converted" method,
and assumes that the convertible debt, stock options, restricted stock,
performance restricted stock, warrants, preferred stock, and other potentially
dilutive financial instruments were converted into common stock on the first day
of the period. If the conversion of a potentially dilutive security yields an
antidilutive result, such potential dilutive security is excluded from the
diluted earnings per share calculation.
The following table contains common share equivalents, which were not included
in the historical loss per share calculations as their effect would be
antidilutive:
16 Weeks Ended 16 Weeks Ended
June 19, 2010 June 20, 2009
------------- -------------
Stock options 1,988,469 1,853,239
Warrants 686,277 686,277
Performance restricted stock units 218,294 757,888
Restricted stock units 1,080,710 342,377
Financing warrant 11,278,988 11,278,988
Convertible debt 8,086,769 3,553,806
Preferred stock 35,000,000 -
The following table sets forth the calculation of basic and diluted earnings per
share:
16 Weeks Ended 16 Weeks Ended
June 19, 2010 June 20, 2009
-------------- ---------------
Loss from continuing operations $ (115,607) $ (58,304)
Preferred stock dividends (4,308) -
Beneficial conversion feature amortization (1,481) -
-------------- ---------------
Loss from continuing operations - basic (121,396) (58,304)
Adjustments for convertible debt (1) (10,655) (26,840)
Adjustments on Other financial liabilities (2) (8,277) 1,875
-------------- ---------------
Loss from continuing operations-diluted $ (140,328) $ (83,269)
============== ===============
Weighted average common shares outstanding 55,926,065 57,814,900
Share lending agreement (3) (2,427,944) (4,927,944)
-------------- ---------------
Common shares outstanding-basic 53,498,121 52,886,956
Effect of dilutive securities:
Convertible debt (1) 3,192,219 7,725,182
Convertible financial liabilities (2) (26,165,689) (35,830,098)
-------------- ---------------
Common shares outstanding-diluted 30,524,651 24,782,040
============== ===============
(1) We have debt instruments with a bifurcated conversion feature that were
recorded at a significant discount. (Refer to Note 8 - Indebtedness and
Other Financial Liabilities). For purposes of determining if an application
of the "if-converted method" to these convertible instruments produces a
dilutive result, we consider the combined impact of the numerator and
denominator adjustments, including a numerator adjustment for gains and
losses, which would have been incurred had the instruments been converted
on the first day of the period presented.
(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 8
- Indebtedness and Other Financial Liabilities). These warrants are
marked-to-market on our Consolidated Statements of Operations. For example,
in periods when the market price of our common stock decreases, our income
from continuing operations is increased. For purposes of determining if an
application of the treasury stock method produces a dilutive result, we
assume proceeds are used to repurchase common stock and we adjust the
numerator similar to the adjustments required under the "if-converted"
method. We consider the combined impact of the numerator and denominator
adjustments, including a denominator adjustment to reduce shares, even when
the average market price of our common stock for the period is below the
warrant's strike price.
(3) As of June 19, 2010 and June 20, 2009, we had 5,634,002 and 8,134,002,
respectively, of loaned shares under our share lending agreements, which
were considered issued and outstanding. The obligation of the financial
institutions to return the borrowed shares has been accounted for as
prepaid forward contract and, accordingly, shares underlying this contract
are removed from the computation of basic and diluted earnings per share,
unless the borrower defaults on returning the related shares. On September
15, 2008, Lehman Europe, who is a party to a 3,206,058 share lending
agreement with our Company filed under Chapter 11 of the U.S. Bankruptcy
Code with the United States Bankruptcy Court and/or commenced equivalent
proceedings in jurisdictions outside of the United States (collectively,
the "Lehman Bankruptcy"). As such, we have included these loaned shares as
issued and outstanding effective September 15, 2008 for purposes of
computing our basic and diluted weighted average shares and (loss) income
per share. This treatment is consistent with the new accounting guidance
relating to accounting for own share lending arrangements in contemplation
of convertible debt issuance, which we adopted during the 16 weeks ended
June 19, 2010 (Refer to Note 2 - Impact of New Accounting Pronouncements).
For the 16 weeks ended June 19, 2010 and June 20, 2009, weighted average
common shares relating to share lending agreements of 2,427,944 and
4,927,944, respectively, were excluded from the computation of earnings per
share.
17. Commitments and Contingencies
Supply Agreement
On March 7, 2008, we entered into a definitive agreement with C&S Wholesale
Grocers, Inc. ("C&S") whereby C&S will provide warehousing, logistics,
procurement and purchasing services (the "Services") in support of our Company's
entire supply chain. This agreement expires on September 29, 2018. The
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
agreement defines the parties' respective responsibilities for the procurement
and purchase of merchandise intended for use or resale at our Company's stores,
as well as the parties' respective remuneration for warehousing and
procurement/purchasing activities. In consideration for its services, C&S is
paid an annual fee and has incentive income opportunities based upon our cost
savings and increases in retail sales volume. The agreement also provides that
we will purchase virtually our entire warehoused inventory from C&S.
Although there are a limited number of distributors that can supply our stores,
we believe that other suppliers could provide similar product on comparable
terms. However, a change in suppliers could cause a delay in distribution and a
possible loss of sales which would affect our results adversely.
Lease 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 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. On June 1, 2010, the Appellate Division reversed
the trial court's denial of Pathmark's motion for summary judgment and entered
judgment in favor of Pathmark with respect to the $6 million escrow, and CPS has
appealed this judgment.
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 June 19, 2010, 181 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 $561.9 million, which could be partially or totally offset by
reassigning or subletting these leases.
Legal Proceedings
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
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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 completed discovery and our Company is proceeding with motions
for summary judgment and to decertify the class. If our Company fails to prevail
on these motions, the matter will likely be scheduled for trial in early 2011.
Our Company at this time does not believe that Plaintiffs have established in
discovery a proper basis for class certification, nor does our Company believe
on the basis of discovery that Plaintiffs damages are material.
