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 QUARTER ENDED DECEMBER 2, 2006
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 IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT. YES [X] NO [ ]
AS OF JANUARY 5, 2007 THE REGISTRANT HAD A TOTAL OF 41,509,506 SHARES OF COMMON
STOCK - $1 PAR VALUE OUTSTANDING.
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
STATEMENTS OF CONSOLIDATED OPERATIONS
(Dollars in thousands, except share and per share amounts)
(Unaudited)
12 Weeks Ended 40 Weeks Ended
-------------------------------------- -------------------------------------
Dec. 2, 2006 Dec. 3, 2005 Dec. 2, 2006 Dec. 3, 2005
------------------ ------------------ ------------------ -----------------
Sales $ 1,543,004 $ 1,580,942 $ 5,242,149 $ 7,132,824
Cost of merchandise sold (1,078,439) (1,116,399) (3,658,042) (5,113,659)
------------ -------------- -------------- -------------
Gross margin 464,565 464,543 1,584,107 2,019,165
Store operating, general and administrative
expense (463,413) (546,100) (1,591,162) (2,283,928)
------------ -------------- --------------- --------------
Income (loss) from operations 1,152 (81,557) (7,055) (264,763)
(Loss) gain on sale of Canadian operations (599) (6,083) (890) 912,468
Interest expense (17,171) (15,398) (56,221) (76,783)
Interest income 1,845 4,803 8,472 9,146
Minority interest in earnings of consolidated
franchisees - - - (1,131)
Equity in earnings of Metro, Inc. 11,023 3,397 30,840 3,397
------------ -------------- -------------- -------------
(Loss) income from continuing operations
before income taxes (3,750) (94,838) (24,854) 582,334
Benefit from (provision for) income taxes 43,702 21,279 58,584 (152,885)
------------ -------------- -------------- --------------
Income (loss) from continuing operations 39,952 (73,559) 33,730 429,449
Discontinued operations:
Income from operations of discontinued
businesses, net of tax provision
of $547 and $1,428 for the 12 weeks
ended 12/2/06 and 12/3/05, respectively,
and $259 and $1,232 for the 40 weeks
ended 12/2/06 and 12/3/05, respectively 755 1,972 357 1,704
Gain on disposal of discontinued
operations, net of tax provision of
$0 and $417 for the 12 weeks ended 12/2/06
and 12/3/05, respectively, and $0 and $417
for the 40 weeks ended 12/2/06
and 12/3/05, respectively - 577 - 577
------------- -------------- -------------- -------------
Income from discontinued operations 755 2,549 357 2,281
------------ -------------- -------------- -------------
Net income (loss) $ 40,707 $ (71,010) $ 34,087 $ 431,730
============ =============== ============== =============
Net income (loss) per share - basic:
Continuing operations $ 0.96 $ (1.80) $ 0.81 $ 10.71
Discontinued operations 0.02 0.06 0.01 0.06
------------- --------------- ------------- -------------
Net income (loss) per share - basic $ 0.98 $ (1.74) $0.82 $ 10.77
============= ============== ============== =============
Net income (loss) per share - diluted:
Continuing operations $ 0.95 $ (1.80) $0.80 $ 10.56
Discontinued operations 0.02 0.06 0.01 0.06
------------- --------------- ------------- -------------
Net income (loss) per share - diluted $ 0.97 $ (1.74) $0.81 $ 10.62
============= ============== ============== =============
Weighted average number of common shares
outstanding 41,499,554 40,997,714 41,403,346 40,075,391
Common stock equivalents 520,892 622,161 501,420 559,174
------------- -------------- -------------- -------------
Weighted average number of common and
common equivalent shares outstanding 42,020,446 41,619,875 41,904,766 40,634,565
============= ============== ============== =============
See Notes to Quarterly Report
2
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Dollars in thousands, except share amounts)
(Unaudited)
Retained Accumulated
Common Stock Additional Earnings Other Total
----------------------------- Paid-in (Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit) Income (Loss) Equity
-------------- ------------- ------------- ------------- ----------------- ---------------
40 WEEK PERIOD ENDED
DECEMBER 2, 2006
----------------------
Balance at beginning of period 41,148,987 $ 41,149 $ 497,193 $ 126,432 $ 6,953 $ 671,727
Net income 34,087 34,087
Other comprehensive income 3,566 3,566
Cash dividends on common stock -
$7.25 per share (299,089) (299,089)
Stock options exercised 333,161 333 4,700 5,033
Other share based awards 26,104 26 6,626 6,652
------------ ----------- ----------- ----------- ----------- -----------
Balance at end of period 41,508,252 $ 41,508 $ 209,430 $ 160,519 $ 10,519 $ 421,976
========== =========== =========== =========== =========== ===========
40 WEEK PERIOD ENDED
DECEMBER 3, 2005
----------------------
Balance at beginning of period 38,764,999 $ 38,765 $ 464,543 $ (266,198) $ (3,308) $ 233,802
Net income 431,730 431,730
Other comprehensive income 4,648 4,648
Stock options exercised 2,209,963 2,210 21,208 23,418
Other share based awards 5,303 5 6,965 6,970
------------ ----------- ----------- ----------- ----------- -----------
Balance at end of period 40,980,265 $ 40,980 $ 492,716 $ 165,532 $ 1,340 $ 700,568
============ =========== =========== =========== =========== ===========
COMPREHENSIVE INCOME (LOSS)
---------------------------
12 Weeks Ended 40 Weeks Ended
-------------------------------------- -------------------------------------
Dec. 2, 2006 Dec. 3, 2005 Dec. 2, 2006 Dec. 3, 2005
------------------ ------------------ ------------------ -----------------
Net income (loss) $ 40,707 $ (71,010) $ 34,087 $ 431,730
------------ ------------ ----------- -----------
Foreign currency translation adjustment (9,398) 2,591 2,904 5,511
Net unrealized loss on derivatives,
net of tax - - - (57)
Net unrealized gain (loss) on marketable
securities, net of tax 277 (891) 662 (806)
----------- ------------ ----------- -----------
Other comprehensive (loss) income (9,121) 1,700 3,566 4,648
----------- ------------ ----------- -----------
Total comprehensive income (loss) $ 31,586 $ (69,310) $ 37,653 $ 436,378
=========== ============ =========== ===========
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BALANCES
------------------------------------------------------
Net Unrealized Accumulated
Foreign (Loss) Gain on Net Unrealized Minimum Other
Currency Marketable Gain (Loss) Pension Comprehensive
Translation Securities on Derivatives Liability Income (Loss)
--------------- ---------------- -------------- ------------ -------------
Balance at February 25, 2006 $ 12,874 $ (1,015) $ - $ (4,906) $ 6,953
Current period change 2,904 662 - - 3,566
--------------- ----------- ---------- ----------- -----------
Balance at December 2, 2006 $ 15,778 $ (353) $ - $ (4,906) $ 10,519
=============== ============ ========== ============ ===========
Balance at February 26, 2005 $ 3,035 $ - $ 57 $ (6,400) $ (3,308)
Current period change 5,511 (806) (57) - 4,648
--------------- ------------ ----------- ----------- -----------
Balance at December 3, 2005 $ 8,546 $ (806) $ - $ (6,400) $ 1,340
=============== ============ ========== ============ ===========
See Notes to Quarterly Report
3
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share amounts)
December 2, 2006 February 25, 2006
-------------------- --------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 92,748 $ 229,589
Restricted cash 3,585 146,309
Restricted marketable securities 84,302 -
Marketable securities - 167,405
Accounts receivable, net of allowance for doubtful accounts
of $3,710 and $7,042 at December 2, 2006 and
February 25, 2006, respectively 130,073 175,939
Inventories 442,507 405,310
Prepaid expenses and other current assets 92,486 85,462
------------- --------------
Total current assets 845,701 1,210,014
------------- --------------
Non-current assets:
Property:
Property owned 927,950 875,140
Property leased under capital leases 21,101 23,094
------------- --------------
Property - net 949,051 898,234
Equity investment in Metro, Inc. 367,495 338,756
Other assets 54,857 51,861
------------- --------------
Total assets $ 2,217,104 $ 2,498,865
============= ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 32,180 $ 569
Current portion of obligations under capital leases 1,560 2,274
Accounts payable 199,553 209,774
Book overdrafts 55,120 35,447
Accrued salaries, wages and benefits 99,981 121,734
Accrued taxes 30,879 34,215
Other accruals 149,196 206,260
------------- --------------
Total current liabilities 568,469 610,273
------------- --------------
Non-current liabilities:
Long-term debt 342,729 246,282
Long-term obligations under capital leases 30,263 32,270
Long-term real estate liabilities 300,818 297,453
Other non-current liabilities 552,849 640,860
------------- --------------
Total liabilities 1,795,128 1,827,138
------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock--no par value; authorized - 3,000,000
shares; issued - none - -
Common stock--$1 par value; authorized - 80,000,000
shares; issued and outstanding - 41,508,252 and 41,148,987
shares at December 2, 2006 and February 25, 2006, respectively 41,508 41,149
Additional paid-in capital 209,430 497,193
Accumulated other comprehensive income 10,519 6,953
Retained earnings 160,519 126,432
------------- --------------
Total stockholders' equity 421,976 671,727
------------- --------------
Total liabilities and stockholders' equity $ 2,217,104 $ 2,498,865
============= ==============
See Notes to Quarterly Report
4
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in thousands)
(Unaudited)
40 Weeks Ended
---------------------------------------
Dec. 2, 2006 Dec. 3, 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 34,087 $ 431,730
Adjustments to reconcile net income to net cash used in operating activities:
Asset disposition initiatives 3,719 163,108
Depreciation and amortization 135,775 164,042
Income tax (benefit) provision (61,545) 119,643
Gain on disposal of owned property and write-down of property, net (23,238) (25,836)
Other property impairments 3,410 23,018
Impairment loss relating to Hurricane Katrina - 6,090
Gain on sale of discontinued operations - (994)
Loss (gain) on sale of Canadian operations 890 (912,468)
Loss on derivatives - 15,446
Loss on early extinguishment of debt - 28,623
Non-cash impact of early extinguishment of debt - 809
Other share based awards 6,652 6,970
Equity in earnings of Metro, Inc. (30,840) (3,397)
Proceeds from dividends from Metro, Inc. 5,067 3,061
Other changes in assets and liabilities:
Decrease (increase) in receivables 49,780 (25,770)
(Increase) decrease in inventories (32,401) 33,432
Increase in prepaid expenses and other current assets (16,486) (15,890)
Increase in other assets (2,897) (44)
Decrease in accounts payable (10,221) (89,717)
Decrease in accrued salaries, wages, benefits and taxes (30,508) (36,152)
(Decrease) increase in other accruals (57,063) 8,558
Increase in minority interest - 1,806
Decrease in other non-current liabilities (20,381) (59,721)
Other operating activities, net 3,336 6,191
----------- -----------
Net cash used in operating activities (42,864) (157,462)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (184,017) (134,762)
Proceeds from disposal of property 37,489 62,538
Purchase of business (24,652) -
Proceeds from sale of Canadian operations, net of cash disposed - 960,689
Disposal related expenditures for sale of Canadian operations (890) (53,543)
Decrease (increase) in restricted cash 142,724 (146,651)
Payments for derivatives - (15,446)
Purchases of marketable securities (148,700) (517,883)
Proceeds from maturities of marketable securities 230,904 274,835
----------- -----------
Net cash provided by investing activities 52,858 429,777
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 1,262,900 -
Principal payments on long-term borrowings (1,134,466) (413,948)
Long-term real estate liabilities 3,365 1,339
Principal payments on capital leases (4,098) (9,635)
Proceeds from capital leases - 10,000
Increase (decrease) in book overdrafts 19,673 (10,887)
Deferred financing fees (233) (2,921)
Dividends paid (299,089) -
Proceeds from exercises of stock options 5,033 23,418
----------- -----------
Net cash used in financing activities (146,915) (402,634)
Effect of exchange rate changes on cash and cash equivalents 80 82
----------- -----------
Net decrease in cash and cash equivalents (136,841) (130,237)
Cash and cash equivalents at beginning of period 229,589 257,748
----------- -----------
Cash and cash equivalents at end of period $ 92,748 $ 127,511
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 20,504 $ 43,153
Income taxes $ 4,952 $ 22,600
See Notes to Quarterly Report
5
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
1. BASIS OF PRESENTATION
The accompanying Statements of Consolidated Operations for the 12 and 40 weeks
ended December 2, 2006 and December 3, 2005, Statements of Consolidated
Stockholders' Equity and Comprehensive Income and Statements of Consolidated
Cash Flows for the 40 weeks ended December 2, 2006 and December 3, 2005, and the
Consolidated Balance Sheets at December 2, 2006 and February 25, 2006 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 2005 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. Significant intercompany accounts and transactions have been
eliminated. Our Company uses the equity method of accounting for our investment
in Metro, Inc. as we exert significant influence over substantive operating
decisions made by Metro, Inc. through our membership on Metro, Inc.'s Board of
Directors and its committees and through an information technology services
agreement with Metro, Inc.
Certain reclassifications have been made to prior year amounts to conform to
current year presentation.
2. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In October 2005, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position FAS 13-1 ("FSP FAS 13-1"), which requires companies to expense
rental costs associated with ground or building operating leases that are
incurred during a construction period. As a result, companies that are currently
capitalizing these rental costs are required to expense them beginning in its
first reporting period beginning after December 15, 2005. FSP FAS 13-1 was
effective for our Company as of the first quarter of fiscal 2006. We evaluated
the provisions of FSP FAS 13-1 and have adopted the guidance. This adoption did
not have a material impact on our Company's financial position or results of
operations.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes--an Interpretation of FASB Statement 109 ("FIN 48"),
which clarifies the accounting for uncertainty in tax positions. This
Interpretation provides that the tax effects from an uncertain tax position can
be recognized in our financial statements, only if the position is more likely
than not of being sustained on audit, based on the technical merits of the
position. The provisions of FIN 48 are effective as of the beginning of fiscal
2007, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. We are currently evaluating the
impact of adopting FIN 48 on our financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value,
establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value
measurements. The provisions of SFAS 157 are effective for fiscal years
beginning after November 15, 2007 (our year ended February 28, 2009). Our
Company is currently evaluating the impact, if any, of the provisions of
SFAS 157.
6
In September 2006, the FASB issued SFAS 158, "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106 and 132(R)" ("SFAS 158") and is effective for our fiscal year
ended February 24, 2007. SFAS 158 was issued to improve the overall financial
statement presentation of pension and other postretirement plans and does not
impact the determination of net periodic benefit cost or the measurement of plan
assets or obligations. This standard requires companies to recognize the funded
status of their defined benefit pension and other postretirement benefit plans
as a net liability or asset on their balance sheets and requires any
unrecognized prior service costs and actuarial gains or losses to be recognized
as a component of accumulated other comprehensive income or loss. Additionally,
SFAS 158 no longer allows companies to measure their plans as of any date other
than the end of their fiscal year; however, this provision is not effective for
companies until fiscal years ending after December 15, 2008 (our year ended
February 28, 2009). We currently measure our plan assets and obligations using a
December 31 measurement date. Had this new standard been in effect for our
fiscal year ended February 25, 2006, we estimate that our stockholders' equity
would have been increased by approximately $17 million. The impact of adoption
could differ materially from this estimate as it will reflect asset performance
through the end of the calendar year as well as interest rates and other factors
that will be applicable as of December 31, 2006.
In September 2006, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). This bulletin provides guidance on the consideration of
the effects of prior year misstatements in quantifying current year
misstatements for the purpose of materiality assessment. SAB 108 is effective
for our fiscal year ending February 24, 2007. The cumulative effect, if any, of
applying the provisions of SAB 108 will be reported as an adjustment to
beginning-of-year retained earnings. We are currently evaluating the impact of
SAB 108.
3. SPECIAL ONE-TIME DIVIDEND
On April 25, 2006, our Company paid a special one-time dividend to our
shareholders of record on April 17, 2006 equal to $7.25 per share. This dividend
payout totaling $299.1 million was considered a return of capital to our
shareholders and accordingly was recorded as a reduction of "Additional paid in
capital" in our Consolidated Balance Sheets at December 2, 2006. The transaction
was funded primarily by cash available on the balance sheet resulting from the
strategic restructuring of the Company during fiscal 2005.
Although we paid this one-time special dividend, our Company's practice is to
not pay dividends. As such, we have not made dividend payments in the previous
three years and do not intend to pay dividends in the normal course of business
in fiscal 2006. However, our Company is permitted, under the terms of our
Revolver, to pay cash dividends on common shares.
In connection with the payment of the special one-time dividend discussed above,
our Company also adjusted the number and/or price of all unexercised stock
options and nonvested performance restricted stock units as of April 12, 2006,
to ensure that an individual's right to purchase stock at an aggregate value
remained the same both before and after the special one-time dividend payment.
These adjustments did not have an impact on stock compensation expense for the
40 weeks ended December 2, 2006. Refer to Note 10 - Stock Based Compensation for
adjustments made to stock options outstanding and nonvested performance
restricted stock units as a result of the dividend.
7
4. EQUITY INVESTMENT IN METRO, INC.
We use the equity method of accounting to account for our investment in Metro,
Inc. on the basis that we have significant influence over substantive operating
decisions made by Metro, Inc. through our membership on Metro, Inc.'s Board of
Directors and its committees and through an information technology services
agreement with Metro, Inc. The value of our equity investment in Metro, Inc.
based upon Metro, Inc.'s quoted market price was $572.4 million at December 2,
2006.
The following table summarizes the status and results of our Company's equity
investment in Metro, Inc. from February 25, 2006 through December 2, 2006:
Equity investment at February 25, 2006 $ 338,756
Dividends and distributions received (5,067)
Equity earnings in Metro, Inc. 30,840
Foreign currency translation 2,966
------------
Equity investment at December 2, 2006 $ 367,495
============
In accordance with Emerging Issues Task Force ("EITF") 01-2, "Interpretations of
APB Opinion No. 29," we have indefinitely deferred $171.7 million of the gain
resulting from the sale of our Canadian operations that directly related to the
economic interest we retained in Metro, Inc. We record our equity earnings or
losses relating to our equity investment in Metro, Inc. on about a three-month
lag period as permitted by APB 18, "The Equity Method of Accounting for
Investments in Common Stock." Thus, during the 12 and 40 weeks ending December
2, 2006, we recorded $11.0 million and $30.8 million, respectively, in equity
earnings relating to our equity investment in Metro, Inc. During the 12 and 40
weeks ended December 3, 2005, we recorded $3.4 million in equity earnings
related to our equity investment in Metro, Inc. These amounts were included in
"Equity in earnings of Metro, Inc." on our Statements of Consolidated
Operations.