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.
18. Reportable Segments
Reportable segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Our chief operating decision maker is our President and
Chief Executive Officer.
We have four reportable segments: Fresh, Pathmark, Gourmet and Other. The Other
segment includes our Food Basics and Wine, Beer & Spirits businesses.
The accounting policies for these segments are the same as those described in
the summary of significant accounting policies included in our Fiscal 2009
Annual Report. 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 16 weeks ended
--------------------------------
June 19, 2010 June 20, 2009
--------------- --------------
Grocery (1) $ 1,758,844 $ 1,939,600
Meat (2) 491,482 526,771
Produce (3) 314,604 323,872
--------------- ---------------
Total $ 2,564,930 $ 2,790,243
=============== ==============
(1) The grocery category includes grocery, frozen foods, dairy, general
merchandise/health and beauty aids, wine, beer & spirits, and pharmacy.
(2) The meat category includes meat, deli, bakery and seafood.
(3) The produce category includes produce and floral.
For the 16 Weeks Ended
----------------------------------------------
June 19, 2010 June 20, 2009
-------------------- -------------------
Sales
Fresh $ 1,278,569 $ 1,386,740
Pathmark (1) 1,111,401 1,239,223
Gourmet 82,872 85,381
Other 92,088 78,899
-------------------- -------------------
Total sales $ 2,564,930 $ 2,790,243
==================== ===================
Segment income (loss)
Fresh $ 13,472 $ 41,241
Pathmark (1) (24,808) (1,775)
Gourmet 6,511 8,119
Other 737 923
-------------------- -------------------
Total segment (loss) income (4,088) 48,508
Corporate (2) (47,242) (44,897)
Reconciling items (3) (11,272) (5,447)
-------------------- -------------------
Loss from operations (62,602) (1,836)
Nonoperating income (loss) 8,277 (1,875)
Interest expense, net (61,142) (54,207)
-------------------- -------------------
Loss from continuing operations before income taxes $ (115,467) $ (57,918)
==================== ===================
For the 16 Weeks Ended
----------------------------------------------
June 19, 2010 June 20, 2009
-------------------- -------------------
Segment depreciation and amortization
Fresh $ 23,392 $ 26,294
Pathmark (1) 26,771 30,558
Gourmet 2,751 2,901
Other 1,663 1,220
-------------------- -------------------
Total segment depreciation and amortization 54,577 60,973
Corporate 15,802 16,815
-------------------- -------------------
Total depreciation and amortization $ 70,379 $ 77,788
==================== ===================
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
(1) Includes results from Fresh stores that have been subsequently converted to
Pathmark stores.
(2) Represents a $5.1 million decline in corporate and administrative costs,
which was more than offset by a $7.5 million increase in corporate costs
attributable to store-related activities, primarily benefits and occupancy
costs which are not allocated to segments.
(3) Reconciling items, which are not included in segment income, consist of the
following:
For the 16 Weeks Ended
----------------------------------------------
June 19, 2010 June 20, 2009
-------------------- -------------------
Long-lived asset impairment $ 5,398 $ -
Net restructuring and other 3,932 1,144
Real estate related activity 1,947 (2,233)
Stock-based compensation (861) 2,853
Pension withdrawal costs - 2,445
LIFO adjustment 856 1,238
-------------------- -------------------
Total reconciling items $ 11,272 $ 5,447
==================== ===================
19. Subsequent Events
At our Annual Meeting of Stockholders held on July 15, 2010, our stockholders
approved an amendment to our Company's charter to increase the number of shares
of common stock that our Company has the authority to issue from 160,000,000 to
260,000,000 shares.
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 Overview - a general description of our business and segment structure
o Operating Results - a discussion of 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 2010 to assist in understanding the business.
o Results of Operations and Liquidity and Capital Resources - a discussion of
results for the 16 weeks ended June 19, 2010 compared to the 16 weeks ended
June 20, 2009 and current and expected future liquidity.
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.
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 429
stores as of June 19, 2010.
We operate in four reportable segments: Fresh, Pathmark, Gourmet and Other. The
Other segment includes our Food Basics and Wine, Beer & Spirits businesses.
OPERATING RESULTS
-----------------
During the first quarter of fiscal 2010, there was a significant shift in
consumer spending behavior towards our existing competitors, as well as
non-traditional competitors who have increased their food offerings. Our
comparable store sales, which include stores that have been in operation for at
least one full year and replacement stores, declined 7.2% this quarter. As a
result, our operating results were significantly below those of the prior year
and our expectations.
Highlights of our operating results for the four formats in which our business
operates, were as follows:
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
Fresh
(A&P, Waldbaum's and SuperFresh)
In our Fresh format, we experienced a decline in sales due to decreasing
customer count. This decline is attributable to increased competition,
particularly in alternative channels due to the expansion of food offerings in
wholesale clubs, supercenters, and drug stores. Customers' negative value
perception combined with negative in-store experiences contributed to a shift in
market share to our competitors.
In response, we launched the New Lower Price Project in April with robust radio,
television, and signage programs to address the decline in sales resulting from
decreased customer count. The initial phase of this Project enhanced our
offerings and prices within the center store. The second phase of this Project
is currently underway, which includes a comprehensive overhaul of our perishable
food departments' pricing.
Pathmark
In our Pathmark and Pathmark Sav-A-Center stores, where we continued to
experience declining sales attributable to declining customer count, we launched
Project MMX, a redesign of the customer experience that includes updating the
stores, improving customer service and updating our merchandising mix and
prices. This initiative is intended to combat external forces such as new
competition and enhanced offers from multiple channels, including
non-traditional competitors in New York City's urban trading areas, which have
had a significant effect on our stores.
Gourmet
(The Food Emporium)
Our Gourmet stores located in Manhattan continued to deliver industry-leading
results despite a decline in comparable store sales, scheduled cash rent
increases and increased utility costs, which contributed to a reduced segment
income over prior year.
Other
(Food Basics, Best Cellars and A&P Liquors)
Our Food Basics format experienced an increase in comparable store sales and
related gross margin, which was offset by year-over-year increase in operating
costs, primarily relating to labor and occupancy costs attributable to scheduled
rent increases.
Our Wine, Beer and Spirits businesses continued to perform well with a
year-over-year increase in segment income attributable primarily to positive
comparable stores sales.
OUTLOOK
-------
On July 23, 2010, our Company announced an operational and revenue-driven
turnaround strategy designed to generate sustained profitability and cash flow,
drive sales growth, restore competitive margins to the business and strengthen
the foundation of our Company for the long term.
The four key elements of the turnaround are:
o Improve our Company's customer value proposition through merchandising;
o Enhance the customer experience and drive clear brand identity;
o Lower structural and operating costs; and
o Implement new financing initiatives to augment our first quarter
liquidity of $253 million.
In addition to revenue-generation and cost reduction initiatives, we are
pursuing capital raising opportunities, including incremental financing through
our current bank facility. We are also pursuing sale-leaseback transactions and
the sale of certain non-core assets.
While reversing negative consumer trends is a very difficult process and the
timing and success of these measures cannot be assured, we anticipate that our
initiatives to lower retail prices and improve our customers' shopping
experience will reverse the decreasing customer count and related sales decline
that we have been experiencing.
We continue to pursue collaborative improvements under our existing contracts
with our business partners, such as C&S Wholesale Grocers, Inc. ("C&S"). We are
partnering with C&S to rationalize our supply chain to ensure that the structure
of the distribution network is more closely aligned with the needs of our
business. We anticipate that this will result in significant cost savings and
will provide the foundation for continued discussions with C&S, but there
can be no assurance that these efforts will be successful or will result in
any savings or improvements.
We believe that we have good relationships with our labor union partners and
continue to engage them in discussions about working collaboratively to address
contract issues impacting our Company through our turnaround strategy. We have
no open labor union contracts and four labor union contracts that cover
approximately 1,600 employees that are scheduled to expire in fiscal 2010 and,
therefore, are subject to negotiation. We cannot assure our stakeholders that
our labor negotiations will conclude successfully or that work stoppage or
labor disturbances will not occur.
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
RESULTS OF CONTINUING 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, per share
amounts and where noted.
16 WEEKS ENDED JUNE 19, 2010 COMPARED TO THE 16 WEEKS ENDED JUNE 20, 2009
-------------------------------------------------------------------------
OVERALL
-------
The following table summarizes our results of operations for the 16 weeks ended
June 19, 2010 compared to the 16 weeks ended June 20, 2009:
16 Weeks Ended 16 Weeks Ended Favorable
June 19, 2010 June 20, 2009 (Unfavorable) % Change
--------------- --------------- ------------- ---------
(in millions, except percentages)
Sales $ 2,564.9 $ 2,790.2 $ (225.3) (8.1)%
Decrease in comparable store sales (7.2)% (3.3)% NA NA
Loss from continuing operations $ (115.6) $ (58.3) $ (57.3) (98.3)%
Loss from discontinued operations $ (7.0) $ (6.9) $ (0.1) (2.6)%
Net loss $ (122.6) $ (65.2) $ (57.4) (88.2)%
Net loss per share - basic $ (2.40) $ (1.23) $ (1.17) (95.1)%
Net loss per share - diluted $ (4.83) $ (3.64) $ (1.19) (32.7)%
Non-GAAP Financial Data:
------------------------
Adjusted EBITDA (1) $ 19.0 $ 81.4 $ (62.4) (76.6)%
-------------------------------------------------------
(1) For an explanation of Adjusted EBITDA, refer to the Non-GAAP Financial
Measures - Adjusted EBITDA discussion that follows.
Average weekly sales per supermarket were approximately $393,000 for the first
quarter of fiscal 2010 versus $420,700 for the corresponding period of the prior
year, a decrease of 6.6%, primarily due to the overall decline in our sales
resulting from decreased customer counts due to increased competition and
negative
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
value perception of our stores.
SALES
------
For the 16 weeks ended
--------------------------------
June 19, 2010 June 20, 2009
-------------- -------------
(in thousands)
Fresh $ 1,278,569 $ 1,386,740
Pathmark 1,111,401 1,239,223
Gourmet 82,872 85,381
Other 92,088 78,899
------------- -------------
Total sales $ 2,564,930 $ 2,790,243
============= =============
Sales decreased from $2,790.2 million for the 16 weeks ended June 20, 2009 to
$2,564.9 million for the 16 weeks ended June 19, 2010, 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 overall decline in
sales was primarily caused by a decrease in customer count. The decrease in
sales in our Fresh segment of $108.2 million was primarily related to a decline
in the comparable store sales of $93.0 million and the absence of sales due to
store closures of $15.2 million. The decrease in sales in our Pathmark segment
of $127.8 million was primarily due to a decline in comparable store sales of
$114.0 million and the absence of sales due to store closures of $25.1 million,
partially offset by an increase in sales from new stores of $11.3 million. Sales
generated by our Gourmet segment declined by $2.5 million, primarily due to a
decline in comparable store sales. The sales increase of $13.2 million, or
16.7%, in our Other segment, representing Discount and Wine, Beer & Spirits, was
primarily driven by increased sales generated by our Discount business, and was
primarily attributable to increased new store sales of $15.0 million, partially
offset by a decline in comparable store sales of $1.6 million.
GROSS MARGIN
------------
Gross margin of $763.8 million decreased 50 basis points as a percentage of
sales to 29.78% for the first quarter of fiscal 2010 from gross margin of $844.9
million or 30.28% for the first quarter of fiscal 2009, reflecting lower margins
from our Fresh, Pathmark and Gourmet segments, partially offset by improved
margin rate from our Other Segment driven by our Discount business.