The difference between the carrying value of our investment of $367.5 million
and the amount of our underlying equity in Metro, Inc.'s net assets of $238.0
million was $129.5 million.
Metro, Inc.'s summarized financial information, derived from its unaudited
fourth quarter ended September 30, 2006 and audited years ended September 30,
2006 and September 24, 2005 financial statements, is as follows (in millions):
Sept. 30, 2006 Sept. 24, 2005
--------------- ---------------
Balance sheet:
Current assets $ 929.7 $ 833.9
Noncurrent assets 2,717.9 2,574.2
--------------- --------------
Total assets $ 3,647.6 $ 3,408.1
=============== ==============
Current liabilities $ 958.3 $ 914.7
Noncurrent liabilities * 1,179.3 1,180.2
--------------- --------------
Total liabilities $ 2,137.6 $ 2,094.9
=============== ==============
8
13 Weeks Ended 53 Weeks Ended 52 Weeks Ended
Sept. 30, 2006 Sept. 30, 2006 Sept. 24, 2005
----------------- -------------- -------------
Income statement:
Net sales $ 2,370.1 $ 9,705.1 $ 5,587.1
============= ============= =============
Cost of sales and operating expenses $ 2,216.4 $ 9,138.9 $ 5,281.7
============= ============= =============
Net income $ 69.9 $ 224.4 $ 158.9
============= ============= =============
* Includes minority interests of $8.6 million and $5.5 million for
the years ended September 23, 2006 and September 24, 2005,
respectively.
5. CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND MARKETABLE SECURITIES
At December 2, 2006, we had $3.6 million in restricted cash representing monies
held in escrow for services which our Company is required to perform in
connection with the sale of our real estate properties.
During the third quarter of fiscal 2006, our Company transferred 6,000,000 of
our Class A subordinate shares of Metro, Inc. from our foreign subsidiary to the
United States. These transferred shares are being used as collateral for our new
Letter of Credit Agreement that we entered into during fiscal 2005 and have
allowed us to reduce the amount of restricted cash and/or marketable securities
we were required to maintain as collateral previously.
At February 25, 2006, we had $146.3 million, in restricted cash, which was held
in a money market fund, and could only be used as collateral for our new Letter
of Credit Agreement that we entered into during fiscal 2005. In addition, our
restricted marketable securities of $84.3 million at December 2, 2006, held by
Bank of America, could only be used as collateral for our new Letter of Credit
Agreement that we entered into during fiscal 2005.
The following is a summary of cash, cash equivalents, restricted cash, and
marketable securities at December 2, 2006 and February 25, 2006:
At December 2, 2006
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Costs Gains Losses Value
------------- ------------- ------------- -------------
CLASSIFIED AS:
Cash $ 88,757 $ - $ - $ 88,757
Cash equivalents:
Money market funds 3,991 - - 3,991
----------- ----------- ------------- -----------
Total cash and cash equivalents 92,748 - - 92,748
----------- ----------- ------------- -----------
Restricted cash 3,585 - - 3,585
Restricted marketable securities:
Corporate bonds 39,193 - (79) 39,114
Securities of the U.S. government and its agencies 45,461 - (273) 45,188
----------- ----------- -------------- -----------
Total restricted marketable securities 84,654 - (352) 84,302
----------- ----------- -------------- -----------
Total cash, cash equivalents, restricted cash and
marketable securities $ 180,987 $ - $ (352) $ 180,635
=========== =========== ============== ===========
SECURITIES AVAILABLE-FOR-SALE:
Maturing within one year $ 58,333 $ 58,170
=========== ===========
Maturing greater than one year $ 30,312 $ 30,123
=========== ===========
9
At February 25, 2006
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Costs Gains Losses Value
------------- ------------- ------------- -------------
CLASSIFIED AS:
Cash $ 78,414 $ - $ - $ 78,414
Cash equivalents:
Money market funds 151,175 - - 151,175
----------- ----------- ------------- -----------
Total cash and cash equivalents 229,589 - - 229,589
----------- ----------- ------------- -----------
Restricted cash 146,309 - - 146,309
Marketable securities:
Corporate bonds 51,456 - (457) 50,999
Securities of the U.S. government and its agencies 45,943 - (558) 45,385
Auction rate securities 71,021 - - 71,021
----------- ----------- ------------- -----------
Total marketable securities 168,420 - (1,015) 167,405
----------- ----------- -------------- -----------
Total cash, cash equivalents, restricted cash and
marketable securities $ 544,318 $ - $ (1,015) $ 543,303
=========== =========== ============== ===========
SECURITIES AVAILABLE-FOR-SALE:
Maturing within one year $ 233,921 $ 233,879
=========== ===========
Maturing greater than one year $ 85,674 $ 84,701
=========== ===========
The following table provides the breakdown of the investments with unrealized
losses at December 2, 2006 and February 25, 2006:
December 2, 2006
-------------------------------------------------------------------------------------------------------
Less than 12 Months 12 Months or Longer Total
-------------------------------- -------------------------------- --------------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------------- -------------- ------------- --------------- --------------- ---------------
Corporate bonds $ 39,114 $ (79) $ - $ - $ 39,114 $ (79)
Securities of the
U.S. government
and its agencies 15,065 (84) 30,123 (189) 45,188 (273)
--------------- -------------- ------------- -------------- --------------- --------------
Total $ 54,179 $ (163) $ 30,123 $ (189) $ 84,302 $ (352)
================ ============== ============= ============== =============== ==============
February 25, 2006
-----------------------------------------------------------------------------------------------------
Less than 12 Months 12 Months or Longer Total
--------------------------------- -------------------------------- --------------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------------- --------------- -------------- --------------- --------------- ---------------
Corporate bonds $ 11,683 $ (41) $ 39,316 $ (416) $ 50,999 $ (457)
Securities of the
U.S. government
and its agencies - - 45,385 (558) 45,385 (558)
---------------- --------------- -------------- -------------- --------------- --------------
Total $ 11,683 $ (41) $ 84,701 $ (974) $ 96,384 $ (1,015)
================ =============== ============== ============== =============== ==============
Corporate bonds: Our unrealized losses on our investments in corporate bonds
were caused by interest rate increases by the Federal Reserve. The contractual
terms of those investments do not permit the issuer to settle the security at a
price less than the amortized cost of the investment. We believe it is probable
that we will be able to collect all amounts due according to the contractual
terms of these investments. Therefore, it is expected that the debentures would
not be settled at a price less than the amortized cost of the investment.
Because we have the ability and intent to hold those investments until a
recovery of fair value, which may be maturity, we do not consider those
investments to be other-than-temporarily impaired at December 2, 2006 and
February 25, 2006, respectively.
10
Securities of the U.S. government and its agencies: Our unrealized losses on our
investments in securities of the U.S. government and its agencies were caused by
interest rate increases by the Federal Reserve. The contractual terms of those
investments do not permit the issuer to settle the securities at a price less
than the amortized cost of the investment. Because we have the ability and
intent to hold those investments until a recovery of fair value, which may be
maturity, we do not consider those investments to be other-than-temporarily
impaired at December 2, 2006 and February 25, 2006, respectively.
Gross realized losses on sales of investments were nil and $0.05 million for the
12 and 40 weeks ended December 2, 2006, respectively. There were no gross
realized gains or losses on sales of investments for the 12 and 40 weeks ended
December 3, 2005.
6. VALUATION OF LONG-LIVED ASSETS
In accordance with SFAS 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), we review the carrying values of our long-lived
assets for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable. Such review
is primarily based upon groups of assets and the undiscounted estimated future
cash flows from such assets to determine if the carrying value of such assets is
recoverable from their respective cash flows. If such review indicates an
impairment exists, we measure such impairment on a discounted basis using a
probability-weighted approach and a risk-free rate.
During the 12 and 40 weeks ended December 2, 2006, we recorded impairment losses
on long-lived assets of $1.0 million and $4.6 million, respectively. During the
12 and 40 weeks ended December 3, 2005, we recorded impairment losses on
long-lived assets of $18.0 million and $44.6 million, respectively.
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 12 and 40 weeks ended December 2, 2006, we recorded impairment losses
on property, plant and equipment of $1.0 million and $3.5 million, respectively,
related to stores that were or will be closed or converted in the normal course
of business as compared to $3.8 million and $5.3 million, respectively, in
impairment losses on property, plant and equipment related to stores that were
or will be closed or converted in the normal course of business during the 12
and 40 weeks ended December 3, 2005. These amounts were included in "Store
operating, general and administrative expense" in our Consolidated Statements of
Operations.
11
Impairments due to unrecoverable assets
---------------------------------------
Through the 12 and 40 weeks ended December 3, 2005, we experienced operating
losses for two of the past three years for two of our United States' asset
groups, located in the Northeast, which we believe was a triggering event under
SFAS 144 for potential impairment of the asset group's long-lived assets. Thus,
we reviewed the carrying value of these asset groups for potential impairment,
and based upon internal analysis, we estimated the asset groups' future cash
flows from their long-lived assets, which primarily consisted of equipment and
leasehold improvements. As these asset groups' carrying value were not
recoverable from their future cash flows, we determined the fair value of the
related assets based on the same analysis, primarily using the discounted cash
flow approach. As a result of this review, we recorded an impairment charge for
these asset groups' long-lived assets of $8.1 million and $17.7 million,
respectively, as a component of operating loss in "Store operating, general and
administrative expense" in our Consolidated Statements of Operations for the 12
and 40 weeks ended December 3, 2005.
Impairments related to closure of stores impacted by Hurricane Katrina
----------------------------------------------------------------------
During both the 12 and 40 weeks ended December 3, 2005, we recorded impairment
losses on property, plant and equipment that was not covered by insurance of
$6.1 million as discussed in Note 14 - Hurricane Katrina and Impact on U.S.
Business. This amount was included in "Store operating, general and
administrative expense" in our Consolidated Statements of Operations for the 12
and 40 weeks ended December 3, 2005. There were no such amounts recorded during
the 12 and 40 weeks ended December 2, 2006.
Impairments related to our Asset Disposition Initiatives
--------------------------------------------------------
During the 12 and 40 weeks ended December 2, 2006, we recorded impairment losses
on property of nil and $1.1 million, respectively, related to property
write-downs as a result of our asset disposition initiatives as discussed in
Note 8 - Asset Disposition Initiatives. These amounts were included in "Store
operating, general and administrative expense" in our Consolidated Statements of
Operations for the 12 and 40 weeks ended December 2, 2006.
During the 12 and 40 weeks ended December 3, 2005, we recorded impairment losses
on property of nil and $15.5 million, respectively, related to property
write-downs as a result of our asset disposition initiatives as discussed in
Note 8 - Asset Disposition Initiatives. These amounts were included in "Store
operating, general and administrative expense" in our Statements of Consolidated
Operations for the 12 and 40 weeks ended December 3, 2005.
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
7. DISCONTINUED OPERATIONS
In February 2003, we announced the sale of a portion of our non-core assets,
including nine of our stores in northern New England and seven stores in
Madison, Wisconsin. In March 2003, we entered into an agreement to sell an
additional eight stores in northern New England.
During fiscal 2003, we adopted a formal plan to exit the New England and
Milwaukee, Wisconsin markets, as well as our Eight O'Clock Coffee business,
through the sale and/or disposal of these assets. Summarized below are the
operating results for these discontinued businesses, which are included in our
Statements of Consolidated Operations, under the caption "Income from operations
of discontinued businesses, net of tax" for the 12 and 40 weeks ending December
2, 2006 and December 3, 2005. These asset sales are now complete.
12
12 Weeks ended December 2, 2006
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
INCOME (LOSS) FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses 25 1,318 (41) 1,302
------------- --------------- --------------- -------------
Income (loss) from operations
of discontinued businesses,
before tax 25 1,318 (41) 1,302
Tax (provision) benefit (10) (554) 17 (547)
--------------- ---------------- --------------- --------------
Income (loss) from operations
of discontinued businesses,
net of tax $ 15 $ 764 $ (24) $ 755
=============== ================ =============== =============
Disposal related costs
included in operating
expenses above:
Non-accruable closing costs $ 25 $ 42 $ (41) $ 26
Vacancy - 970 - 970
Proceeds from lease termination - 394 - 394
Interest accretion on
present value of future
occupancy costs - (88) - (88)
--------------- ---------------- --------------- --------------
Total disposal related costs $ 25 $ 1,318 $ (41) $ 1,302
--------------- ---------------- --------------- -------------
13
12 Weeks Ended December 3, 2005
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
(LOSS) INCOME FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses (10) 3,546 (136) 3,400
--------------- ---------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses,
before tax (10) 3,546 (136) 3,400
Tax benefit (provision) 4 (1,489) 57 (1,428)
--------------- ---------------- --------------- ----------------
(Loss) income from operations
of discontinued businesses,
net of tax $ (6) $ 2,057 $ (79) $ 1,972
=============== ================ =============== ================
Disposal related costs included
in operating expenses above:
Non-accruable closing costs $ (10) $ (26) $ (136) $ (172)
Vacancy - 3,717 - 3,717
Interest accretion on present
value of future occupancy costs - (145) - (145)
--------------- ---------------- --------------- ----------------
Total disposal related costs $ (10) $ 3,546 $ (136) $ 3,400
--------------- ---------------- --------------- ----------------
GAIN ON DISPOSAL OF
DISCONTINUED BUSINESSES
Sales $ - $ 994 $ - $ 994
-------------- --------------- --------------- ---------------
Gain from operations of
discontinued businesses,
before tax - 994 - 994
Tax provision - (417) - (417)
--------------- ---------------- --------------- ----------------
Gain from operations of
discontinued businesses,
net of tax $ - $ 577 $ - $ 577
=============== ================ =============== ================
14
40 Weeks ended December 2, 2006
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
INCOME (LOSS) FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses - 657 (41) 616
------------- --------------- -------------- -------------
Income (loss) from operations of
discontinued businesses, before
tax - 657 (41) 616
Tax (provision) benefit - (276) 17 (259)
--------------- ---------------- --------------- --------------
Income (loss) from operations
of discontinued businesses,
net of tax $ - $ 381 $ (24) $ 357
=============== ================ =============== =============
Disposal related costs included
in operating expenses above:
Non-accruable closing costs $ - $ - $ (41) $ (41)
Severance and benefits - 146 - 146
Vacancy - 429 - 429
Proceeds from lease termination - 394 - 394
Interest accretion on present
value of future occupancy
costs - (312) - (312)
--------------- ---------------- --------------- -------------
Total disposal related costs $ - $ 657 $ (41) $ 616
--------------- ---------------- --------------- -------------
15
40 Weeks Ended December 3, 2005
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
(LOSS) INCOME FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses (47) 3,170 (187) 2,936
--------------- ---------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses, before
tax (47) 3,170 (187) 2,936
Tax benefit (provision) 20 (1,331) 79 (1,232)
--------------- ---------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses, net
of tax $ (27) $ 1,839 $ (108) $ 1,704
=============== ================ =============== ================
Disposal related costs included
in operating expenses above:
Non-accruable closing costs $ (47) $ (44) $ (187) $ (278)
Vacancy - 3,717 - 3,717
Interest accretion on present
value of future occupancy
costs - (503) - (503)
--------------- ---------------- --------------- ----------------
Total disposal related costs $ (47) $ 3,170 $ (187) $ 2,936
--------------- ---------------- --------------- ----------------
GAIN ON DISPOSAL OF
DISCONTINUED BUSINESSES
Sales $ - $ 994 $ - $ 994
--------------- ---------------- --------------- ----------------
Gain from operations of
discontinued businesses,
before tax - 994 - 994
Tax provision - (417) - (417)
--------------- ---------------- --------------- ----------------
Gain from operations of
discontinued businesses,
net of tax $ - $ 577 $ - $ 577
=============== ================ =============== ================
NORTHERN NEW ENGLAND
--------------------
During the 12 and 40 weeks ended December 2, 2006, we recorded gains of $0.02
million and nil, respectively, primarily related to adjustments as a result of
changes in estimates. During the 12 and 40 weeks ended December 3, 2005, we
incurred additional costs subsequent to the sale of these stores of $0.01
million and $0.05 million, respectively, primarily related to adjustments as a
result of changes in estimates. These amounts were included in "Income from
operations of discontinued businesses, net of tax" on our Statements of
Consolidated Operations for the 12 and 40 weeks ended December 2, 2006 and
December 3, 2005, respectively.
KOHL'S MARKET
-------------
During the 12 and 40 weeks ended December 2, 2006, we recorded gains of $1.3
million and $0.6 million, respectively, primarily due to favorable results of
terminating leases at certain locations and adjustments as a result of changes
in estimates partially offset by interest accretion on future occupancy payments
that were recorded at present value at the time of the original charge. During
the 12 and 40 weeks ended December 3, 2005, we recorded a pretax gain of $3.5
million and $3.2 million, respectively, primarily due to the reversal of
previously accrued occupancy related costs partially offset by the costs of
winding down this business. These amounts were included in "Income from
operations of discontinued businesses, net of tax" on our Statements of
Consolidated Operations for the 12 and 40 weeks ended December 2, 2006 and
December 3, 2005.
16
During the 12 and 40 weeks ended December 3, 2005, we recorded a pretax gain on
the sale of property of $1.0 million. There were no similar gains in the 12 and
40 weeks ended December 2, 2006. This amount was included in "Gain on disposal
of discontinued operations, net of tax" in our Statements of Consolidated
operations for those periods.