The following table details the dollar impact of items affecting the gross
margin dollar decrease from the first quarter of fiscal 2009 to the first
quarter of fiscal 2010 (in millions):
Sales Volume Gross Margin Rate Total
---------------- ----------------- -----------
Total Company $ (68.2) $ (12.9) $ (81.1)
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
---------------------------------------------------
Our Store operating, general and administrative ("SG&A") expense was $821.0
million or 32.01% as a percentage of sales for the first quarter of fiscal 2010,
as compared to $846.7 million or 30.34% as a percentage of sales for the first
quarter of fiscal 2009.
SG&A expenses for the first quarter of fiscal 2010 included (i) net
restructuring and other costs of $3.9 million, or 15 basis points and (ii) real
estate related costs of $1.9 million, or 8 basis points. These costs were
partially offset by net stock-based compensation related income of $0.9 million,
or 3 basis points, primarily due to forfeitures.
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
SG&A expenses for the first quarter of fiscal 2009 included (i) stock-based
compensation costs of $2.9 million, or 10 basis points, (ii) pension withdrawal
costs of $2.4 million, or 9 basis points, and (iii) restructuring and other
costs of $1.1 million, or 4 basis points. These charges were partially offset by
net real estate income of $2.2 million, or 8 basis points.
Excluding the items listed above, SG&A as a percentage of sales increased by 162
basis points during the first quarter of fiscal 2010 as compared to the first
quarter of fiscal 2009, primarily due to lower sales leverage on fixed costs,
including increased labor costs of 88 basis points, increased occupancy related
costs of 41 basis points, and increased advertising costs of 14 basis points. In
addition, corporate and banner administrative expenses increased by $2.3
million, or 24 basis points, as the decline in corporate and administrative
costs was more than offset by an increase in corporate costs attributable to
store-related activities, primarily benefits and occupancy costs.
During the 16 weeks ended June 19, 2010 and June 20, 2009, we recorded
impairment losses on long-lived assets for impairments due to closure or
conversion of stores in the normal course of business of $0.5 million and $1.1
million, respectively.
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense. If current operating levels do not improve, there may be a
need to take further actions which may result in additional future impairments
on long-lived assets, including the potential for impairment of assets that are
held and used.
LONG-LIVED ASSET IMPAIRMENT
---------------------------
As a result of increasing cash flow losses within certain stores, we determined
that a triggering event had occurred during the first quarter of fiscal 2010 for
testing the related long-lived assets for potential impairment. As a result of
our testing, we recorded impairment charges aggregating $5.4 million, primarily
attributable to favorable leases and capital leases. Refer to Note 5 to our
Consolidated Financial Statements - Valuation of Long-Lived Assets for
additional information.
During the first quarter of fiscal 2010, our operating results were
significantly below those of the prior year and our expectations. These declines
led to revised short-term and long-term operating forecasts that were
significantly lower than previously expected as of the end of fiscal 2009. All
of this resulted in substantially decreased fair values from the values we used
in conjunction with our annual impairment test conducted during the fourth
quarter of fiscal 2009. Accordingly, during the first quarter of fiscal 2010, we
concluded that an interim triggering event had occurred requiring us to test the
goodwill of the reporting units comprising our Fresh segment for impairment.
(The Pathmark reporting unit does not have goodwill). We determined that a
triggering event did not occur for our Gourmet and Other reportable segments,
since the operating results of these reporting units have been largely
consistent with our expectations. As a result of our testing, we concluded that
no goodwill impairment was required. We also performed interim impairment
testing of our intangible assets recorded within our Pathmark reporting unit and
concluded that no impairment was required. Refer to Note 3 to our Consolidated
Financial Statements - Goodwill and Other Intangible Assets for additional
information.
We believe our estimates used to perform the impairment analysis of our
goodwill, trademark, and other intangible assets are appropriate given the
current market conditions; however, future impairment charges could be required
due to changes in the market conditions or other factors relating to our
performance.
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
SEGMENT (LOSS) INCOME
---------------------
For the 16 weeks ended
June 19, 2010 June 20, 2009
------------- -------------
(in thousands)
Fresh $ 13,472 $ 41,241
Pathmark (24,808) (1,775)
Gourmet 6,511 8,119
Other 737 923
------------- -------------
Total segment (loss) income $ (4,088) $ 48,508
============= =============
Segment income decreased $52.6 million from income of $48.5 million for the 16
weeks ended June 20, 2009 to a loss of $4.1 million for the 16 weeks ended June
19, 2010. Our Fresh and Pathmark segments experienced segment income declines of
$27.8 million and $23.0 million, respectively, primarily attributable to
declines in sales and lower gross margins, partially due to higher promotional
spending and reductions in everyday prices for these segments, partially offset
by reduced labor, operating and occupancy expenses. Segment income from our
Gourmet business declined by $1.6 million, primarily due to a decline in sales
and gross margins. Segment income for our Other segment, representing Discount
and Wine, Beer and Spirits, declined by $0.2 million, as the improved sales and
gross margin from our Discount business were more than offset by increased labor
and occupancy expenses. Refer to Note 18 - Reportable Segments for further
discussion of our reportable operating segments.
ADJUSTED EBITDA
---------------
Adjusted EBITDA declined $62.4 million from $81.4 million for the 16 weeks ended
June 20, 2009 to $19.0 million for the 16 weeks ended June 19, 2010, primarily
due to the $52.6 million decline in our segment income (refer to the above
Segment (Loss) Income discussion).
Our management uses Adjusted EBITDA as a supplemental non-GAAP financial
measure. Refer to Non-GAAP Financial Measures-Adjusted EBITDA discussion that
follows for further description and reconciliations to the appropriate GAAP
financial measures.
NONOPERATING INCOME
-------------------
During the first quarter of fiscal 2010 and 2009, we recorded a favorable
adjustment of $8.3 million and an unfavorable adjustment of $1.9 million,
respectively, relating to our Series B warrants acquired in connection with our
purchase of Pathmark. These adjustments are primarily a function of fluctuations
in the market price of our Company's common stock.
INTEREST EXPENSE, NET
---------------------
Interest expense, net of $61.1 million for the first quarter of fiscal 2010
increased from the prior year expense of $54.2 million, primarily due to $10.0
million of interest expense and bond issuance cost amortization recorded during
the first quarter of fiscal 2010 relating to our $260 million 11.375% senior
secured notes due 2015 that were issued in August 2009. This increase in
interest expense was partially offset by a $1.6 million of reduced interest
expense relating to bank borrowings, as a result of our repayment of a portion
of our variable debt using proceeds from the August 2009 offerings of senior
notes and preferred stock. In addition, during first quarter of fiscal 2010,
interest expense attributable to our GHI contractual obligation was $1.5 million
lower than in the first quarter of fiscal 2009, primarily due to a smaller
discount rate adjustment used to revalue this obligation during the quarter,
which is derived each period from published zero-coupon AA corporate bond
yields.
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
INCOME TAXES
------------
The provision for income taxes from continuing operations for the first quarter
of fiscal 2010 was $0.1 million, compared to $0.4 million for the first quarter
of fiscal 2009. Consistent with prior year, we continue to record a valuation
allowance against our net deferred tax assets.
The effective tax rate on continuing operations of 0.1% and 0.7%,
respectively, for the 16 weeks ended June 19, 2010 and June 20, 2009,
respectively, varied from the statutory rate of 35%, primarily due to state and
local income taxes, the increase in our valuation allowance and the impact of
the Pathmark financing.
DISCONTINUED OPERATIONS
-----------------------
The loss from operations of discontinued businesses, net of tax, for the first
quarter of fiscal 2010 of $7.1 million remained relatively flat, compared to the
loss of $6.9 million for the first quarter of fiscal 2009, primarily relating to
interest accretion.
NON-GAAP FINANCIAL MEASURES - ADJUSTED EBITDA
---------------------------------------------
We present the non-GAAP financial measure of "Adjusted EBITDA" as a supplemental
measure in the financial information made available, as it is among the primary
measures used by our management to monitor and evaluate our liquidity and the
performance of our business, as well as for the planning and forecasting of
future periods. In addition, we have performance targets based on our Adjusted
EBITDA for determining our incentive compensation and performance-based
stock-based compensation. We believe that the presentation of this measure is
relevant and useful for investors because it allows investors to view results in
a manner similar to the method used by our management and makes it easier to
compare our results with other companies that have different financing and
capital structures or tax rates.
Adjusted EBITDA is not a presentation made in accordance with GAAP and our
computation of Adjusted EBITDA may vary from others in our industry. Adjusted
EBITDA has important limitations as an analytical tool and should not be
considered in isolation, or as a substitute for analysis of our results as
reported under GAAP.
Adjusted EBITDA is defined as EBITDA adjusted to exclude the following, if
applicable: (i) goodwill, long-lived asset and intangible asset impairment, (ii)
net restructuring and other charges, (iii) real estate related activity, (iv)
stock based compensation, (v) pension withdrawal costs, (vi) LIFO provision
adjustments, (vii) nonoperating loss/income, and (viii) other items that
management considers nonoperating in nature and excludes when evaluating the
results of the ongoing business.
The following tables reconcile our non-GAAP measure of "Adjusted EBITDA" to "Net
loss" per our Consolidated Statements of Operations and to "Net cash used in
operating activities" per our Consolidated Statements of Cash Flows prepared in
accordance with GAAP (in thousands):
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
For the 16 Weeks Ended
----------------------------------
June 19, 2010 June 20, 2009
-------------- --------------
Net Loss $ (122,643) $ (65,160)
Loss from discontinued operations 7,036 6,856
Provision for income taxes 140 386
Interest Expense, net 61,142 54,207
Depreciation and amortization 70,379 77,788
-------------- --------------
EBITDA 16,054 74,077
Adjustments:
Long-lived asset impairment 5,398 -
Net restructuring and other 3,932 1,144
Real estate related activity 1,947 (2,233)
Stock-based compensation (861) 2,853
Pension withdrawal costs - 2,445
LIFO adjustment 856 1,238
Nonoperating (income) loss (8,277) 1,875
-------------- --------------
Total adjustments to EBITDA 2,995 7,322
-------------- --------------
Adjusted EBITDA $ 19,049 $ 81,399
============== ==============
For the 16 Weeks Ended
----------------------------------
June 19, 2010 June 20, 2009
-------------- --------------
Net cash used in operating activities $ (58,265) $ (2,958)
Long-lived asset impairment (5,890) (1,056)
Nonoperating income (loss) 8,277 (1,875)
Net interest expense 61,142 54,207
Non-cash interest expense (12,785) (12,877)
Asset disposition initiatives (4) 1,012
Occupancy charges for normal store closures (466) (1,260)
(Loss) gain on disposal of owned property (1,025) 3,256
Amortization of deferred real estate income 1,371 1,504
Loss from operations of discontinued operations 7,115 6,856
Provision for income taxes 140 386
Pension withdrawal costs - (2,445)
Employee benefit related costs (1,965) -
LIFO adjustment (856) (1,238)
Stock compensation expense income (expense) 861 (2,853)
Changes in working capital (3,938) 11,390
Other assets 1,224 2,213
Other non-current liabilities 21,089 21,029
Other, net 29 (1,214)
--------------- --------------
EBITDA 16,054 74,077
Adjustments:
Long-lived asset impairment 5,398 -
Net restructuring and other 3,932 1,144
Real estate related activity 1,947 (2,233)
Stock-based compensation (861) 2,853
Pension withdrawal costs - 2,445
LIFO adjustment 856 1,238
Nonoperating (income) loss (8,277) 1,875
--------------- -------------
Total adjustments to EBITDA 2,995 7,322
--------------- -------------
Adjusted EBITDA $ 19,049 $ 81,399
=============== =============
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash Flows
----------
The following table presents excerpts from our Consolidated Statement of Cash
Flows (in thousands):
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
For the 16 Weeks Ended
-----------------------------------
June 19, 2010 June 20, 2009
--------------- ---------------
Net cash used in operating activities $ (58,265) $ (2,958)
--------------- ---------------
Net cash used in investing activities $ (17,689) $ (17,425)
--------------- ---------------
Net cash used in financing activities $ (5,710) $ (35,495)
--------------- ---------------
Net cash used in operating activities increased by $55.3 million during the 16
weeks ended June 19, 2010 as compared to 16 weeks ended June 20, 2009, primarily
due to lower sales and the related margin income, as reflected in our $70.3
million increase in net loss adjusted by non-cash charges, partially offset by
an increase in working capital of $15.3 million.