The following table summarizes the reserve activity related to the exit of the
Kohl's market since the charge was recorded through the 40 weeks ended December
2, 2006:
Severance
and Fixed
Occupancy Benefits Assets Total
------------- ------------- --------------- ----------------
Fiscal 2003 charge(1) $ 25,487 $ 13,062 $ 18,968 $ 57,517
Additions (2) 352 - - 352
Utilization (3) (5,342) (8,228) (18,968) (32,538)
Adjustments (4) (1,458) - - (1,458)
----------- ------------- ------------- --------------
Balance at February 28, 2004 $ 19,039 $ 4,834 $ - $ 23,873
Additions (2) 688 52 602 1,342
Utilization (3) (1,918) (2,201) (602) (4,721)
Adjustments (4) (354) - - (354)
----------- ------------- ------------- --------------
Balance at February 26, 2005 $ 17,455 $ 2,685 $ - $ 20,140
Additions(2) 562 44 - 606
Utilization (3) (3,235) (2,128) - (5,363)
Adjustments (4) (4,299) 582 - (3,717)
----------- ------------- ------------- --------------
Balance at February 25, 2006 $ 10,483 $ 1,183 $ - $ 11,666
Additions (2) 308 4 - 312
Utilization (3) (1,779) (1,041) - (2,820)
Adjustments (4) (429) (146) - (575)
----------- ------------- ------------- --------------
Balance at December 2, 2006 $ 8,583 $ - $ - $ 8,583
============ ============= ============= ==============
(1) The fiscal 2003 charge to occupancy consists of $25.5 million related
to future occupancy costs such as rent, common area maintenance and
real estate taxes. The fiscal 2003 charge to severance and benefits of
$13.1 million related to severance costs of $6.6 million and costs for
future obligations for early withdrawal from multi-employer union
pension plans and a health and welfare plan of $6.5 million. The fiscal
2003 charge to property of $18.9 million represents the impairment
losses at certain Kohl's locations.
(2) The fiscal 2003, fiscal 2004, fiscal 2005 and the year to date third
quarter of fiscal 2006 additions to occupancy and severance and
benefits 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. The addition to fixed assets represents additional
impairment losses recorded as a result of originally estimated proceeds
on the disposal of these assets not being achieved.
(3) Occupancy utilization represents vacancy related payments for closed
locations such as rent, common area maintenance, real estate taxes and
lease termination payments. Severance and benefits utilization
represents payments made to terminated employees during the period and
payments for pension withdrawal.
(4) 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. During fiscal 2003, we recorded net
adjustments of $1.5 million primarily related to reversals of
previously accrued vacancy costs due to favorable results of
terminating and subleasing certain locations of $4.5 million offset by
additional vacancy accruals of $3.0 million. During fiscal 2004, we
recorded a reversal of previously accrued occupancy related costs due
to favorable results of terminating leases. During fiscal 2005, we
recorded adjustments relating to (i.) a reversal of previously accrued
occupancy costs of $3.7 million due to favorable results of terminating
the Kohl's warehouse lease and (ii.) the reclassification of $0.6
million between the liabilities for occupancy and severance and
benefits to properly state their respective ending balances at February
25, 2006. During the 40 weeks ended December 2, 2006, we recorded
adjustments for (i.) a reduction in vacancy related costs for our
properties due to favorable results of terminating leases at certain
locations of $0.7 million partially offset by changes in our estimation
of such future costs of $0.3 million and (ii.) a reversal of previously
accrued pension withdrawal payments of $0.1 million that were no longer
required to be paid.
17
We paid $12.3 million of the total occupancy charges from the time of the
original charge through December 2, 2006 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. The remaining occupancy liability of $8.6 million relates to
expected future payments under long term leases and is expected to be paid out
in full by 2020.
We paid $13.6 million of the total severance and benefits charges from the time
of the original charges through December 2, 2006, which resulted from the
termination of approximately 2,000 employees. At December 2, 2006, there are no
future obligations for severance and benefits.
At December 2, 2006 and February 25, 2006, $2.3 million and $3.7 million,
respectively, of the Kohl's exit reserves were included in "Other accruals" and
$6.3 million and $8.0 million, respectively, were included in "Other non-current
liabilities" on our Consolidated Balance Sheets. We have evaluated the liability
balance of $8.6 million as of December 2, 2006 based upon current available
information and have concluded that it is adequate. We will continue to monitor
the status of the vacant properties and adjustments to the reserve balance may
be recorded in the future, if necessary.
EIGHT O'CLOCK COFFEE
--------------------
During fiscal 2003, we completed the sale of our Eight O'Clock Coffee business,
generating gross proceeds of $107.5 million and a net gain after transaction
related costs of $85.0 million ($49.3 million after tax). The sale of the coffee
business also included a contingent note for up to $20.0 million, the value and
payment of which is based upon certain elements of the future performance of the
Eight O'Clock Coffee business and therefore is not included in the gain.
During the 12 and 40 weeks ended December 2, 2006, we incurred costs of $0.04
million related to legal fees for this business. During the 12 and 40 weeks
ended December 3, 2005, we incurred pretax costs of $0.1 million and $0.2
million to wind down our operations in this business subsequent to the sale.
These amounts were included in "Income from operations of discontinued
businesses, net of tax" on our Statements of Consolidated Operations for the 12
and 40 weeks ended December 2, 2006 and December 3, 2005.
8. ASSET DISPOSITION INITIATIVES
Presented below is a reconciliation of the charges recorded on our Consolidated
Balance Sheets, Statements of Consolidated Operations and Statements of
Consolidated Cash Flows for the 12 and 40 weeks ended December 2, 2006 and
December 3, 2005. Present value ("PV") interest represents interest accretion on
future occupancy costs which were recorded at present value at the time of the
original charge. Non-accruable items represent charges related to the
restructuring that are required to be expensed as incurred in accordance with
SFAS 146 "Accounting for Costs Associated with Exit or Disposal Activities".
18
12 weeks ended December 2, 2006
------------------------------------------------------------------------------------------------
U.S.
Project 2001 Farmer Closure of Distribution
Great Asset Jack Stores in Operations and
Renewal Disposition Restructuring the Midwest Warehouses Total
----------- --------------- -------------- ------------- ----------- -----------
Balance Sheet accruals
Vacancy $ (3,796) $ 49 $ - $ 1,937 $ 604 $ (1,206)
PV interest 197 300 169 796 56 1,518
Severance - - - 4 32 36
----------- --------------- -------------- ------------- ----------- -----------
Total accrued to
balance sheet (3,599) 349 169 2,737 692 348
------------ --------------- -------------- ------------- ----------- -----------
Non-accruable items
recorded on Statements
of Operations
Gain on capital lease
termination - - - (55) - (55)
Loss on sale of property - - - - 24 24
Closing costs (5) - - - 86 81
------------ --------------- -------------- ------------- ----------- -----------
Total non-accruable items (5) - - (55) 110 50
------------ --------------- -------------- ------------- ----------- -----------
Less PV interest (197) (300) (169) (796) (56) (1,518)
------------ --------------- --------------- -------------- ------------ -----------
Total amount recorded
on Statements of
Operations excluding
PV interest (3,801) 49 - 1,886 746 (1,120)
------------ --------------- -------------- ------------- ----------- -----------
Less closing costs 5 - - - (86) (81)
----------- --------------- -------------- ------------- ----------- ----------
Total amount recorded
On Statements of
Cash Flows $ (3,796) $ 49 $ - $ 1,886 $ 660 $ (1,201)
============ =============== ============== ============= =========== ===========
19
12 weeks ended December 3, 2005
---------------------------------------------------------------------------------------------
U.S.
Project 2001 Farmer Closure of Distribution
Great Asset Jack Stores in Operations and
Renewal Disposition Restructuring the Midwest Warehouses Total
------------ ------------ ------------- ------------- ------------ ------------
Balance Sheet accruals
Vacancy $ - $ (1,689) $ 302 $ 16,925 $ 1,000 $ 16,538
PV interest 328 471 184 646 - 1,629
Severance - - - 591 (482) 109
------------ ------------ ---------- ------------- ------------ ------------
Total accrued to
balance sheets 328 (1,218) 486 18,162 518 18,276
------------ ------------ ---------- ------------- ------------ ------------
Non-accruable items
recorded on Statements
of Operations
Gain on capital lease
termination - - - (588) - (588)
Property writeoffs - - - 12 106 118
Inventory related costs - - - 138 1,073 1,211
Closing costs - - - 1,059 2,044 3,103
------------ ------------ ---------- ------------- ------------ ------------
Total non-accruable items - - - 621 3,223 3,844
------------ ------------ ---------- ------------- ------------ ------------
Less PV interest (328) (471) (184) (646) - (1,629)
------------- ------------ ----------- -------------- ------------ ------------
Total amount recorded
on Statements of
Operations excluding
PV interest - (1,689) 302 18,137 3,741 20,491
------------ ------------ ---------- ------------- ------------ ------------
Less closing costs - - - (1,059) (2,044) (3,103)
------------ ------------ ---------- ------------- ------------ -----------
Total amount recorded
On Statements of
Cash Flows $ - $ (1,689) $ 302 $ 17,078 $ 1,697 $ 17,388
============ ============ ========== ============= ============ ============
20
40 weeks ended December 2, 2006
---------------------------------------------------------------------------------------------
U.S.
Project 2001 Farmer Closure of Distribution
Great Asset Jack Stores in Operations and
Renewal Disposition Restructuring the Midwest Warehouses Total
----------- ------------ ------------- ----------- -------------- ------------
Balance Sheet accruals
Vacancy $ (5,429) $ 4,482 $ (3,021) $ 4,794 $ 2,348 $ 3,174
PV interest 756 1,150 574 2,778 187 5,445
Severance (95) - - (16) 167 56
----------- ------------ ------------- ----------- ------------ ------------
Total accrued to
balance sheets (4,768) 5,632 (2,447) 7,556 2,702 8,675
------------ ------------ ------------- ----------- ------------ ------------
Non-accruable items
recorded on Statements
of Operations
Gain on capital lease
termination - - - (55) - (55)
Property writeoffs - - - - 1,049 1,049
Inventory related costs - - - - (571) (571)
Loss on sale of property - - - 46 20 66
Closing costs (5) - - 93 2,161 2,249
------------ ------------ ------------- ----------- ------------ ------------
Total non-accruable items (5) - - 84 2,659 2,738
------------ ------------ ------------- ----------- ------------ ------------
Less PV interest (756) (1,150) (574) (2,778) (187) (5,445)
------------ ------------ ------------- ----------- ------------ ------------
Total amount recorded
on Statements of
Operations excluding
PV interest (5,529) 4,482 (3,021) 4,862 5,174 5,968
------------ ------------ ------------- ----------- ------------ ------------
Less closing costs 5 - - (93) (2,161) (2,249)
----------- ------------ ------------- ----------- ------------ -----------
Total amount recorded
On Statements of
Cash Flows $ (5,524) $ 4,482 $ (3,021) $ 4,769 $ 3,013 $ 3,719
============ ============ ============= =========== ============ ============
21
40 weeks ended December 3, 2005
---------------------------------------------------------------------------------------------------
U.S.
Project 2001 Farmer Closure of Distribution
Great Asset Jack Stores in Operations and
Renewal Disposition Restructuring the Midwest Warehouses Total
------------ ------------- ------------- ------------ --------------- -------------
Balance Sheet accruals
Vacancy $ (2,570) $ (1,689) $ 3,662 $ 88,443 $ 4,400 $ 92,246
PV interest 1,228 1,703 521 782 - 4,234
Severance - - - 2,710 46,345 49,055
------------ ------------- ------------ ------------ --------------- -------------
Total accrued to
balance sheets (1,342) 14 4,183 91,935 50,745 145,535
------------ ------------- ------------ ------------ --------------- -------------
Non-accruable items
recorded on Statements
of Operations
Gain on capital lease
termination - - - (588) - (588)
Property writeoffs - - - 6,873 8,677 15,550
Inventory related costs - - - 1,268 3,314 4,582
Loss on sale of property - - - 2,263 - 2,263
Gain on sale of pharmacy
scripts - - - (870) - (870)
Closing costs - - - 4,016 7,904 11,920
------------ ------------- ------------ ------------ --------------- -------------
Total non-accruable items - - - 12,962 19,895 32,857
------------ ------------- ------------ ------------ --------------- -------------
Less PV interest (1,228) (1,703) (521) (782) - (4,234)
------------- ------------- ------------- ------------- --------------- -------------
Total amount recorded
on Statements of
Operations excluding
PV interest (2,570) (1,689) 3,662 104,115 70,640 174,158
------------- ------------- ------------ ------------ --------------- -------------
Less Gain on sale
of pharmacy
scripts - - - 870 - 870
Less closing costs - - - (4,016) (7,904) (11,920)
------------ ------------- ------------ ------------ --------------- ------------
Total amount recorded
On Statements of
Cash Flows $ (2,570) $ (1,689) $ 3,662 $ 100,969 $ 62,736 $ 163,108
============= ============= ============ ============ =============== =============
22
PROJECT GREAT RENEWAL
---------------------
The following table summarizes the activity related to this phase of the
initiative over the last three fiscal years:
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 22, 2003 $ 48,788 $ 487 $ 49,275 $ 2,446 $ - $ 2,446 $ 51,234 $ 487 $ 51,721
Addition (1) 2,276 372 2,648 - - - 2,276 372 2,648
Utilization (2) (19,592) (407) (19,999) (289) - (289) (19,881) (407) (20,288)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 31,472 $ 452 $ 31,924 $ 2,157 $ - $ 2,157 $ 33,629 $ 452 $ 34,081
Addition (1) 1,902 20 1,922 - - - 1,902 20 1,922
Utilization (2) (5,410) (222) (5,632) (497) - (497) (5,907) (222) (6,129)
-------- -------- -------- -------- -------- -------- --------- ---------- ---------
Balance at
February 26, 2005 $ 27,964 $ 250 $ 28,214 $ 1,660 $ - $ 1,660 $ 29,624 $ 250 $ 29,874
Addition (1) 1,541 7 1,548 - - - 1,541 7 1,548
Utilization (2) (5,858) (167) (6,025) (223) - (223) (6,081) (167) (6,248)
Adjustments (3) (3,648) (90) (3,738) - - - (3,648) (90) (3,738)
--------- --------- --------- -------- -------- -------- ---------- ---------- ---------
Balance at
February 25, 2006 $ 19,999 $ - $ 19,999 $ 1,437 $ - $ 1,437 $ 21,436 $ - $ 21,436
Addition (1) 756 - 756 - - - 756 - 756
Utilization (2) (3,796) - (3,796) (99) - (99) (3,895) - (3,895)
Adjustments (3) (5,429) - (5,429) (95) - (95) (5,524) - (5,524)
--------- -------- --------- --------- -------- --------- ---------- --------- ---------
Balance at
December 2, 2006 $ 11,530 $ - $ 11,530 $ 1,243 $ - $ 1,243 $ 12,773 $ - $ 12,773
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $2.6 million, $1.9 million, and $1.5
million during fiscal 2003, 2004 and 2005, respectively, and $0.8 million
during the 40 weeks ended December 2, 2006 represent the interest accretion
on future occupancy costs which were recorded at present value at the time
of the original charge.
(2) Occupancy utilization of $20.0 million, $5.6 million, and $6.0 million for
fiscal 2003, 2004 and 2005, respectively, and $3.8 million during the 40
weeks ended December 2, 2006 represents payments made during those periods
for costs such as rent, common area maintenance, real estate taxes and
lease termination costs. Severance utilization of $0.3 million, $0.5
million, and $0.2 million for fiscal 2003, 2004 and 2005, respectively, and
$0.1 million during the 40 weeks ended December 2, 2006 represents payments
to individuals for severance and benefits, as well as payments to pension
funds for early withdrawal from multi-employer union pension plans.
(3) 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. We have continued to make favorable
progress in marketing and subleasing the closed stores. As a result, during
fiscal 2005, we recorded an additional reduction of $3.6 million in
occupancy accruals due to subleasing additional closed stores and
converting a previously closed store to a store that was opened in fiscal
2006. During the 40 weeks ended December 2, 2006, we recorded adjustments
for a reduction in vacancy related costs for our properties of $5.4 million
due to changes in our estimation of such future costs. We also recorded a
decrease of $0.1 million for the reversal of previously accrued severance
and benefits due to changes in individual severings and associated benefit
costs.
We paid $108.2 million of the total occupancy charges from the time of the
original charges through December 2, 2006 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $30.2 million of the total net severance charges from
the time of the original charges through December 2, 2006, which resulted from
the termination of approximately 3,400 employees. The remaining occupancy
liability of $11.5 million relates to expected future payments under long term
leases and is expected to be paid in full by 2020. The remaining severance
liability of $1.2 million primarily relates to expected future payments for
early withdrawals from multi-employer union pension plans and will be fully paid
out in 2020. None of these stores were open during the 12 and 40 weeks ended
December 2, 2006 and December 3, 2005.
23
At December 2, 2006 and February 25, 2006, approximately $3.0 million and $5.1
million, respectively, of the reserve were included in "Other accruals" and the
remaining amounts were included in "Other non-current liabilities" on our
Company's Consolidated Balance Sheets.
Based upon current available information, we evaluated the reserve balances as
of December 2, 2006 of $12.8 million for this phase of the asset disposition
initiative and have concluded that they are adequate to cover expected future
costs. We will continue to monitor the status of the vacant properties and
adjustments to the reserve balances may be recorded in the future, if necessary.
2001 ASSET DISPOSITION
----------------------
The following table summarizes the activity related to this phase of the
initiative recorded on the Consolidated Balance Sheets over the last three
fiscal years:
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 22, 2003 $ 53,502 $ 344 $ 53,846 $ 3,813 $ 481 $ 4,294 $ 57,315 $ 825 $ 58,140
Addition (1) 2,847 3 2,850 - - - 2,847 3 2,850
Utilization (2) (9,987) (974) (10,961) (2,457) (1,026) (3,483) (12,444) (2,000) (14,444)
Adjustments (3) (6,778) 1,002 (5,776) 955 603 1,558 (5,823) 1,605 (4,218)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 39,584 $ 375 $ 39,959 $ 2,311 $ 58 $ 2,369 $ 41,895 $ 433 $ 42,328
Addition (1) 2,449 - 2,449 - - - 2,449 - 2,449
Utilization (2) (5,646) (375) (6,021) (2,197) (58) (2,255) (7,843) (433) (8,276)
Adjustments (3) (4,488) - (4,488) - - - (4,488) - (4,488)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 26, 2005 $ 31,899 $ - $ 31,899 $ 114 $ - $ 114 $ 32,013 $ - $ 32,013
Addition (1) 2,170 - 2,170 - - - 2,170 - 2,170
Utilization (2) (5,262) - (5,262) (97) - (97) (5,359) - (5,359)
Adjustments (3) (2,089) - (2,089) - - - (2,089) - (2,089)
-------- -------- -------- -------- -------- -------- ---------- --------- ---------
Balance at
February 25, 2006 $ 26,718 $ - $ 26,718 $ 17 $ - $ 17 $ 26,735 $ - $ 26,735
Addition (1) 1,150 - 1,150 - - - 1,150 - 1,150
Utilization (2) (8,354) - (8,354) (17) - (17) (8,371) - (8,371)
Adjustments (3) 4,482 - 4,482 - - - 4,482 - 4,482
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
December 2, 2006 $ 23,996 $ - $ 23,996 $ - $ - $ - $ 23,996 $ - $ 23,996
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $2.9 million, $2.4 million, and $2.2
million during fiscal 2003, 2004 and 2005, respectively, and $1.2 million
during the 40 weeks ended December 2, 2006 represent the interest accretion
on future occupancy costs which were recorded at present value at the time
of the original charge.
(2) Occupancy utilization of $11.0 million, $6.0 million, and $5.3 million
during fiscal 2003, 2004 and 2005, respectively, and $8.4 million during
the 40 weeks ended December 2, 2006 represent payments made during those
periods for costs such as rent, common area maintenance, real estate taxes
and lease termination costs. Severance utilization of $3.5 million, $2.3
million, $0.1 million, and $0.02 million during fiscal 2003, 2004, 2005 and
the 40 weeks ended December 2, 2006, respectively, represent payments made
to terminated employees during the period.
(3) At each balance sheet date, we assess the adequacy of the reserve balance
to determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During fiscal 2003, we recorded net
adjustments of $5.8 million related to reversals of previously accrued
occupancy costs due to favorable results of subleasing, assigning and
terminating leases. We also accrued $1.6 million for additional severance
and benefit costs that were unforeseen at the time of the original charge.
During fiscal 2004, we recorded adjustments of $4.5 million related to the
reversals of previously accrued occupancy costs due to the disposals and
subleases of locations at more favorable terms than originally anticipated
at the time of the original charge. During fiscal 2005, we recorded
adjustments of $2.1 million related to the reversals of previously accrued
occupancy costs due to the favorable result of subleasing one of the closed
properties and changes in our original estimate of our future vacancy
obligations for closed stores. Finally, during the 40 weeks ended December
2, 2006, we recorded adjustments for additional vacancy related costs of
$4.5 million due to changes in our estimation of such future costs.
24
We paid $52.8 million ($49.8 million in the U.S. and $3.0 million in Canada) of
the total occupancy charges from the time of the original charges through
December 2, 2006 which was primarily for occupancy related costs such as rent,
common area maintenance, real estate taxes and lease termination costs. We paid
$28.2 million ($19.2 million in the U.S. and $9.0 million in Canada) of the
total net severance charges from the time of the original charges through
December 2, 2006, which resulted from the termination of approximately 1,100
employees. The remaining occupancy liability of $24.0 million primarily relates
to expected future payments under long term leases through 2022. The severance
liability has been fully utilized as of December 2, 2006 and no additional
future payments for severance and benefits to individual employees will be paid
out. None of these stores were open during the 12 and 40 weeks ended December 2,
2006 and December 3, 2005.
At December 2, 2006 and February 25, 2006, approximately $5.8 million and $6.6
million of the reserve, respectively, were included in "Other accruals" and the
remaining amounts were included in "Other non-current liabilities" on our
Company's Consolidated Balance Sheets.
Based upon current available information, we evaluated the reserve balances as
of December 2, 2006 of $24.0 million for this phase of the asset disposition
initiative and have concluded that they are adequate to cover expected future
costs. We will continue to monitor the status of the vacant properties and
adjustments to the reserve balances may be recorded in the future, if necessary.
FARMER JACK RESTRUCTURING
The following table summarizes the activity to date related to the charges
recorded for this initiative all of which were in the U.S.
Severance
and
Occupancy Benefits Total
------------ ------------- ----------
Original charge (1) $ 20,999 $ 8,930 $ 29,929
Addition (1) 56 - 56
Utilization (2) (1,093) (4,111) (5,204)
------------ ------------- ----------
Balance at February 28, 2004 $ 19,962 $ 4,819 $ 24,781
Addition (1) 687 - 687
Utilization (2) (4,747) (4,813) (9,560)
------------ ------------- ----------
Balance at February 26, 2005 $ 15,902 $ 6 $ 15,908
Addition (1) 710 - 710
Utilization (2) (2,738) (6) (2,744)
Adjustment (3) 4,376 - 4,376
------------ ------------- -----------
Balance at February 25, 2006 $ 18,250 $ - $ 18,250
Addition (1) 574 - 574
Utilization (2) (1,329) - (1,329)
Adjustment (3) (3,021) - (3,021)
------------- ------------- -----------
Balance at December 2, 2006 $ 14,474 $ - $ 14,474
============= ============ ==========
(1) The original charge to occupancy during fiscal 2003 represents charges
related to closures and conversions in the Detroit, Michigan market of
$21.0 million. The additions to occupancy during fiscal 2003, fiscal 2004,
fiscal 2005 and the 40 weeks ended December 2, 2006 represent interest
accretion on future occupancy costs which were recorded at present value at
the time of the original charge. The original charge to severance during
fiscal 2003 of $8.9 million related to individual severings as a result of
the store closures, as well as a voluntary termination plan initiated in
the Detroit, Michigan market.
25
(2) Occupancy utilization of $1.1 million, $4.7 million, $2.7 million and $1.3
million during fiscal 2003, fiscal 2004, fiscal 2005 and for the 40 weeks
ended December 2, 2006, respectively, represents payments made for costs
such as rent, common area maintenance, real estate taxes and lease
termination costs. Severance utilization of $4.1 million, $4.8 million, and
$0.01 million during fiscal 2003, fiscal 2004, and fiscal 2005,
respectively, represent payments made to terminated employees during the
period.
(3) 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. During fiscal 2005, we recorded an increase
of $4.4 million in occupancy accruals due to changes in our original
estimate of when we would terminate certain leases, obtain sublease rental
income related to such leases and changes in our original estimate of our
future vacancy obligations for closed stores. During the 40 weeks ended
December 2, 2006, we recorded adjustments for a reduction in vacancy
related costs for our properties of $3.0 million due to changes in our
estimation of such future costs.
We paid $9.9 million of the total occupancy charges from the time of the
original charge through December 2, 2006 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. The remaining occupancy liability of $14.5 million relates to
expected future payments under long term leases and is expected to be paid out
in full by 2022. We paid $8.9 million of the total net severance charges from
the time of the original charges through December 2, 2006, which resulted from
the termination of approximately 300 employees. The severance liability has been
fully utilized as of December 2, 2006 and no additional future payments for
severance and benefits to individual employees will be paid out. None of these
stores were open during the 12 and 40 weeks ended December 2, 2006 and December
3, 2005.
At December 2, 2006 and February 25, 2006, approximately $1.3 million and $1.6
million, respectively, of the liability were included in "Other accruals" and
the remaining amounts were included in "Other non-current liabilities" on our
Consolidated Balance Sheets.
We have evaluated the liability balance of $14.5 million as of December 2, 2006
based upon current available information and have concluded that it is adequate.
We will continue to monitor the status of the vacant properties and adjustments
to the reserve balance may be recorded in the future, if necessary.
CLOSURE OF STORES IN THE MIDWEST
--------------------------------
During the first quarter of fiscal 2005, we announced plans for a major
strategic restructuring that would focus future effort and investment on our
core operations in the Northeastern United States. Thus, we initiated efforts to
close stores in the Midwest. This planned store closure included the closing of
a total of 35 stores, all of which have been closed as of December 2, 2006. The
remaining business located in the Midwestern United States will continue to
operate as part of our core business going forward.
26
The following table summarizes the activity to date related to the charges
recorded for these store closures.
Severance
and
Occupancy Benefits Total
-------- -------- --------
Original charge (1) $ 14,766 $ 1,337 $ 16,103
Additions (2) 75,259 1,373 76,632
Utilization (3) (9,538) (2,439) (11,977)
Adjustment (4) 9,153 (44) 9,109
-------- -------- --------
Balance at
February 25, 2006 $ 89,640 $ 227 $ 89,867
Additions (2) 2,778 -- 2,778
Utilization (3) (11,177) (211) (11,388)
Adjustment (4) 4,794 (16) 4,778
-------- -------- --------
Balance at
December 2, 2006 $ 86,035 $ -- $ 86,035
======== ======== ========
(1) The original charge to occupancy during fiscal 2005 represents charges
related to closures of the first 8 stores in conjunction with our decision
to close stores in the Midwest of $14.8 million. The original charge to
severance during fiscal 2005 of $1.3 million related to individual
severings as a result of these store closures.
(2) The additions to occupancy during fiscal 2005 represent charges related to
the closures of an additional 27 stores in the amount of $73.7 million and
interest accretion on future occupancy costs which were recorded at present
value at the time of the original charge in the amount of $1.6 million. The
additions to occupancy during the 40 weeks ended December 2, 2006 represent
interest accretion on future occupancy costs which were recorded at present
value at the time of the original charge in the amount of $2.8 million. The
additional charge to severance during fiscal 2005 of $1.4 million related
to individual severings as a result of the additional stores identified for
closures.
(3) Occupancy utilization of $9.5 million and $11.2 million for fiscal 2005 and
the 40 weeks ended December 2, 2006, respectively, represents payments made
for costs such as rent, common area maintenance, real estate taxes and
lease termination costs. Severance utilization of $2.4 million and $0.2
million for fiscal 2005 and the 40 weeks ended December 2, 2006,
respectively, represents payments made to terminated employees during the
period.
(4) 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. During fiscal 2005, we recorded an increase
of $9.2 million in occupancy accruals due to changes in our original
estimate of our future vacancy obligations for closed stores. We also
recorded a decrease of $0.04 million for the reversal of previously accrued
severance and benefits due to changes in individual severings and
associated benefit costs. During the 40 weeks ended December 2, 2006, we
recorded adjustments for additional vacancy related costs for our
properties of $4.8 million due to changes in our estimation of such future
costs. We also recorded a decrease of $0.02 million for the reversal of
previously accrued severance and benefits due to changes in individual
severings and associated benefit costs.
We paid $20.7 million of the total occupancy charges from the time of the
original charge through December 2, 2006 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $2.6 million of the total net severance charges from
the time of the original charges through December 2, 2006, which resulted from
the termination of approximately 125 employees. The remaining occupancy
liability of $86.0 million relates to expected future payments under long term
leases and is expected to be paid out in full by 2025. The severance liability
has been fully utilized as of December 2, 2006 and no additional future payments
for severance and benefits to individual employees will be paid out.
Included in the Statements of Consolidated Operations for the 12 and 40 weeks
ended December 2, 2006 and December 3, 2005 are the sales and operating results
of the 35 stores that were closed as part of this divestiture. The results of
these operations are as follows:
27
12 Weeks Ended 40 weeks Ended
----------------------------------- -----------------------------------
December 2, December 3, December 2, December 3,
2006 2005 2006 2005
--------------- --------------- ---------------- ---------------
Sales $ - $ 2,994 $ - $ 110,882
=============== ============== =============== ==============
Loss from operations $ - $ (938) $ - $ (14,434)
=============== =============== =============== ===============
At December 2, 2006 and February 25, 2006, approximately $17.0 million and $22.5
million of the liability were included in "Other accruals" and the remaining
amounts were included in "Other non-current liabilities" on our Consolidated
Balance Sheets.
We have evaluated the liability balance of $86.0 million as of December 2, 2006
based upon current available information and have concluded that it is adequate.
We will continue to monitor the status of the vacant properties and adjustments
to the reserve balance may be recorded in the future, if necessary.
U.S DISTRIBUTION OPERATIONS AND WAREHOUSES
------------------------------------------
During fiscal 2005, our Company entered into definitive agreements, including an
Asset Purchase Agreement and a 15 year Supply Agreement, selling our U.S.
distribution operations and some warehouse facilities and related assets to C&S
Wholesale Grocers, Inc. The Asset Purchase Agreement included the assignment of
our leases in Central Islip, New York and Baltimore, Maryland, and a warranty
deed for our owned facilities in Dunmore, Pennsylvania. In the Supply Agreement,
C&S Wholesale Grocers, Inc. will supply our Company with all of our requirements
for groceries, perishables, frozen food and other merchandise in the product
categories carried by C&S Wholesale Grocers, Inc. The transition of our owned
warehouses and operations began in the second quarter of fiscal 2005 and was
completed during the fourth quarter of fiscal 2005.
The following table summarizes the activity to date related to the charges
recorded for the closing of these facilities.
Severance
and
Occupancy Benefits Total
-------- -------- --------
Original charge (1) $ -- $ 40,417 $ 40,417
Additions (2) 15,420 7,296 22,716
Utilization (3) (337) (43,597) (43,934)
Adjustments (4) -- (493) (493)
-------- -------- --------
Balance at
February 25, 2006 $ 15,083 $ 3,623 $ 18,706
Additions (2) 187 32 219
Utilization (3) (12,207) (2,309) (14,516)
Adjustment (4) 2,348 135 2,483
-------- -------- --------
Balance at
December 2, 2006 $ 5,411 $ 1,481 $ 6,892
======== ======== ========
(1) The original charge to severance and benefits during the first quarter of
fiscal 2005 of $40.4 million related to (i.) individual severings as well
as retention and productivity incentives that were accrued as earned of
$7.6 million and (ii.) costs for future obligations for early withdrawal
from multi-employer union pension plans of $32.8 million.
(2) The additions to occupancy during fiscal 2005 related to future occupancy
costs such as rent, common area maintenance and real estate taxes, and
future obligations for the warehouses sold to C&S Wholesale Grocers, Inc.
The additions to occupancy during the 40 weeks ended December 2, 2006
represent interest accretion on future occupancy costs which were recorded
at present value at the time of the original charge in the amount of $0.2
million. The additions to severance and benefits during fiscal 2005
represented charges related to additional individual severings as well as
retention and productivity incentives that were accrued as earned.
28
(3) Occupancy utilization of $0.3 million and $12.2 million for fiscal 2005 and
the 40 weeks ended December 2, 2006, respectively, represents payments
associated with the closure of certain warehouses. Severance and benefits
utilization of $43.6 million and $2.3 million for fiscal 2005 and the 40
weeks ended December 2, 2006, respectively, represents payments made to
terminated employees during the period as well as payments made to pension
funds for early withdrawal from multi-employer union pension plans.
(4) 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. During the fiscal 2005, we recorded
adjustments of $0.5 million primarily related to reversals of previously
accrued severance and benefits due to changes in individual severings and
associated benefit costs. During the 40 weeks ended December 2, 2006, we
recorded adjustments for additional vacancy related costs for our
properties of $2.3 million due to changes in our estimation of such future
costs. During the 40 weeks ended December 2, 2006, we recorded adjustments
of $0.1 million primarily related to additions to severance and benefits
due to changes in individual severings and associated benefit costs.
We paid $12.5 million of the total occupancy charges from the time of the
original charge through December 2, 2006 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $45.9 million of the total net severance and benefits
charges from the time of the original charges through December 2, 2006, which
resulted from the termination of approximately 140 employees. The remaining
occupancy liability of $5.4 million relates to expected future payments under
long term leases and is expected to be paid out in full by 2026. The remaining
severance and benefits liability of $1.5 million relates to expected future
payments for severance and benefits to individual employees and will be fully
paid out by February 23, 2008.
As of December 2, 2006 and February 25, 2006, approximately $0.2 million and
$1.4 million, respectively, of the liability were included in "Accrued salaries,
wages and benefits," $1.6 million and $11.3 million, respectively, of the
liability were included in "Other Accruals" and the remaining amount was
included in "Other non-current liabilities" on our Consolidated Balance Sheets.
We have evaluated the liability balance of $6.9 million as of December 2, 2006
based upon current available information and have concluded that it is adequate.
We will continue to monitor the status of the warehouses and adjustments to the
reserve balance may be recorded in the future, if necessary.
Our Company currently acquires a significant amount of our saleable inventory
from one supplier, C&S Wholesale Grocers, Inc. Although there are a limited
number of distributors that can supply our stores, we believe that other
suppliers could provide similar product on reasonable terms. However, a change
in suppliers could cause a delay in distribution and a possible loss of sales,
which would affect operating results adversely.
29
9. RETIREMENT PLANS AND BENEFITS
DEFINED BENEFIT PLANS
We provide retirement benefits to certain non-union and union employees under
various defined benefit plans. Our defined benefit pension plans are
non-contributory and benefits under these plans are generally determined based
upon years of service and, for salaried employees, compensation. We fund these
plans in amounts consistent with the statutory funding requirements. The
components of net pension cost were as follows:
For the 12 Weeks Ended
-----------------------------------------------------
December 2, 2006 December 3, 2005
---------------------- ----------------------
U.S. Canada U.S. Canada
--------- --------- -------- ---------
Service cost $ 1,219 $ - $ 1,384 $ -
Interest cost 2,612 - 2,743 -
Expected return on plan assets (2,850) - (3,097) -
Amortization of unrecognized net prior service gain (41) - (68) -
Amortization of unrecognized net loss 38 - 13 -
Administrative expenses and other 116 - - -
--------- --------- -------- ---------
Net pension cost $ 1,094 $ - $ 975 $ -
========= ========= ======== =========
For the 40 Weeks Ended
-----------------------------------------------------
December 2, 2006 December 3, 2005
---------------------- ----------------------
U.S. Canada U.S. Canada
--------- --------- -------- ---------
Service cost $ 4,064 $ - $ 4,614 $ 4,576
Interest cost 8,705 - 9,144 6,519
Expected return on plan assets (9,500) - (10,325) (8,369)
Amortization of unrecognized net prior service (gain) cost (137) - (226) 286
Amortization of unrecognized net loss 125 - 44 900
Administrative expenses and other 311 - - 138
--------- --------- -------- ---------
Net pension cost $ 3,568 $ - $ 3,251 $ 4,050
========= ========= ======== =========
CONTRIBUTIONS
We previously disclosed in our consolidated financial statements for the year
ended February 25, 2006, that we expected to contribute $5.2 million in cash to
our defined benefit plans in fiscal 2006. As of December 2, 2006, we contributed
approximately $3.6 million to our defined benefit plans. We plan to contribute
approximately $1.6 million to our plans in the remainder of fiscal 2006.