Net cash used in investing activities increased by $0.3 million during the 16
weeks ended June 19, 2010 as compared to 16 weeks ended June 20, 2009, primarily
due to the absence of $5.9 million in proceeds from the sale of a joint venture
and $1.4 million in proceeds from maturities of marketable securities that were
received during the first quarter of fiscal 2009, and a $0.5 million reduction
in proceeds from disposal of property. These increases in cash used in investing
activities were partially offset by a $7.3 million decrease in property
expenditures during the first quarter of fiscal 2010. Property expenditures
during the 16 weeks ended June 19, 2010 totaled $19.7 million, reflecting one
in-progress store addition and expenditures relating to equipment and leasehold
improvements for existing stores, as compared to $27.0 million during the 16
weeks ended June 20, 2009, which related to two additions, four remodels and two
conversions.
Net cash used in financing activities decreased $29.8 million during the 16
weeks ended June 19, 2010 as compared to 16 weeks ended June 20, 2009, primarily
due to the absence of $30.0 million in net principal payments on revolving lines
of credit made during the first quarter of fiscal 2009 and increased book
overdrafts of $8.4 million. These increases in cash from financing activities
were partially offset by $7.0 million in dividend payments on preferred stock
made during the first quarter of fiscal 2010.
Working Capital
---------------
We had working capital of $(51.0) million at June 19, 2010, compared to working
capital of $201.3 million at February 27, 2010. We had cash and cash equivalents
aggregating $170.8 million at June 19, 2010 (which includes cash in-transit and
cash used in our stores), compared to $252.4 million at February 27, 2010. The
decrease in working capital was primarily attributable to the following:
o A decrease in cash and cash equivalents, as detailed in our
Consolidated Statements of Cash Flows and
o An increase in the current portion of our long-term debt, representing
our obligation relating to our 5.125% Convertible Senior Notes, due
June 15, 2011.
Debt Obligations
----------------
Our total long-term debt was $990.6 million and $996.8 million at February 27,
2010 and June 19, 2010, respectively. The current portion of our long-term debt
increased from $0.2 million at February 27, 2010 to $157.9 million at June 19,
2010, primarily due to the current classification of our $165.0 million 5.125%
Convertible Senior Notes due June 15, 2011, that have a carrying value of $157.7
million at June 19, 2010.
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
At June 19, 2010, we had the following availability under our amended $655.0
million Credit Agreement and other resources, available to reduce our
obligations or use in our future operations:
Amount Expiration Date
-------------- ---------------
Amended $655.0 million Credit Agreement $ 655,000 December 2012
Borrowing base collateral adjustment (138,312)
-------------
Available for borrowing 516,688(1)
Loans outstanding (132,900)
Letters of Credit Outstanding (200,780)
--------------
Net available borrowings as of June 19, 2010 $ 183,008
==============
Invested cash $ 70,282(2)
==============
-------------------------------
(1) The availability under the credit agreement is limited to the value
assigned to the collateral supporting the credit agreement.
(2) The remainder of our cash is in-transit or is used in our stores for
operations.
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.
As previously stated, our Company announced a comprehensive operational
and revenue-driven turnaround strategy. The turnaround strategy is designed to
generate sustained profitability and cash flow, drive sales growth, restore
competitive margins to the business and strengthen the foundation of our Company
for the long term. As part of this effort, we are pursuing several new financing
initiatives to augment our Company's liquidity, including incremental financing
through our bank facility, sale-leaseback transactions and the sale of certain
non-core assets in order to meet our liquidity needs for the next twelve months,
including the debt maturity of $165.0 million on June 15, 2011. However, the
availability and cost of financing to our Company could be adversely affected if
our results of operations do not improve, by future changes in our credit
ratings, and by a decline in capital market conditions. We believe that by
executing on this turnaround, we will be able to meet all our financial
obligations; nevertheless, there can be no assurances that we will complete
these efforts or that such efforts will be sufficient to meet our liquidity
needs.
We operate under an annual operating plan which incorporates the specific
operating initiatives we expect to pursue and the anticipated financial results
of our Company. We implemented a number of labor rationalization initiatives
designed to reduce the number of our store and administrative personnel,
including a program during the first quarter of the year designed to reduce our
administrative labor expenses in excess of 15%, or approximately $20 million per
year. During the first quarter of fiscal 2010, we have launched additional
initiatives to drive increased sales, profitability and liquidity; primarily the
New Lower Price Project in our Fresh format stores and Project MMX in our
Pathmark stores. We expect to use the resulting savings to support store and
performance initiatives designed to improve our business and increase future
sales.
Our existing corporate rating with Moody's Investors Service ("Moody's") is Caa2
with a negative outlook. Our senior unsecured debt is rated Caa3, our senior
secured notes are rated Caa1 and our liquidity rating is SGL-3. Our corporate
credit rating with Standard & Poor's Ratings Group ("S&P") is CCC with a
negative outlook. Our senior unsecured debt is rated
CC, and our recovery rating is 6, indicating that unsecured bond holders can
expect a negligible (0%-10%) recovery in the event of a payment default. Our
senior secured notes are rated CCC, with a recovery rating of 4, indicating
that lenders can expect an average recovery (30%-50%) in the event of a payment
default. Our convertible preferred stock is rated CC. Given these current
ratings, the availability and cost of financing to our Company could be
adversely affected.