POSTRETIREMENT BENEFITS
We provide postretirement health care and life benefits to certain union and
non-union employees. We recognize the cost of providing postretirement benefits
during employees' active service periods. We use a December 31 measurement date
for both the U.S. and Canadian postretirement benefits. The components of net
postretirement benefits (income) cost are as follows:
For the 12 Weeks Ended
-----------------------------------------------------
December 2, 2006 December 3, 2005
---------------------- ----------------------
U.S. Canada U.S. Canada
--------- --------- -------- ---------
Service cost $ 87 $ - $ 78 $ -
Interest cost 270 - 276 -
Amortization of gain (51) - (64) -
Prior service gain (311) - (311) -
--------- --------- -------- ---------
Net postretirement benefits income $ (5) $ - $ (21) $ -
========== ========= ========= =========
For the 40 Weeks Ended
-----------------------------------------------------
December 2, 2006 December 3, 2005
---------------------- ----------------------
U.S. Canada U.S. Canada
--------- --------- -------- ---------
Service cost $ 288 $ - $ 260 $ 75
Interest cost 902 - 922 270
Amortization of (gain) loss (171) - (214) 118
Prior service gain (1,036) - (1,036) (148)
--------- --------- -------- ---------
Net postretirement benefits (income) cost $ (17) $ - $ (68) $ 315
========== ========= ========= =========
30
10. STOCK BASED COMPENSATION
During the 12 and 40 weeks ended December 2, 2006, compensation expense related
to share-based incentive plans was $0.8 million and $6.6 million, after tax,
respectively, compared to $2.1 million and $7.0 million, after tax, during the
12 and 40 weeks ended December 3, 2005, respectively.
Included in share-based compensation expense recorded during the 12 and 40 weeks
ended December 2, 2006 was $0.2 million and $0.9 million, respectively, related
to expensing of stock options, $0.5 million and $4.8 million, respectively,
relating to expensing of restricted stock, and $0.1 million and $0.9 million,
respectively, relating to expensing of common stock to be granted to our Board
of Directors at the Annual Meeting of Stockholders.
Included in share-based compensation expense recorded during the 12 and 40 weeks
ended December 3, 2005, was $0.6 million and $2.0 million, respectively, related
to expensing of stock options, $1.3 million and $3.5 million, respectively,
relating to expensing of restricted stock, nil and $1.1 million, respectively,
relating to the immediate vesting of certain stock options, and $0.2 million and
$0.4 million, respectively, relating to expensing of common stock to be granted
to our Board of Directors at the Annual Meeting of Stockholders.
At December 2, 2006, we had two stock-based compensation plans. The general
terms of each plan, the method of estimating fair value for each plan and fiscal
2005 and 2006 activity is reported below.
I. The 1998 Long Term Incentive and Share Award Plan: This plan provides for
the grant of awards in the form of options, SAR's, restricted shares,
restricted share units, performance shares, performance units, dividend
equivalent, or other share based awards to our Company's officers and key
employees. The total number of shares available for issuance under this
plan is 8,000,000 subject to anti-dilution provisions. Options and SAR's
issued under this plan vest 25% on each anniversary date of issuance over a
four year period.
Performance restricted stock units issued under this plan during fiscal
2005 are earned based on our Company achieving in Fiscal 2007 a profit
after taxes, after adjusting for specific matters which our Company
considers to be of a non-operating nature, with an outlook for continued,
sustainable profitability on the same basis. The units will vest 50% based
on achievement of a net profit in fiscal 2007 and 50% based on achievement
of a net profit in fiscal 2008. However, if our Company achieves
profitability in fiscal 2006, the shares will be earned and vesting will
commence in fiscal 2006 in one-third increments, based on achievement of
profitability in each year and the outlook for continued, sustainable
profitability.
Performance restricted stock units issued under this plan during fiscal
2006 are earned based on our Company achieving certain operating targets in
Fiscal 2008 and are 100% vested in Fiscal 2008 upon achievement of those
targets.
31
The stock option awards under The 1998 Long Term Incentive and Share Award
Plan are granted at the fair market value of the Company's common stock at
the date of grant. Fair value calculated under SFAS 123, as amended,
"Accounting for Stock-Based Compensation" is used to recognize expense upon
adoption of SFAS 123R. Fair values for each grant were estimated using a
Black-Scholes valuation model which utilized assumptions as detailed in the
following table for expected life based upon historical option exercise
patterns, historical volatility for a period equal to the stock option's
expected life, and risk-free rate based on the U.S. Treasury constant
maturities in effect at the time of grant. During the 12 weeks ended
December 2, 2006 and the 12 and 40 weeks ended December 3, 2005, our
Company did not grant any stock options under this plan. The following
assumptions were in place for options granted during the 40 weeks ended
December 2, 2006:
40 weeks ended
Dec. 2, 2006
-----------------
Expected life 7 years
Volatility 56%
Risk-free interest rate 4.96%
Performance restricted stock units issued under The 1998 Long Term
Incentive and Share Award Plan are granted at the fair market value of the
Company's common stock at the date of grant, adjusted by an estimated
forfeiture rate.
Stock options
-------------
The following is a summary of the stock option activity during the 40 weeks
ended December 2, 2006:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term (years) Value
------------- ------------- ------------ -------------
Outstanding at February 25, 2006 1,534,385 $ 19.24
Adjustment for dividend* 371,995 -
Granted 86,430 27.71
Canceled or expired (251,958) 21.29
Exercised (333,161) 14.94
------------- ----------
Outstanding at December 2, 2006 1,407,691 $ 15.33 4.1 $ 15,434
============= ========== ============= ===========
Exercisable at:
December 2, 2006 1,143,876 $ 16.27 3.4 $ 11,463
============= ===========
Nonvested at:
December 2, 2006 263,815 $ 11.24 7.2 $ 3,970
============= ===========
The total intrinsic value of options exercised during the 40 weeks ended
December 2, 2006 was $4.5 million.
As of December 2, 2006, approximately $0.9 million, after tax, of total
unrecognized compensation expense related to unvested stock option awards
will be recognized over a weighted average period of 0.9 years.
The amount of cash received from the exercise of stock options was
approximately $5.0 million for the 40 weeks ended December 2, 2006.
32
Performance Restricted Stock Units
----------------------------------
During the 12 and 40 weeks ended December 2, 2006, our Company granted nil
and 393,162 shares of performance restricted stock units to selected
employees, respectively, for a total grant date fair value of $10.8
million. Approximately $14.9 million of unrecognized fair value
compensation expense relating to these performance restricted stock units
and those issued in the previous year are expected to be recognized through
fiscal 2009 based on estimates of attaining vesting criteria.
The following is a summary of the performance restricted stock units
activity during the 40 weeks ended December 2, 2006:
Weighted
Average
Exercise
Shares Price
----------- -------------
Nonvested at February 25, 2006 1,285,000 $ 14.42
Adjustment for dividend* 339,369 -
Granted 393,162 27.59
Canceled or expired (157,024) 14.55
Exercised - -
----------- -------------
Nonvested at December 2, 2006 1,860,507 $ 14.56
=========== =============
* As discussed in Note 3 - Special One-Time Dividend, our Company adjusted
the number and/or price of all unexercised stock options and nonvested
performance restricted stock units as of April 12, 2006, to ensure that an
individual's right to purchase stock at an aggregate value remained the
same both before and after the special one-time dividend payment. These
adjustments had no impact on stock compensation expense for the 40 weeks
ended December 2, 2006.
II. 2004 Non-Employee Director Compensation Plan: This plan provides for the
annual grant of Company common stock equivalent of $90 to members of our
Board of Directors. The $90 grant of common stock shall be made on the
first business day following the Annual Meeting of Stockholders. The number
of shares of our Company's $1.00 common stock granted annually to each
non-employee Director will be based on the closing price of the common
stock on the New York Stock Exchange, as reported in the Wall Street
Journal on the date of grant. Only whole shares will be granted; any
remaining amounts will be paid in cash as promptly as practicable following
the date of grant.
11. INCOME TAXES
The income tax provision recorded for the 40 weeks ended December 2, 2006 and
December 3, 2005 reflects our estimated expected annual tax rates applied to our
respective domestic and foreign financial results.
SFAS No. 109 "Accounting for Income Taxes" ("SFAS 109") provides that a deferred
tax asset is recognized for temporary differences that will result in deductible
amounts in future years and for carryforwards. In addition, SFAS 109 requires
that a valuation allowance be recognized if, based on existing facts and
circumstances, it is more likely than not that some portion or all of the
deferred tax asset will not be realized. Based upon our continued assessment of
the realization of our U.S. net deferred tax asset and our historic cumulative
losses, we concluded that it was appropriate to record a valuation allowance in
an amount that would reduce our net U.S. deferred tax asset to zero. For the 12
and 40 weeks ended December 2, 2006, the valuation allowance was decreased by
$11.9 million and $19.0 million, respectively, as compared to decreased by $14.9
million and $242.1 million during the 12 and 40 weeks ended December 3, 2005,
respectively. To the extent that our U.S. operations generate sufficient taxable
income in future periods, we will reverse the income tax valuation allowance. In
future periods, we will continue to record a valuation allowance against net
deferred tax assets that are created by U.S. losses until such time as the
certainty of future tax benefits can be reasonably assured.
33
In October 2004, the U.S. government passed the "Homeland Investment Act" which
allowed companies to repatriate cash balances from their controlled foreign
subsidiaries at a reduced tax rate. This was achieved by permitting a one time
85% dividends received deduction. Our Company completed the sale of our Canadian
subsidiary to Metro, Inc. during fiscal 2005. As a result of this transaction,
our Company had repatriated $949.0 million from our foreign subsidiaries, of
which $500.0 million was intended to qualify for the 85% dividends received
deduction. Until such time as the taxing authorities have affirmed the adequacy
of our Company's Domestic Reinvestment Plan, we recorded a tax provision of
$98.1 million, in fiscal 2005, for the potential disallowance of the 85%
dividend received deduction. This amount was recorded in "(Provision for)
benefit from income taxes" in our Statements of Consolidated Operations for
fiscal 2005 and in "Other non-current liabilities" in our Consolidated Balance
Sheet at February 25, 2006. During the 12 and 40 weeks ended December 2, 2006,
this tax provision was reduced by $44.2 million and $61.5 million, respectively,
principally due to the recognition of foreign tax credits and current year
operating losses. The tax impact of the utilization of foreign tax credits for
the 12 and 40 weeks ended December 2, 2006, was $45.0 million. The tax impact of
the utilization of current year operating losses was a provision of $0.8 million
and a benefit of $16.5 million, respectively, for the 12 and 40 weeks ended
December 2, 2006. This reduction was recorded in "Benefit from (provision for)
income taxes" in our Statements of Consolidated Operations for the 12 and 40
weeks ended December 2, 2006. In addition, as a result of the completion of our
tax return during the quarter, the provision was reduced by $4.9 million along
with a corresponding increase in current taxes payable of $4.9 million. The
balance in the provision of $31.7 million is included in "Other non-current
liabilities" in our Consolidated Balance Sheet at December 2, 2006.
For the third quarter of fiscal 2006, our effective income tax rate of 1,165.4%
changed from the effective income tax rate of 22.4% in the third quarter of
fiscal 2005 as follows:
12 Weeks Ended
--------------------------------------------------------------------
December 2, 2006 December 3, 2005
--------------------------------- ---------------------------------
Tax Effective Tax Effective
Benefit Tax Rate Benefit Tax Rate
--------------- ---------------- --------------- ----------------
United States $ 43,702 (1,165.4%) $ 21,279 (22.4%)
The change in our effective tax rate was primarily due to (i.) the recognition
of tax benefits during the 12 weeks ended December 2, 2006 as we continue to
experience operating losses and these operating losses decrease the overall tax
provision previously recorded during the second quarter of fiscal 2005 in
connection with our Company's Domestic Reinvestment Plan as discussed above and
the sale of our Canadian operations, (ii) the recognition of foreign tax
credits, (iii) the decrease in our valuation allowance as discussed above, and
(iv) the tax benefit from not providing deferred taxes on the undistributed
earnings of our investment in Metro, Inc.
34
For the 40 weeks ended December 2, 2006, our effective income tax rate of 235.7%
changed from the effective income tax rate of 26.3% for the 40 weeks ended
December 3, 2005 as follows:
40 Weeks Ended
--------------------------------------------------------------------
December 2, 2006 December 3, 2005
--------------------------------- ---------------------------------
Effective Effective
Tax Benefit Tax Rate Tax Provision Tax Rate
--------------- ---------------- --------------- ----------------
United States $ 58,584 (235.7%) $ (134,346) 23.1%
Canada - - (18,539) 3.2
--------------- ---------------- --------------- ----------------
$ 58,584 (235.7%) $ (152,885) 26.3%
=============== ================ =============== ================
The change in our effective tax rate was primarily due to (i.) the recognition
of tax benefits during the 40 weeks ended December 2, 2006 as we continue to
experience operating losses and these operating losses decrease the overall tax
provision previously recorded during the second quarter of fiscal 2005 in
connection with our Company's Domestic Reinvestment Plan as discussed above and
the sale of our Canadian operations, (ii) the recognition of foreign tax
credits, (iii) the decrease in our valuation allowance as discussed above, (iv)
the tax benefit from not providing deferred taxes on the undistributed earnings
of our investment in Metro, Inc., and (v.) the absence of a tax provision that
was recorded for our Canadian operations during the 40 weeks ended December 3,
2005 that was not recorded during the 40 weeks ended December 2, 2006 due to the
sale of our Canadian operations during the second quarter of fiscal 2005.
At December 2, 2006 and February 25, 2006, we had a net current deferred tax
asset which is included in "Prepaid expenses and other current assets" on our
Consolidated Balance Sheet totaling $50.4 million and $60.0 million,
respectively, and a net non-current deferred tax liability which is included in
"Other non-current liabilities" on our Consolidated Balance Sheets totaling
$50.4 million and $60.0 million, respectively.
12. OPERATING SEGMENTS
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Our chief operating decision maker is our President and
Chief Executive Officer.
During the 12 and 40 weeks ended December 2, 2006 and 12 weeks ended December 3,
2005, we operated in two reportable segments: United States and our investment
in Metro, Inc. During the 40 weeks ended December 3, 2005, we operated in three
reportable segments: United States, Canada, and our investment in Metro, Inc.
Our United States and Canadian segments are comprised of retail supermarkets.
Our equity investment represents our economic interest in Metro, Inc. and is
required to be reported as an operating segment in accordance with SFAS 131,
"Disclosure about Segments of an Enterprise and Related Information" as our
investment is greater than 10% of our Company's combined assets of all operating
segments and we have significant influence over substantive operating decisions
through our membership on Metro, Inc.'s Board of Directors and its committees.
The accounting policies for these segments are the same as those described in
the summary of significant accounting policies included in our Fiscal 2005
Annual Report. We measure segment performance based upon income (loss) from
operations.
35
Interim information on segments is as follows:
12 Weeks Ended 40 Weeks Ended
---------------------------------------- ---------------------------------------
December 2, December 3, December 2, December 3,
2006 2005 2006 2005
------------------ ------------------ ----------------- -----------------
Sales
United States $ 1,543,004 $ 1,580,942 $ 5,242,149 $ 5,408,945
Canada * - - - 1,723,879
------------------ ------------------ ----------------- -----------------
Total Company $ 1,543,004 $ 1,580,942 $ 5,242,149 $ 7,132,824
================== ================== ================= =================
Sales by category
Grocery (1) $ 1,057,506 $ 1,087,448 $ 3,544,564 $ 4,698,601
Meat (2) 300,682 309,866 1,029,783 1,455,643
Produce (3) 180,688 179,722 654,130 973,376
Other (4) 4,128 3,906 13,672 5,204
------------------ ------------------ ----------------- -----------------
Total Company $ 1,543,004 $ 1,580,942 $ 5,242,149 $ 7,132,824
================== ================== ================= =================
(1) The grocery category includes grocery, frozen foods, dairy, general
merchandise/health and beauty aids, liquor, pharmacy and fuel.
(2) The meat category includes meat, deli, bakery and seafood.
(3) The produce category includes produce and floral.
(4) Other includes sales from an information technology services agreement with
Metro, Inc.
Depreciation and amortization
United States $ 40,556 $ 46,274 $ 135,775 $ 153,100
Canada * - - - 10,942
------------------ ------------------ ----------------- -----------------
Total Company $ 40,556 $ 46,274 $ 135,775 $ 164,042
================== ================== ================= =================
Income (loss) from operations
United States $ 1,152 $ (81,557) $ (7,055) $ (321,987)
Canada * - - - 57,224
------------------ ------------------ ----------------- -----------------
Total Company $ 1,152 $ (81,557) $ (7,055) $ (264,763)
================== ================== ================== ==================
(Loss) income from continuing
operations before income taxes
United States $ (14,773) $ (98,235) $ (55,694) $ 530,736
Canada * - - - 48,201
Equity investment in Metro, Inc. 11,023 3,397 30,840 3,397
------------------ ------------------ ----------------- -----------------
Total Company $ (3,750) $ (94,838) $ (24,854) $ 582,334
=================== =================== ================== =================
Capital expenditures
United States $ 63,671 $ 25,185 $ 184,017 $ 87,561
Canada * - - - 47,201
------------------ ------------------ ----------------- -----------------
Total Company $ 63,671 $ 25,185 $ 184,017 $ 134,762
================== ================== ================= =================
December 2, February 25,
2006 2006
----------------- -----------------
Total assets
United States $ 1,849,609 $ 2,160,109
Equity investment in Metro, Inc. 367,495 338,756
----------------- -----------------
Total Company $ 2,217,104 $ 2,498,865
================= =================
* We sold our Canadian operations during fiscal 2005; thus, we have included the
operating results of our Canadian subsidiary through the date of its sale.
36
13. INDEBTEDNESS
During fiscal 2005, we entered into a new, cash collateralized, Letter of Credit
Agreement that enables us to issue letters of credit up to $200 million. Refer
to Note 5 - Cash, Cash Equivalents, Restricted Cash, and Marketable Securities
for further discussion of our Letter of Credit Agreement. We also secured a $150
million Revolver with four lenders enabling us to borrow funds on a revolving
basis for working capital loans and letters of credit. The Revolver includes a
$100 million accordion feature which gives us the ability to increase
commitments from $150 million to $250 million. Effective April 4, 2006, we
exercised the accordion option and increased our commitments to $250 million.
At December 2, 2006 and February 25, 2006, there were $128.5 million and nil,
respectively, in outstanding borrowings under our Revolver.
During the third quarter of fiscal 2006, our Company transferred 6,000,000 of
our Class A subordinate shares of Metro, Inc. from our foreign subsidiary to the
United States. These transferred shares are being used as collateral for our new
Letter of Credit Agreement that we entered into during fiscal 2005 and have
allowed us to reduce the amount of restricted cash and/or marketable securities
we were required to maintain as collateral previously.
14. HURRICANE KATRINA AND IMPACT ON U.S. BUSINESS
During the second quarter of fiscal 2005, Hurricane Katrina had a major effect
on certain portions of the Gulf Coast region and resulted in the closure of our
28 stores and warehouse facilities. As of December 2, 2006, 23 of these stores
were open and operating and the remaining 5 stores were closed in fiscal 2005.
During the third quarter of fiscal 2005, we recorded a charge for future
occupancy costs of $7.1 million for our 5 closed stores, which has been included
in "Store operating, general and administrative expense" in our Statement of
Consolidated Operations for the 12 and 40 weeks ended December 3, 2005.
As of the balance sheet date, December 3, 2005, we were able to determine that
we incurred impairment losses of $6.1 million for property, plant & equipment
that was not covered by insurance. This amount has been included in "Store
operating, general and administrative expense" in our Statements of Consolidated
Operations and in "Impairment loss relating to Hurricane Katrina" in our
Consolidated Statement of Cash Flows for the 40 weeks ended December 3, 2005.
We maintain property insurance coverage which provides for reimbursement from
losses resulting from property damage, loss of product as well as business
interruption coverage. We have recovered and expect to recover the remaining
losses caused by Hurricane Katrina in excess of our estimated insurance
deductible of approximately $5.0 million, which was recorded in "Store
operating, general and administrative expense" in our Consolidated Statements of
Operations for the 40 weeks ended December 3, 2005. During the third quarter of
fiscal 2006, we received a cash payment of $5.0 million, representing an
insurance settlement for a portion of our losses caused by Hurricane Katrina, of
which $4.3 million was recorded as gain to reduce "Store operating, general and
administrative expense" in our Statement of Consolidated Operations for the 12
and 40 weeks ended December 2, 2006.
15. COMMITMENTS AND CONTINGENCIES
Antitrust Class Action Litigation
---------------------------------
In connection with a settlement reached in the VISA/MasterCard antitrust class
action litigation, our Company is entitled to a portion of the settlement fund
that will be distributed to class members. Pursuant to our initial review of our
historical records as well as estimates provided by the Claims Administrator, we
recorded an estimated pretax recovery of $1.5 million as a credit to "Selling,
general and administrative expense" in our Statements of Consolidated Operations
during fiscal 2005.
37
During the second quarter of fiscal 2006, our Company received a cash payment of
$1.6 million for our portion of the settlement funds for this class action
litigation. During the remainder of fiscal 2006, we will continue to work with
the Claims Administrator to ensure that any additional monies owed to our
Company in connection with this litigation are received. This process may result
in additional recoveries being recorded in future periods.
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.
38
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
------------
The following Management's Discussion and Analysis is intended to help the
reader understand the financial position, operating results, and cash flows of
The Great Atlantic and Pacific Tea Company, Inc. It should be read in
conjunction with our financial statements and the accompanying notes ("Notes").
It discusses matters that Management considers relevant to understanding the
business environment, financial position, results of operations and our
Company's liquidity and capital resources. These items are presented as follows:
o Basis of Presentation - a discussion of our Company's results during the 12
and 40 weeks ended December 2, 2006 and December 3, 2005.
o Overview - a general description of our business; the value drivers of our
business; measurements; opportunities; challenges and risks; and
initiatives.
o Outlook - a discussion of certain trends or business initiatives for the
remainder of fiscal 2006 that Management wishes to share with the reader to
assist in understanding the business.
o Review of Continuing Operations and Liquidity and Capital Resources -- a
discussion of results for the 12 weeks ended December 2, 2006 compared to
the 12 weeks ended December 3, 2005 and results for the 40 weeks ended
December 2, 2006 compared to the 40 weeks ended December 3, 2005; current
and expected future liquidity; and the impact of various market risks on
our Company.
o Critical Accounting Estimates - a discussion of significant estimates made
by Management.
o Impact of New Accounting Pronouncements - a discussion of authoritative
pronouncements that have been or will be adopted by our Company.
o Market Risk - a discussion of the impact of market changes on our
consolidated financial statements.
BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements of The Great Atlantic &
Pacific Tea Company, Inc. for the 12 and 40 weeks ended December 2, 2006 and
December 3, 2005 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 2005
Annual Report to Stockholders on Form 10-K. Interim results are not necessarily
indicative of results for a full year.
The consolidated financial statements include the accounts of our Company and
all subsidiaries.
OVERVIEW
--------
The Great Atlantic & Pacific Tea Company, Inc., based in Montvale, New Jersey,
operates conventional supermarkets, combination food and drug stores and
discount food stores in 9 U.S. states and the District of Columbia. Our
Company's business consists strictly of its retail operations, comprised of 410
stores as of December 2, 2006.
39
Our United States retail operations are organized in three regions: North
Region, operating A&P supermarkets in New York and Northern New Jersey, The Food
Emporium in Westchester County, N.Y, A&P/Super Foodmart stores in Connecticut,
and all Food Basics discount stores; Central Region, operating all Waldbaum's
supermarkets, The Food Emporium in Manhattan, and the Farmer Jack supermarkets
in Michigan; and South Region, operating Super Fresh supermarkets in Baltimore
and Philadelphia, A&P supermarkets in Central New Jersey and Sav-A-Center
supermarkets in the greater New Orleans market.
A&P remained on course in the third quarter with respect to ongoing operating,
merchandising, store development and cost reduction strategies.
Although the pace of sales development slowed somewhat, results in our core
markets remained apace with competitors, despite intensified challenges in
response to our ongoing merchandising and promotion strategies; the short-term
disruption caused by our increased store renovation activity; and our cycling
against the double-digit sales increases achieved in New Orleans in 2005 when we
led the industry in restoring operations in the wake of Hurricane Katrina.
Alongside the fundamental retail improvements that remain in progress, our
Company continued converting suitable locations to our successful Fresh store
format. We completed 11 Fresh conversions during the quarter, the most in any
single quarter this year. As stated, these upgrades have produced overall sales
increases, as well as a profitable shift to greater fresh category distribution
- further driving bottom line store contribution.
In addition to our Fresh store development, the evolution of our discount Food
Basics operations continued, giving us appealing alternative concepts on both
the fresh and discount sides of our business. Combined with our gourmet store
development at The Food Emporium in New York - where the first example of our
developing Fine Food concept was launched at the Bridgemarket in November - this
fulfills the three-tier marketing strategy that will largely be in place in our
Northeast and Mid-Atlantic operations within the next two years.
While our operations remained challenged in Michigan, we continued refining our
merchandising offer while also focusing on operating discipline and cost
control, resulting in a stable bottom line performance there. And as stated, our
Sav-A-Center operation in New Orleans continues to perform well, albeit with
lower same store sales comparisons versus fiscal 2005 as we cycle against prior
results.
Across the business, we continued the improvement of fundamentals, in
merchandising execution, promotional effectiveness, store operating best
practices and cost reduction. Benefits continue to develop from our logistics
partnership with C&S Wholesale Grocers, Inc. with whom we are working steadily
to drive ongoing efficiency, service levels and in-stock performance, aimed at
profitable sales growth.
OUTLOOK
-------
Our objective in the 4th quarter of fiscal 2006 is to remain focused on the
strategic elements that have driven our improvement thus far, while also
exploring opportunities to grow our business and market presence via
acquisition, as we continue to anticipate industry consolidation in and around
our core Northeastern markets.
Accordingly, the execution of our marketing and retail development plans will
continue to be high priorities, as will the continued cost control disciplines
we have established. Key elements are:
40
o Continue to improve our every-day grocery pricing and value image in all
markets, through efficient buying and distribution, and innovative
marketing and promotion;
o Move forward with our capital plan for the conversion of 2 additional
locations to the Fresh format;
o Complete the fine-tuning of the discount Food Basics concept for future
application in appropriate locations;
o Continue the development of our new generation Fine Foods concept under The
Food Emporium banner;
o Continue developing productive strategies for the Farmer Jack operations in
Michigan; and the Sav-A-Center stores in and around New Orleans.
Always underpinning those strategies is the ongoing adherence to cost control
and reduction wherever possible, without compromising the progress of the
business. We will continue to seek and optimize additional means of improving
labor productivity in cooperation with our people and their labor unions, and by
seeking all reasonable opportunities to lower administrative, advertising,
occupancy and other operating expenses.
In summary, we remain both encouraged by our ongoing improvement, and confident
that sound execution of our strategies will lead us to our ultimate goals of
sustainable profitability, and a new era of growth and expansion in the months
and years ahead.
Various factors could cause us to fail to achieve these goals. These include,
among others, the following:
o Actions of competitors could adversely affect our sales and future profits.
The grocery retailing industry continues to experience fierce competition
from other food retailers, super-centers, mass merchandisers, warehouse
clubs, drug stores, dollar stores and restaurants. Our continued success is
dependent upon our ability to effectively compete in this industry and to
reduce operating expenses, including managing health care and pension costs
contained in our collective bargaining agreements. The competitive
practices and pricing in the food industry generally and particularly in
our principal markets may cause us to reduce our prices in order to gain or
maintain share of sales, thus reducing margins.
o Changes in the general business and economic conditions in our operating
regions, including the rate of inflation, population growth, the rising
prices of oil and gas, the nature and extent of continued consolidation in
the food industry and employment and job growth in the markets in which we
operate, may affect our ability to hire and train qualified employees to
operate our stores. This would negatively affect earnings and sales growth.
General economic changes may also affect the shopping habits and buying
patterns of our customers, which could affect sales and earnings. We have
assumed economic and competitive situations will not worsen in fiscal 2006
and 2007. However, we cannot fully foresee the effects of changes in
economic conditions, inflation, population growth, the rising prices of oil
and gas, customer shopping habits and the consolidation of the food
industry on our business.
41
o Our capital expenditures could differ from our estimate if we are
unsuccessful in acquiring suitable sites for new stores, or if development
and remodel costs vary from those budgeted or if performance varies
significantly from expectations.
o Our ability to achieve our profit goals will be affected by (i.) our
success in executing category management and purchasing programs that we
have underway, which are designed to improve our gross margins and reduce
product costs while making our product selection more attractive to
consumers, (ii.) our ability to achieve productivity improvements and
reduce shrink in our stores, (iii.) our success in generating efficiencies
in our supporting activities, and (iv.) our ability to eliminate or
maintain a minimum level of supply and/or quality control problems with our
vendors.
o The vast majority of our employees are members of labor unions. While we
believe that our relationships with union leaderships and our employees are
satisfactory, we operate under collective bargaining agreements which
periodically must be renegotiated. In the coming year, we have several
contracts expiring and under negotiation. In each of these negotiations
rising health care and pension costs will be an important issue, as will
the nature and structure of work rules. We are hopeful, but cannot be
certain, that we can reach satisfactory agreements without work stoppages
in these markets. However, the actual terms of the renegotiated collective
bargaining agreements, our future relationships with our employees and/or a
prolonged work stoppage affecting a substantial number of stores could have
a material effect on our results.
o The amount of contributions made to our pension and multi-employer plans
will be affected by the performance of investments made by the plans and
the extent to which trustees of the plans reduce the costs of future
service benefits.
o Our Company is currently required to acquire a significant amount of our
saleable inventory from one supplier, C&S Wholesale Grocers, Inc. Although
there are a limited number of distributors that can supply our stores, we
believe that other suppliers could provide similar product on reasonable
terms. However, a change in suppliers could cause a delay in distribution
and a possible loss of sales, which would affect operating results
adversely.
o We have estimated our exposure to claims, administrative proceedings and
litigation and believe we have made adequate provisions for them, where
appropriate. Unexpected outcomes in both the costs and effects of these
matters could result in an adverse effect on our earnings.
Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. Accordingly, actual events and results may vary significantly from
those included in or contemplated or implied by forward-looking statements made
by us or our representatives.
42
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 focus on
continuing operations.
We sold our Canadian operations to Metro, Inc. at the close of business on
August 13, 2005. Therefore, comparative information relating to our Canadian
business that follows did not include any weeks during the 12 and 40 weeks ended
December 2, 2006, compared to zero and 24 weeks during the 12 and 40 weeks ended
December 3, 2005.
12 WEEKS ENDED DECEMBER 2, 2006 COMPARED TO THE 12 WEEKS ENDED DECEMBER 3, 2005
OVERALL
Sales for the third quarter of fiscal 2006 were $1.5 billion compared to $1.6
billion with the third quarter of fiscal 2005; comparable store sales, which
includes stores that have been in operation for two full fiscal years and
replacement stores, decreased -3.0%. Results from continuing operations improved
from a loss of $73.5 million for the third quarter of fiscal 2005 to income from
continuing operations of $40.0 million for the third quarter of fiscal 2006. Net
income per share - basic and diluted for the third quarter of fiscal 2006 was
$0.98 and $0.97, respectively, compared to a net loss per share - basic and
diluted of $1.74 for the third quarter of fiscal 2005.
12 Weeks 12 Weeks
Ended Ended (Unfavorable) /
Dec. 2, 2006 Dec. 3, 2005 Favorable % Change
---------------- --------------- --------------- ----------------
Sales $ 1,543.0 $ 1,580.9 $ (37.9) (2.4%)
Decrease in comparable
store sales (3.0%) (0.3%) NA NA
Income (loss) from continuing operations 40.0 (73.5) 113.5 >100.0%
Income from discontinued operations 0.7 2.5 (1.8) (72.0%)
Net income (loss) 40.7 (71.0) 111.7 >100.0%
Net income (loss) per share - basic 0.98 (1.74) 2.72 >100.0%
Net income (loss) per share - diluted 0.97 (1.74) 2.71 >100.0%
SALES
-----
Sales for the third quarter of fiscal 2006 of $1,543.0 million decreased
$37.9 million or 2.4% from sales of $1,580.9 million for third quarter of fiscal
2005. The following details the dollar impact of several items affecting the
decrease in sales from the third quarter of fiscal 2005 to the third quarter of
fiscal 2006:
Impact of Impact of Comparable Impact of
New Closed Store Hurricane
Stores Stores Sales Katrina Other Total
------------- ------------- -------------- ------------- ------------- -----------
United States $ 4.9 $ (20.3) $ (47.2) $ 24.5 $ 0.2 $ (37.9)
43
The decrease in U.S. sales was primarily attributable to the closing of 17
stores since the beginning of the third quarter of fiscal 2005, of which 4 were
closed in fiscal 2006, decreasing sales by $20.3 million and the decline in
comparable store sales of $47.2 million or -3.0% driven mainly by a decrease in
comparable store sales of -7.0% and -28.9% for the Midwest and New Orleans,
respectively. These decreases were partially offset by the opening or re-opening
of 10 new stores since the beginning of the third quarter of fiscal 2005, of
which 9 were opened or re-opened in fiscal 2006, increasing sales by $4.9
million, the increase in sales for our New Orleans stores that were temporarily
closed as a result of Hurricane Katrina during the 12 weeks ended December 3,
2005 of $24.5 million, and the increase in sales relating to an information
technology services agreement with Metro, Inc. of $0.2 million. Included in the
10 stores opened since the beginning of the third quarter of fiscal 2005 was 6
Clemens Markets stores we purchased from C&S Wholesale Grocers, Inc. during the
third quarter of fiscal 2006.
Average weekly sales per supermarket for the U.S. were approximately $329,700
for the third quarter of fiscal 2006 versus $333,400 for the corresponding
period of the prior year, a decrease of 1.1% primarily due to the impact of
negative comparable store sales.
GROSS MARGIN
------------
Gross margin of $464.6 million increased 73 basis points as a percentage of
sales to 30.11% for the third quarter of fiscal 2006 from gross margin of $464.5
million or 29.38% for the third quarter of fiscal 2005. We believe the impact on
margin for changes in costs and special reductions was not significant. The
following table details the dollar impact of several items affecting the gross
margin dollar (decrease) increase from the third quarter of fiscal 2005 to the
third quarter of fiscal 2006:
Gross Margin
Sales Volume Rate Total
------------ ---- -----
United States $ (11.1) $ 11.2 $ 0.1
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
---------------------------------------------------
SG&A expense was $463.4 million or 30.03% for the third quarter of fiscal 2006
as compared to $546.1 million or 34.54% for the third quarter of fiscal 2005.
Included in SG&A in the U.S. for the third quarter of fiscal 2006 were certain
charges as follows:
o costs relating to the closing of our owned warehouses in Edison, New Jersey
and Bronx, New York of $0.7 million (5 basis points) that were not sold as
part of the sale of our U.S. distribution operations and some warehouse
facilities and related assets to C&S Wholesale Grocers, Inc. as discussed
in Note 8 - Asset Disposition Initiatives;
o costs relating to the closures of stores in the Midwest as discussed in
Note 8 - Asset Disposition Initiatives of $1.9 million (12 basis points);
o costs relating to the consolidation of our operating offices in line with
our smaller operations in the U.S. of $0.2 million (1 basis point); and
o costs relating to a voluntary labor buyout program in the South Region of
$0.2 million (1 basis point).
44
Partially offset by:
o net real estate activity of $11.1 million (72 basis points) during the
third quarter of fiscal 2006; and
o gain from proceeds of insurance settlement of $4.3 million (28 basis
points) received during the third quarter of fiscal 2006 for a portion of
our losses caused by Hurricane Katrina, as discussed in Note 14 - Hurricane
Katrina and Impact on U.S. Business.