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
Redeemable Preferred Stock
--------------------------
On August 4, 2009, our Company issued 60,000 shares of 8.0% Cumulative
Convertible Preferred Stock, Series A-T, without par value, to affiliates of
Tengelmann Warenhandelsgesellschaft KG ("Tengelmann") and 115,000 shares of 8.0%
Cumulative Convertible Preferred Stock, Series A-Y, without par value, to
affiliates of Yucaipa Companies LLC ("Yucaipa"), together referred to as the
"Preferred Stock," for approximately $162.8 million, after deducting
approximately $12.2 million in closing and issuance costs. Each share of the
Preferred Stock has an initial liquidation preference of one thousand dollars,
subject to adjustment.
The Preferred Stock issuance was classified within temporary stockholders equity
in our Consolidated Balance Sheets as of June 19, 2010 and February 27, 2010.
The holders of the Preferred Stock are entitled to an 8.0% dividend, payable
quarterly in arrears in cash or in additional shares of Preferred Stock if our
Company does not meet the liquidity levels required to pay the dividends. If our
Company makes a dividend payment in additional shares of Preferred Stock, the
Preferred Stock shall be valued at the liquidation preference of the Preferred
Stock and the dividend rate will be 8.0% plus 1.5%. During the 16 weeks ended
June 19, 2010, we paid cash Preferred Stock dividends of $7.0 million.
In connection with our Preferred Stock issuance, we were required to register
all of the shares of common stock beneficially owned by Tengelmann and Yucaipa,
including the shares issuable upon conversion of the convertible preferred
stock, no later than February 6, 2010. Such filing was not made by the required
date. According to our shareholder agreements with Tengelmann and Yucaipa, we
are required to pay liquidated damages for each day we are in default, at a rate
equivalent to 1% of the value of the related shares per year. This default was
cured upon filing the required registration statement on May 6, 2010. Tengelmann
and Yucaipa have agreed to waive the liquidated damages due to them for failure
to timely file the registration statement, the amount of which was not material.
Share Lending Agreements
------------------------
We currently have 5,634,002 of loaned share outstanding under our share lending
agreements with financial institutions, which were sold to investors on December
18, 2007 to facilitate hedging transactions relating to the issuance of our
5.125% and 6.750% Senior Convertible Notes. Any shares we loan are considered
issued and outstanding. 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 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.
During the first quarter of fiscal 2010, we adopted the new accounting guidance
for accounting for one's own-share lending arrangements entered into in
contemplation of a convertible debt issuance or other financing, which requires
share lending arrangements to be measured at fair value and recognized as a debt
issuance cost, and amortized using the effective interest method over the life
of the financing arrangement
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
as interest cost. The loaned shares are excluded from basic and diluted earnings
per share, unless a default occurs. When a default becomes probable, expense
equal to the fair value of the unreturned loaned shares, net of any probable
recoveries, must be recognized. This guidance is effective beginning with our
fiscal 2010, with retrospective application required. The fair values of our
share lending agreements with the Bank of America and Lehman Europe were
immaterial at inception. Our share lending arrangement with Lehman Europe, who
is a party to a 3,206,058 share lending agreement with our Company, is subject
to this default provision guidance as a result of their September 15, 2008
bankruptcy filing. In connection with Lehman Europe's default, during the first
quarter of fiscal 2010, we recorded a retrospective adjustment of $28.3 million
to our third quarter of fiscal 2008 financial statements by charging "Store
operating, general and administrative expense" and crediting "Additional
paid-in-capital", which represents the fair value of the unreturned shares at
September 15, 2008. This expense is reflected in our Consolidated Balance Sheets
as of February 27, 2010 and June 19, 2010 as an adjustment to the opening
"Accumulated deficit" and "Additional paid-in capital". We have been including
the loaned shares in our Company's basic and diluted earnings per share since
September 15, 2008.
Other
-----
We participate in various multi-employer pension plans which are administered
jointly by management and union representatives. During the fourth quarter of
fiscal 2008, we made a standard withdrawal from one of our multi-employer
pension plans, to limit our pension benefit obligation to our employees, as we
believed that this plan was likely to have funding challenges and would require
higher contributions in the future, and recorded standard withdrawal liability
of $28.9 million. During the first quarter of fiscal 2010, we received
preliminary information indicating that the trustees of the multi-employer
pension plan have voted to go into a mass withdrawal. Formal notification has
not been received. Based on the preliminary information, we may have a potential
additional withdrawal obligation of up to $50 million payable over a period of
up to 25 years in the future. This preliminary estimate is subject to change due
to the uncertainty as to the number of participants that will be subject to mass
withdrawal and the finalization of asset values and calculations by the
multi-employer pension plan.
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 June 19, 2010, 181 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 $561.9 million, which could be partially or totally offset by
reassigning or subletting these leases.
CRITICAL ACCOUNTING ESTIMATES
-----------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results 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
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
February 27, 2010. There have been no significant changes in these policies
during the 16 weeks ended June 19, 2010.
Our operating results and assumptions of our revenue and cash flow projections
for the Fresh and Pathmark segments have significantly declined from the prior
quarter and expectations, which resulted in an interim triggering event for
purposes of testing for both long-lived tangible assets and intangible assets
within the reporting units comprising these segments. As discussed above, we
noted no impairment after testing for goodwill impairment within our A&P and
Waldbaum's reporting units. We also noted no impairment after testing for other
intangible asset impairment within our Pathmark reporting unit.
During the 16 weeks ended June 19, 2010, we recorded impairment of $5.4 million
of our long-lived assets, $4.5 million of which related to Pathmark and $0.9
million of which related to our SuperFresh reporting unit, primarily
attributable to favorable leases and other owned property.
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 and our Company's
Annual Report on Form 10-K for the fiscal year ended February 27, 2010.