Included in SG&A in the U.S. for the third quarter of fiscal 2005 were certain
charges as follows:
o costs relating to the closing of our owned warehouses in Edison, New Jersey
and the Bronx, New York of $2.7 million (17 basis points) that will not be
sold as part of the sale of our U.S. distribution operations and some
warehouse facilities and related assets to C&S Wholesale Grocers as
discussed in Note 8 - Asset Disposition Initiatives;
o costs relating to the divestiture of our Midwestern U.S. business as
discussed in Note 8 - Asset Disposition Initiatives of $18.6 million (118
basis points);
o costs relating to future occupancy costs for four stores closed in
connection with Hurricane Katrina in addition to the write-off of an asset
for a favorable lease that was recorded for one of these stores that is now
closed of $13.2 million (84 basis points) as discussed in Note 14 -
Hurricane Katrina and Impact on U.S. Business;
o costs relating to the impairment of unrecoverable assets of $8.1 million
(51 basis points) as discussed in Note 6 - Valuation of Long-Lived Assets;
o costs relating to an administrative reorganization during the third quarter
of fiscal 2005 of $6.7 million (42 basis points); and
o costs relating to the consolidation of our operating offices in line with
our smaller operations in the U.S. of $5.6 million (35 basis points).
There was no change in SG&A within our core U.S. operations during the third
quarter of fiscal 2006 as compared to the third quarter of fiscal 2005.
During the 12 weeks ended December 2, 2006 and December 3, 2005, we recorded
impairment losses on long-lived assets as follows:
12 weeks ended 12 weeks ended
December 2, 2006 December 3, 2005
---------------- ----------------
Impairments due to closure or conversion in the
normal course of business $ 1.0 $ 3.8
Impairments due to unrecoverable assets - 8.1
Impairments due to closure of stores impacted
by Hurricane Katrina(1) - 6.1
------- -------
Total impairments $ 1.0 $ 18.0
======= =======
(1) Refer to Note 14 - Hurricane Katrina and Impact on U.S. Business
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
If current operating levels and trends continue, there may be additional future
impairments on long-lived assets, including the potential for impairment of
assets that are held and used.
45
GAIN ON SALE OF CANADIAN OPERATIONS
-----------------------------------
We sold our Canadian operations to Metro, Inc. at the close of business on
August 13, 2005. As a result of this sale, we recorded additional costs of $0.6
million and $6.1 million during the 12 weeks ended December 2, 2006 and December
3, 2005, respectively.
INTEREST EXPENSE
----------------
Interest expense of $17.2 million for the third quarter of fiscal 2006 increased
from the prior year amount of $15.4 million primarily as a result of increased
borrowings on our revolving line of credit.
EQUITY IN EARNINGS OF METRO, INC.
---------------------------------
We use the equity method of accounting to account for our investment in Metro,
Inc. on the basis that we have significant influence over substantive operating
decisions made by Metro, Inc. through our membership on Metro, Inc.'s Board of
Directors and its committees and through an information technology services
agreement with Metro, Inc. During the 12 weeks ended December 2, 2006 and
December 3, 2005, we recorded $11.0 million and $3.4 million, respectively, in
equity earnings relating to our equity investment in Metro, Inc.
INCOME TAXES
------------
The benefit from income taxes from continuing operations for the third quarter
of fiscal 2006 was $43.7 million compared to $21.3 million for the third quarter
of fiscal 2005. Consistent with prior year, we continue to record a valuation
allowance against our U.S. net deferred tax assets.
For the third quarter of fiscal 2006, our effective income tax rate of 1,165.4%
changed from the effective income tax rate of 22.4 % in the third quarter of
fiscal 2005 as follows:
12 Weeks Ended
--------------------------------------------------------------------
December 2, 2006 December 3, 2005
--------------------------------- ---------------------------------
Tax Effective Tax Effective
Benefit Tax Rate Benefit Tax Rate
--------------- ---------------- --------------- ----------------
United States $ 43,702 (1,165.4%) $ 21,279 (22.4%)
The change in our effective tax rate was primarily due to (i.) the recognition
of tax benefits during the 12 weeks ended December 2, 2006 as we continue to
experience operating losses and these operating losses decrease the overall tax
provision previously recorded during the second quarter of fiscal 2005 in
connection with our Company's Domestic Reinvestment Plan and the sale of our
Canadian operations, (ii) the recognition of foreign tax credits, (iii) the
decrease in our valuation allowance, and (iv) the tax benefit from not providing
deferred taxes on the undistributed earnings of our investment in Metro, Inc.
DISCONTINUED OPERATIONS
-----------------------
Beginning in the fourth quarter of fiscal year 2002 and in the early part of the
first quarter of fiscal 2003, we decided to sell our operations located in
Northern New England and Wisconsin, as well as our Eight O'Clock Coffee
business. These asset sales are now complete.
Income from operations of discontinued businesses, net of tax, for the third
quarter of fiscal 2006 was $0.8 million as compared to $2.0 million for the
third quarter of fiscal 2005, which was primarily due to adjustments as a result
of changes in estimates partially offset by interest accretion on future
occupancy payments that were recorded at present value at the time of the
original charge.
46
The gain on disposal of discontinued operations, net of tax, was $0.6 million
for the third quarter of fiscal 2005 which was primarily related to the sale of
a Kohl's warehouse in the third quarter of fiscal 2005. There were no similar
gains in the third quarter of fiscal 2006.
40 WEEKS ENDED DECEMBER 2, 2006 COMPARED TO THE 40 WEEKS ENDED DECEMBER 3, 2005
OVERALL
Sales for the 40 weeks ended December 2, 2006 were $5.2 billion, compared with
$7.1 billion for the 40 weeks ended December 3, 2005; comparable store sales,
which includes stores that have been in operation for two full fiscal years and
replacement stores, decreased -0.2%. Income from continuing operations decreased
from $429.4 million for the 40 weeks ended December 3, 2005 to $33.7 million for
the 40 weeks ended December 2, 2006, primarily due to the absence of the gain on
sale of our Canadian operations recorded during the 40 weeks ended December 3,
2005. Net income per share - basic and diluted for the 40 weeks ended December
2, 2006 was $0.82 and $0.81, respectively, compared to net income per share -
basic and diluted of $10.77 and $10.62, respectively, for the 40 weeks ended
December 3, 2005.
40 Weeks 40 Weeks
Ended Ended
Dec. 2, 2006 Dec. 3, 2005 Unfavorable % Change
------------ ------------ ------------- ------------
Sales $ 5,242.1 $ 7,132.8 $ (1,890.7) (26.5%)
Decrease in comparable store sales (0.2%) (0.6%) NA NA
Income from continuing operations 33.7 429.4 (395.7) (92.2%)
Income from discontinued operations 0.4 2.3 (1.9) (82.6%)
Net income 34.1 431.7 (397.6) (92.1%)
Net income per share - basic 0.82 10.77 (9.95) (92.4%)
Net income per share - diluted 0.81 10.62 (9.81) (92.4%)
SALES
-----
Sales for the 40 weeks ended December 2, 2006 of $5,242.1 million
decreased $1,890.7 million or 26.5% from sales of $7,132.8 million for 40 weeks
ended December 3, 2005. The lower sales were due to a decrease in U.S. sales of
$166.8 million and a decrease in Canadian sales of $1,723.9 million. The
following table presents sales for each of our reportable operating segments for
the 40 weeks ended December 2, 2006 and the 40 weeks ended December 3, 2005:
40 Weeks Ended 40 Weeks Ended
Dec. 2, 2006 Dec. 3, 2005 Decrease % Change
-------------- -------------- ------------ -----------
United States $ 5,242.1 $ 5,408.9 $ (166.8) (3.1%)
Canada - 1,723.9 (1,723.9) (100.0)
-------------- -------------- ------------ -----------
Total $ 5,242.1 $ 7,132.8 $ (1,890.7) (26.5%)
============== ============== ============ ===========
47
The following details the dollar impact of several items affecting the decrease
in sales by reportable operating segment from the 40 weeks ended December 3,
2005 to the 40 weeks ended December 2, 2006:
Impact of Impact of Comparable Impact of
New Closed Store Hurricane
Stores Stores Sales Katrina Other Total
------------- ------------- -------------- ------------- ------------- -----------
United States $ 21.0 $ (223.5) $ (11.6) $ 38.8 $ 8.5 $ (166.8)
Canada - - - - (1,723.9) (1,723.9)
------------- ------------- -------------- ------------- ------------ ------------
Total $ 21.0 $ (223.5) $ (11.6) $ 38.8 $ (1,715.4) $ (1,890.7)
============= ============= ============== ============= ============ ============
The decrease in U.S. sales was primarily attributable to the closing of 53
stores since the beginning of fiscal 2005, of which 4 were closed in fiscal
2006, decreasing sales by $223.5 million and the decline in comparable store
sales of $11.6 million or -0.2% driven mainly by a decrease in comparable store
sales of -5.3% for the Midwest. These decreases were partially offset by the
opening or re-opening of 11 new stores since the beginning of fiscal 2005, of
which 10 were opened or re-opened in fiscal 2006, increasing sales by $21.0
million, the increase in sales for our New Orleans stores that were temporarily
closed as a result of Hurricane Katrina during the 40 weeks ended December 3,
2005 of $38.8 million and the increase in sales relating to an information
technology services agreement with Metro, Inc. of $8.5 million. Included in the
53 stores closed since the beginning of fiscal 2005 were 35 stores closed as
part of the asset disposition initiative as discussed in Note 8 of our
Consolidated Financial Statements. Included in the 10 stores opened since the
beginning of the third quarter of fiscal 2005 was 6 Clemens Markets stores we
purchased from C&S Wholesale Grocers, Inc. during the 40 weeks ended December 2,
2006.
The decrease in Canadian sales of $1,723.9 million was due to the sale of our
Canadian operations during the second quarter of fiscal 2005 which resulted in
the inclusion of zero weeks of sales for the 40 weeks ended December 2, 2006 as
compared to the inclusion of 24 weeks for the 40 weeks ended December 3, 2005.
Average weekly sales per supermarket for the U.S. were approximately $336,300
for the 40 weeks ended December 2, 2006 versus $326,400 for the corresponding
period of the prior year, an increase of 3.0% primarily due to the impact of
closing smaller stores partially offset by the negative comparable store sales.
GROSS MARGIN
------------
The following table presents gross margin dollar results and gross margin as a
percentage of sales by reportable operating segment for the 40 weeks ended
December 2, 2006 as compared to the 40 weeks ended December 3, 2005. Gross
margin as a percentage of sales increased 191 basis points to 30.22% for the 40
weeks ended December 2, 2006 from 28.31% for the 40 weeks ended December 3,
2005, primarily caused by the sale of our Canadian operations which had a lower
gross margin rate. We believe the impact on margin for changes in costs and
special reductions was not significant.
40 Weeks Ended 40 Weeks Ended
December 2, 2006 December 3, 2005
----------------------------------- ------------------------------------
Gross Margin Rate to Sales % Gross Margin Rate to Sales %
------------ --------------- ------------ ---------------
United States $1,584.1 30.22% $1,598.4 29.55%
Canada - - 420.7 24.40
-------- -------- -------- --------
Total $1,584.1 30.22% $2,019.1 28.31%
======== ======== ======== ========
48
The following table details the dollar impact of several items affecting the
gross margin dollar decrease from the 40 weeks ended December 3, 2005 to the 40
weeks ended December 2, 2006:
Gross Margin
Sales Volume Rate Other Total
--------------- --------------- ---------------- --------------
United States $ (49.3) $ 35.0 $ - $ (14.3)
Canada - - (420.7) (420.7)
--------------- --------------- ---------------- --------------
Total $ (49.3) $ 35.0 $ (420.7) $ (435.0)
=============== =============== ============= ==============
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
---------------------------------------------------
The following table presents store operating, general and administrative expense
by reportable operating segment, in dollars and as a percentage of sales for the
40 weeks ended December 2, 2006 compared with the 40 weeks ended December 3,
2005. SG&A expense was $1,591.2 million or 30.35% for the 40 weeks ended
December 2, 2006 as compared to $2,283.9 million or 32.02% for the 40 weeks
ended December 3, 2005.
40 Weeks Ended 40 Weeks Ended
Dec. 2, 2006 Dec. 3, 2005
---------------------------------- -------------------------------
SG&A Rate to Sales % SG&A Rate to Sales%
-------------- ---------------- -------------- --------------
United States $ 1,591.2 30.35% $ 1,920.4 35.50%
Canada - - 363.5 21.09
-------------- --------------- -------------- --------------
Total $ 1,591.2 30.35% $ 2,283.9 32.02%
============== =============== ============== ==============
Included in SG&A in the U.S. for the 40 weeks ended December 2, 2006 were
certain charges as follows:
o costs relating to the closing of our owned warehouses in Edison, New Jersey
and Bronx, New York of $5.7 million (11 basis points) that were not sold as
part of the sale of our U.S. distribution operations and some warehouse
facilities and related assets to C&S Wholesale Grocers, Inc. as discussed
in Note 8 - Asset Disposition Initiatives;
o costs relating to the closures of stores in the Midwest as discussed in
Note 8 - Asset Disposition Initiatives of $4.9 million (9 basis points);
o costs relating to the consolidation of our operating offices in line with
our smaller operations in the U.S. of $3.8 million (7 basis points); and
o costs relating to a voluntary labor buyout program in the South Region of
$4.5 million (9 basis points).
Partially offset by:
o net real estate activity of $21.0 million (40 basis points); and
o gain from proceeds of insurance settlement of $4.3 million (8 basis points)
received during the 40 weeks ended December 2, 2006 for a portion of our
losses caused by Hurricane Katrina, as discussed in Note 14 - Hurricane
Katrina and Impact on U.S. Business.
Included in SG&A in the U.S. for the 40 weeks ended December 3, 2005 were
certain charges as follows:
o costs relating to the closing of our owned warehouses in Edison, New Jersey
and the Bronx, New York of $67.3 million (124 basis points) that will not
be sold as part of the sale of our U.S. distribution operations and some
warehouse facilities and related assets to C&S Wholesale Grocers as
discussed in Note 8 - Asset Disposition Initiatives;
o costs relating to the divestiture of our Midwestern U.S. business as
discussed in Note 8 - Asset Disposition Initiatives of $103.6 million (192
basis points);
49
o costs relating to future occupancy costs for four stores closed in
connection with Hurricane Katrina, the write-off of an asset for a
favorable lease that was recorded for one of these stores that is now
closed, and our insurance deductible of $18.2 million (34 basis points);
o costs relating to the impairment of unrecoverable assets of $17.7 million
(33 basis points) as discussed in Note 6 - Valuation of Long-Lived Assets;
o costs relating to an administrative reorganization during the 40 weeks
ended December 3, 2005, of $13.8 million (26 basis points);
o costs relating to the consolidation of our operating offices in line with
our smaller operations in the U.S. of $5.6 million (10 basis points);
o costs relating to the cash tender offer completed during the 40 weeks ended
December 3, 2005, of $29.5 million (55 basis points); and
o costs relating to the settlement of our net investment hedge of $15.4
million (29 basis points).
Partially offset by:
o net real estate activity of $22.3 million (41 basis points) during the 40
weeks ended December 3, 2005.
SG&A within our core U.S. operations decreased by 42 basis points during the 40
weeks ended December 2, 2006 as compared to the 40 weeks ended December 3, 2005
primarily due to a reduction in administration expenses of $21.8 million (32
basis points) and a reduction in advertising costs of $4.7 million (5 basis
points).
The decrease in SG&A in Canada of $363.5 million was due to the sale of our
Canadian operations during the second quarter of fiscal 2005 which resulted in
the inclusion of zero weeks of costs during the 40 weeks ended December 2, 2006
as compared to 24 weeks during the 40 weeks ended December 3, 2005.
During the 40 weeks ended December 2, 2006 and December 3, 2005, we recorded
impairment losses on long-lived assets as follows:
40 weeks ended 40 weeks ended
Dec. 2, 2006 Dec. 3, 2005
-------------- ---------------------------------------
U.S. U.S. Canada Total
----------- -------- ---------- ---------
Impairments due to closure or conversion in the
normal course of business $ 3.5 $ 4.8 $ 0.5 $ 5.3
Impairments due to unrecoverable assets - 17.7 - 17.7
Impairments related to our asset disposition initiatives (1) 1.1 15.5 - 15.5
Impairments due to closure of stores impacted by Hurricane
Katrina (2) - 6.1 - 6.1
--------- -------- ---------- -------
Total impairments $ 4.6 $ 44.1 $ 0.5 $ 44.6
========= ======== ========== ========
(1) Refer to Note 8 - Asset Disposition Initiatives
(2) Refer to Note 14 - Hurricane Katrina and Impact on U.S. Business
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
If current operating levels and trends continue, there may be additional future
impairments on long-lived assets, including the potential for impairment of
assets that are held and used.
50
GAIN ON SALE OF CANADIAN OPERATIONS
-----------------------------------
We sold our Canadian operations to Metro, Inc. at the close of business on
August 13, 2005. As a result of this sale, we recorded a pretax gain of $912.5
million (gain of $780.4 million after tax) during the 40 weeks ended December 3,
2005.
INTEREST EXPENSE
----------------
Interest expense of $56.2 million for the 40 weeks ended December 2, 2006
decreased from the prior year amount of $76.8 million due primarily to (i.) the
repurchase of the majority of our 7.75% Notes due April 15, 2007 and our 9.125%
Senior Notes due December 15, 2011 resulting in a reduction in interest expense
of $17.2 million, and (ii.) the absence of interest expense relating to our
Canadian operations that was recorded during the 40 weeks ended December 3, 2005
of $8.4 million but not recorded during the 40 weeks ended December 2, 2006 as a
result of its sale partially offset by an increase in interest expense of $3.5
million due to our increased borrowings on our revolving line of credit.
EQUITY IN EARNINGS OF METRO, INC.
---------------------------------
We use the equity method of accounting to account for our investment in Metro,
Inc. on the basis that we have significant influence over substantive operating
decisions made by Metro, Inc. through our membership on Metro, Inc.'s Board of
Directors and its committees and through an information technology services
agreement with Metro, Inc. During the 40 weeks ended December 2, 2006 and
December 3, 2005, we recorded $30.8 million and $3.4 million, respectively, in
equity earnings relating to our equity investment in Metro, Inc.