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 June 19, 2010, we do not have cash flow exposure due
to rate changes on any of our debt securities with an aggregate book value of
$863.9 million, because they are at fixed interest rates ranging from 2.25% to
11.375%. However, we did have cash flow exposure on our committed and
uncommitted lines of credit of $132.9 million due to our variable floating rate
pricing. Accordingly, during the first quarters of fiscal 2010 and fiscal 2009,
a presumed 1% change in the variable floating rate would have impacted interest
expense by $0.4 million and $1.0 million, respectively.
Foreign Exchange Risk
---------------------
As of June 19, 2010, 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
Executive Chairman and Principal Executive Officer and Senior Vice President,
Chief Financial Officer and Treasurer, 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 Executive Chairman and
Principal Executive Officer along with our Company's Senior Vice President,
Chief Financial Officer and Treasurer, 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 Executive
Chairman and Principal Executive Officer along with our Company's Senior Vice
President, Chief Financial Officer and Treasurer, 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 June 19,
2010 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 17 - 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 those listed in our Company's Annual Report on Form 10-K for the fiscal
year ended February 27, 2010, and should be considered in conjunction with the
risks and uncertainties that are discussed below.
Risks Relating to Our Business
o Failure to execute on our turnaround strategy could adversely affect
our Company's liquidity, financial condition and results of
operations.
As stated above, our Company announced a comprehensive operational and
revenue-driven turnaround strategy. The turnaround strategy is
designed to generate sustained profitability and cash flow, drive
sales growth, restore competitive margins to the business and
strengthen the foundation of our Company for the long term, but there
can be no assurance that it will achieve any of these objectives. As
part of this effort, we are pursuing several new financing initiatives
to augment our Company's liquidity, including incremental financing
through our bank facility, sale-leaseback transactions and the sale of
certain non-core assets, in order to meet our liquidity needs for the
next twelve months, including the debt maturity of $165.0 million on
June 15, 2011. However, the availability and cost of financing to our
Company could be adversely affected if our results of operations do
not improve, by future changes in our credit ratings, or by a decline
in capital market conditions. Although we believe that by executing on
this turnaround, we will be able to meet all our financial
obligations, there can be no assurances that we will have the
liquidity necessary to operate our business.
o Our substantial indebtedness could impair our financial condition and
our ability to fulfill our debt obligations, including our obligations
under the notes.
We have substantial indebtedness. As of June 19, 2010, we had total
indebtedness of $1,140.6 million, consisting of approximately $132.9
million outstanding under our credit facility, $253.9 million of
senior secured notes (net of original issue discount), $610.0 million
of other outstanding notes and approximately $143.8 million
outstanding under capital lease obligations. Our indebtedness could
have important consequences to our stakeholders. For example, it
could: (i) make it more difficult for us to satisfy our obligations
with respect to the notes and our other indebtedness, which could in
turn result in an event of default on the notes or such other
indebtedness, (ii) require us to dedicate a substantial portion of our
cash flow from operations to debt service payments, thereby reducing
the availability of cash for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes, (iii)
impair our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general corporate
purposes or other purposes, (iv) diminish our ability to withstand a
downturn in our business, the industry in which we operate or the
economy generally, (v) limit our flexibility in planning for, or
reacting to, changes in our business and the industry in which we
operate, and (vi) place us at a competitive disadvantage compared to
certain competitors that have proportionately less debt.
If we are unable to meet our debt service obligations, we could be
forced to restructure or refinance our indebtedness, seek additional
equity capital or sell assets. We may be unable to obtain such
financing or sell assets on satisfactory terms, or at all.
In addition, at June 19, 2010, we had $132.9 million of variable rate
debt. If market interest rates increase, such variable-rate debt will
have higher debt service requirements, which could adversely affect
our cash flow. While we may enter into agreements limiting our
exposure to higher interest rates, any such agreements may not offer
complete protection from this risk.
o We are affected by increasing labor, benefit and other operating costs
and a competitive labor market and are subject to the risk of
unionized labor disruptions.
Our financial performance is greatly influenced by increasing wage and
benefit costs, including pension and health care costs, a competitive
labor market and the risk of labor disruption of our highly unionized
workforce.
As of June 19, 2010, we had approximately 46,200 employees, of which
approximately 70% 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 our stakeholders that our labor costs
will not continue to increase, or that such increases can be recovered
through increased prices charged to customers.
As of June 19, 2010, approximately 92% of our employees were
represented by unions and covered by collective bargaining or similar
agreements that are subject to periodic renegotiations. We believe
that we have good relationships with our labor union partners,
and we continue to engage them in discussions about working
collaboratively to address contract issues impacting our Company
through our turnaround strategy. However, there are no assurances
that these discussions will be successful.
We are currently negotiating or will negotiate four labor agreements
covering approximately 1,600 employees in fiscal 2010. In each of
these negotiations, rising health care and pension costs will be
important issues, as will the nature and structure of work rules.
We cannot assure our stakeholders that our labor negotiations will
conclude successfully or that any work stoppage or labor disturbances
will not occur. We expect that we would incur additional costs and
face increased competition for customers if we experience any work
stoppages or labor disturbances, which would adversely affect
operating results.
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3 - Defaults Upon Senior Securities
None
ITEM 4 - (Removed and Reserved)
ITEM 5 - Other Information
None
ITEM 6 - Exhibits
(a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT NO. DESCRIPTION
----------- -----------
10.52* Confidential Settlement and Release Agreement made and entered into as of the 20th day of April, 2010
between The Great Atlantic & Pacific Tea Company, Inc. and Paul Wiseman
10.53* Confidential Employment Separation and Release Agreement made and entered into as of the 16th day of March,
2010 between The Great Atlantic & Pacific Tea Company, Inc. and Jennifer MacLeod
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: July 29, 2010 By: /s/ Melissa E. Sungela
----------------------------------------------------
Melissa E. Sungela, Vice President,
Corporate Controller
(Chief Accounting Officer and Duly Authorized Officer)