INCOME TAXES
The benefit from income taxes from continuing operations for the 40 weeks ended
December 2, 2006 was $58.6 million compared to a provision for income taxes from
continuing operations for the 40 weeks ended December 3, 2005 of $152.9 million
(a $134.3 million provision for our U.S. operations and an $18.6 million
provision for our Canadian operations). Consistent with prior year, we continue
to record a valuation allowance against our U.S. net deferred tax assets.
For the 40 weeks ended December 2, 2006, our effective income tax rate of 235.7%
changed from the effective income tax rate of 26.3% for the 40 weeks ended
December 3, 2005 as follows:
40 Weeks Ended
--------------------------------------------------------------------
December 2, 2006 December 3, 2005
--------------------------------- ---------------------------------
Effective Effective
Tax Benefit Tax Rate Tax Provision Tax Rate
--------------- ---------------- --------------- ----------------
United States $ 58,584 (235.7%) $ (134,346) 23.1%
Canada - - (18,539) 3.2
--------------- ---------------- --------------- ----------------
$ 58,584 (235.7%) $ (152,885) 26.3%
=============== ================ =============== ================
The change in our effective tax rate was primarily due to (i.) the recognition
of tax benefits during the 40 weeks ended December 2, 2006 as we continue to
experience operating losses and these operating losses decrease the overall tax
provision previously recorded during the second quarter of fiscal 2005 in
connection with our Company's Domestic Reinvestment Plan and the sale of our
Canadian operations, (ii) the recognition of foreign tax credits, (iii) the
decrease in our valuation allowance, (iv) the tax benefit from not providing
deferred taxes on the undistributed earnings of our investment in Metro, Inc.,
and (v.) the absence of a tax provision that was recorded for our Canadian
operations during the 40 weeks ended December 3, 2005 that was not recorded
during the 40 weeks ended December 2, 2006 due to the sale of our Canadian
operations during the second quarter of fiscal 2005.
51
DISCONTINUED OPERATIONS
-----------------------
Beginning in the fourth quarter of fiscal year 2002 and in the early part of the
first quarter of fiscal 2003, we decided to sell our operations located in
Northern New England and Wisconsin, as well as our Eight O'Clock Coffee
business. These asset sales are now complete.
Income from operations of discontinued businesses, net of tax, for the 40 weeks
ended December 2, 2006 was $0.4 million as compared to $1.7 million for the 40
weeks ended December 3, 2005, which was primarily due to adjustments as a result
of changes in estimates partially offset by interest accretion on future
occupancy payments that were recorded at present value at the time of the
original charge.
The gain on disposal of discontinued operations, net of tax, was $0.6 million
for 40 weeks ended December 3, 2005 which was related to the sale of a Kohl's
warehouse in the third quarter of fiscal 2005. There were no similar gains for
the 40 weeks ended December 2, 2006.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
CASH FLOWS
----------
The following table presents excerpts from our Statements of Consolidated Cash
Flows:
Dec. 2, 2006 Dec. 3, 2005
----------------- -----------------
Net cash used in operating activities $ (42,864) $ (157,462)
----------------- -----------------
Net cash provided by investing activities $ 52,858 $ 429,777
----------------- -----------------
Net cash used in financing activities $ (146,915) $ (402,634)
----------------- -----------------
Net cash flow used in operating activities of $42.9 million for the 40 weeks
ended December 2, 2006 primarily reflected our net income of $34.1 million,
adjusted for non-cash charges for (i.) depreciation and amortization of $135.8
million, (ii.) asset disposition initiatives of $3.7 million, partially offset
by (iii.) gains on the disposal of owned property of $23.2 million, (iv.) income
tax benefit of $61.5 million, and (v.) our equity in earnings of Metro, Inc. of
$30.8 million, and a decrease in accounts receivables of $49.8 million partially
offset by an increase in inventory of $32.4 million, a decrease in accounts
payable of $10.2 million, a decrease in accrued salaries, wages and benefits of
$30.5 million, a decrease in other accruals of $57.1 million primarily due to
timing and a decrease in non-current liabilities of $20.4 million due mainly to
closed store accruals. Refer to Working Capital below for discussion of changes
in working capital items. Net cash flow used in operating activities of $157.5
million for the 40 weeks ended December 3, 2005 primarily reflected our net
income of $431.7 million, adjusted for non-cash charges for (i.) depreciation
and amortization of $164.0 million, (ii.) asset disposition initiatives of
$163.1 million, (iii.) income tax provision of $119.6 million, and (iv.) other
property impairments of $23.0 million, partially offset by the non-cash gain on
sale of Canadian operations of $912.5 million, and a decrease in inventories of
$33.4 million partially offset by an increase in receivables of $25.8 million, a
decrease in accounts payable of $89.7 million and a decrease in other
non-current liabilities of $59.7 million primarily due to the sale of our
Canadian operations.
52
Net cash flow provided by investing activities of $52.9 million for the 40 weeks
ended December 2, 2006 primarily reflected proceeds received from the sale of
certain of our assets of $37.5 million, a decrease in restricted cash of $142.7
million, and net proceeds from maturities of marketable securities of $82.2
million partially, offset by the purchase of 6 Clemens Markets stores from
C&S Wholesale Grocers, Inc. of $24.7 million, and property expenditures totaling
$184.0 million, which included 3 new supermarkets, 26 major remodels and 33
minor remodels. For the remainder of fiscal 2006, we have planned capital
expenditures of approximately $15 to $20 million, which relates primarily to
enlarging or remodeling approximately 6 supermarkets. We currently expect to
close approximately 2 to 4 stores during the remainder of fiscal 2006. Net cash
flow provided by investing activities of $429.8 million for the 40 weeks ended
December 3, 2005 primarily reflected proceeds from the sale of our Canadian
operations of $960.7 million, proceeds received from the sale of certain of our
assets of $62.5 million partially offset by property expenditures totaling
$134.8 million, which included 1 new supermarket and 30 major remodels, disposal
related expenditures for sale of the Canadian operations of $53.5 million,
payments for derivatives of $15.4 million, an increase in restricted cash of
$146.7 million, and net purchases of marketable securities of $243.0 million.
Net cash flow used in financing activities of $146.9 million for the 40 weeks
ended December 2, 2006 primarily reflected principal payments on long term
borrowings of $1,134.5 million, principal payments on capital leases of $4.1
million, and dividends paid of $299.1 million partially offset by proceeds from
long-term borrowings of $1,262.9 million, proceeds from the exercise of stock
options of $5.0 million and an increase in book overdrafts of $19.7 million. Net
cash flow used in financing activities of $402.6 million for the 40 weeks ended
December 3, 2005 primarily reflected principal payments on long term borrowings
of $413.9 million and principal payments on capital leases of $9.6 million
partially offset by proceeds from the exercise of stock options of $23.4
million.
On April 25, 2006, our Company paid a special one-time dividend to our
shareholders of record on April 17, 2006 equal to $7.25 per share. This dividend
payout totaling $299.1 million was considered a return of capital to our
shareholders and accordingly was recorded as a reduction of "Additional paid in
capital" in our Consolidated Balance Sheets at December 2, 2006. The transaction
was funded primarily by cash available on the balance sheet resulting from the
strategic restructuring of the Company during fiscal 2005.
We believe that our present cash resources, including invested cash on hand as
well as our marketable securities, available borrowings from our Revolver and
other sources, are sufficient to meet our needs. Profitability, cash flow, asset
sale proceeds and timing can be impacted by certain external factors such as
unfavorable economic conditions, competition, labor relations and fuel and
utility costs which could have a significant impact on cash generation. If our
profitability and cash flow do not improve in line with our plans or if the
taxing authorities do not affirm the adequacy of our Company's Domestic
Reinvestment Plan, we anticipate that we would be able to liquidate our
investment in Metro, Inc. and or modify the operating plan in order to ensure
that we have appropriate resources.
WORKING CAPITAL
---------------
We had working capital of $277.2 million at December 2, 2006 compared to working
capital of $599.7 million at February 25, 2006. We had cash and cash equivalents
aggregating $92.7 million at December 2, 2006 compared to $229.6 million at
February 25, 2006. The decrease in working capital was attributable primarily to
the following:
53
o A decrease in cash and cash equivalents as detailed in the Statements of
Consolidated Cash Flows;
o A decrease in restricted cash and marketable securities due to the payment
of a one-time special dividend as discussed in Note 3 - Special One-Time
Dividend;
o A decrease in accounts receivable due to the timing and collection of
receipts;
o An increase in the current portion of our long-term debt primarily due to
our 7.75% Notes becoming due on April 15, 2007; and
o An increase in accounts payable (inclusive of book overdrafts) due to
timing of payments.
Partially offset by the following:
o An increase in inventories due to seasonality;
o A decrease in accrued salaries, wages and benefits due to timing of
payments; and
o A decrease in other accruals due to timing.
REVOLVING CREDIT AGREEMENT
--------------------------
During fiscal 2005, we entered into a new, cash collateralized, Letter of Credit
Agreement that enables us to issue letters of credit up to $200 million. We also
secured a $150 million Revolver with four lenders enabling us to borrow funds on
a revolving basis for working capital loans and letters of credit. The Revolver
includes a $100 million accordion feature which gives us the ability to increase
commitments from $150 million to $250 million. Effective April 4, 2006, we
exercised the accordion option and increased our commitments to $250 million.
Under the terms of this agreement, should availability fall below $25.0 million
and should cash on hand fall below $50.0 million, a borrowing block will be
implemented which provides that no additional loans be made unless we are able
to maintain a minimum consolidated EBITDA covenant on a trailing twelve month
basis. In the event that availability falls below $25.0 million, cash on hand
falls below $50.0 million, and we do not maintain the required minimum EBITDA
covenant, unless otherwise waived or amended, the lenders may, at their
discretion, declare, in whole or in part, all outstanding obligations
immediately due and payable.
The Revolver is collateralized by inventory, certain accounts receivable and
pharmacy scripts. Borrowings under the Revolver bear interest based on LIBOR or
Prime interest rate pricing. This agreement expires in November 2010. At
December 2, 2006, there were no letters of credit outstanding under this
agreement; however, there were $128.5 million in outstanding borrowings under
the Revolver. As of December 2, 2006, after reducing availability for borrowing
base requirements, we had $121.5 million available under the Revolver. Combined
with cash we held in short-term investments and restricted marketable securities
of $88.3 million, we had total cash availability of $209.8 million at December
2, 2006.
Under the Revolver, we are permitted to pay cumulative cash dividends on common
shares as well as make bond repurchases which we may do from time to time in the
future.
During the third quarter of fiscal 2006, the Company transferred 6,000,000 of
our Class A subordinate shares of Metro, Inc. from our foreign subsidiary to the
United States. These transferred shares are being used as collateral for our new
Letter of Credit Agreement that we entered into during fiscal 2005 and has
allowed us to reduce the amount of restricted cash and/or marketable securities
we were required to maintain as collateral previously.
54
PUBLIC DEBT OBLIGATIONS
-----------------------
Outstanding notes totaling $244.7 million at December 2, 2006 consisted of $31.9
million of 7.75% Notes due April 15, 2007, $12.8 million of 9.125% Senior Notes
due December 15, 2011 and $200 million of 9.375% Notes due August 1, 2039.
Interest is payable quarterly on the 9.375% Notes and semi-annually on the
9.125% and 7.75% Notes. The 7.75% Notes are not redeemable prior to their
maturity. The 9.375% notes are now callable at par ($25 per bond) and the 9.125%
Notes may be called at a premium to par after December 15, 2006. The 9.375%
Notes are unsecured obligations and were issued under the terms of our senior
debt securities indenture, which contains among other provisions, covenants
restricting the incurrence of secured debt. The 9.375% Notes are effectively
subordinate to the Revolver and do not contain cross default provisions. All
covenants and restrictions for the 7.75% Notes and the 9.125% Senior Notes have
been eliminated in connection with the cash tender offer in fiscal 2005. Our
notes are not guaranteed by any of our subsidiaries.
OTHER
-----
We currently have active Registration Statements dated January 23, 1998 and June
23, 1999, allowing us to offer up to $75 million of debt and/or equity
securities at terms contingent upon market conditions at the time of sale.
Although our Company paid a special one-time dividend to our shareholders of
record on April 17, 2006 equal to $7.25 per share, our Company's practice is to
not pay dividends. As such, we have not made dividend payments in the previous
three years and do not intend to pay dividends in the normal course of business
in fiscal 2006. However, our Company is permitted under the terms of our
Revolver to pay cash dividends on common shares.
We are the guarantor of a loan of $1.6 million related to a shopping center,
which will expire in 2011.
In the normal course of business, we have assigned to third parties various
leases related to former operating stores (the "Assigned Leases"). At the time
the leases were assigned, we generally remained secondarily liable with respect
to these lease obligations. As such, if any of the assignees were to become
unable to continue making payments under the Assigned Leases, we could be
required to assume the lease obligation. As of December 2, 2006, 113 Assigned
Leases remain in place. Assuming that each respective assignee became unable to
continue to make payments under an Assigned Lease, an event we believe to be
remote, we estimate our maximum potential obligation with respect to the
Assigned Leases to be approximately $293.8 million, which could be partially or
totally offset by reassigning or subletting such leases.
Our existing senior debt rating was Caa1 with negative outlook with Moody's
Investors Service ("Moody's") and B- with stable outlook with Standard & Poor's
Ratings Group ("S&P") as of December 2, 2006. Our liquidity rating was SGL3 with
Moody's as of December 2, 2006. Our recovery rating was 1 with S&P as of
December 2, 2006 indicating a high expectation of 100% recovery of our senior
debt to our lenders. Future rating changes could affect the availability and
cost of financing to our Company.
55
CRITICAL ACCOUNTING ESTIMATES
-----------------------------
Critical accounting estimates are those accounting estimates that we believe are
important to the portrayal of our financial condition and results of operations
and require our most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Self-Insurance Reserves
-----------------------
Our Consolidated Balance Sheets include liabilities with respect to self-insured
workers' compensation and general liability claims. We estimate the required
liability of such claims on a discounted basis, utilizing an actuarial method,
which is based upon various assumptions, which include, but are not limited to,
our historical loss experience, projected loss development factors, actual
payroll and other data. The required liability is also subject to adjustment in
the future based upon the changes in claims experience, including changes in the
number of incidents (frequency) and changes in the ultimate cost per incident
(severity).
Long-Lived Assets
-----------------
We review the carrying values of our long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. Such review is based upon groups of assets and
the undiscounted estimated future cash flows from such assets to determine if
the carrying value of such assets is recoverable from their respective cash
flows. If such review indicates an impairment exists, we measure such impairment
on a discounted basis using a probability weighted approach and a risk free
rate.
We also review assets in stores planned for closure or conversion for impairment
upon determination that such assets will not be used for their intended useful
life. During the 12 and 40 weeks ended December 2, 2006, we recorded impairment
losses on long-lived assets as follows:
12 weeks ended 40 weeks ended
Dec. 2, 2006 Dec. 2, 2006
-------------- --------------
Impairments due to closure or conversion in the
normal course of business $ 1.0 $ 3.5
Impairments related to our asset disposition initiatives (1) - 1.1
---------- ----------
Total impairments $ 1.0 $ 4.6
========== ==========
(1) Refer to Note 8 - Asset Disposition Initiatives
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense. If current operating levels and trends continue, there may
be future impairments on long-lived assets, including the potential for
impairment of assets that are held and used.
Closed Store and Closed Warehouse Reserves
------------------------------------------
For closed stores and warehouses that are under long-term leases, we record a
discounted liability using a risk free rate for the future minimum lease
payments and related costs, such as utilities and taxes, from the date of
closure to the end of the remaining lease term, net of estimated probable
recoveries from projected sublease rentals. If estimated cost recoveries exceed
our liability for future minimum lease payments, the excess is recognized as
income over the term of the sublease. We estimate future net cash flows based on
our experience in and our knowledge of the market in which the closed store and
warehouse is located. However, these estimates project net cash flow several
years into the future and are affected by variable factors such as inflation,
real estate markets and economic conditions. While these factors have been
relatively stable in recent years, variation in these factors could cause
changes to our estimates. As of December 2, 2006, we had recorded liabilities
for estimated probable obligations of $167 million. Of this amount, $17 million
relates to stores closed in the normal course of business, $141 million relates
to stores and warehouses closed as part of the asset disposition initiatives
(see Note 8 of our Consolidated Financial Statements), and $9 million relates to
stores closed as part of our exit of the northern New England and Kohl's
businesses (see Note 7 of our Consolidated Financial Statements).
56
Employee Benefit Plans
----------------------
The determination of our obligation and expense for pension and other
postretirement benefits is dependent, in part, on our selection of certain
assumptions used by our actuaries in calculating these amounts. These
assumptions include, among other things, the discount rate, the expected
long-term rate of return on plan assets and the rates of increase in
compensation and health care costs. In accordance with U.S. GAAP, actual results
that differ from our Company's assumptions are accumulated and amortized over
future periods and, therefore, affect our recognized expense and recorded
obligation in such future periods. While we believe that our assumptions are
appropriate, significant differences in our actual experience or significant
changes in our assumptions may materially affect our pension and other
post-retirement obligations and our future expense.
Inventories
-----------
We evaluate inventory shrinkage throughout the year based on actual physical
counts and record reserves based on the results of these counts to provide for
estimated shrinkage between the store's last inventory and the balance sheet
date.
Income Taxes
------------
As discussed in Note 11 of the Consolidated Financial Statements, our Company
recorded a valuation allowance for the entire U.S. net deferred tax asset since,
in accordance with SFAS 109; it was more likely than not that the net deferred
tax asset would not be utilized based on historical cumulative losses. Under
SFAS 109, this valuation allowance could be reversed in future periods if our
Company experiences improvement in our U.S. operations.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
---------------------------------------
In October 2005, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position FAS 13-1 ("FSP FAS 13-1"), which requires companies to expense
rental costs associated with ground or building operating leases that are
incurred during a construction period. As a result, companies that are currently
capitalizing these rental costs are required to expense them beginning in its
first reporting period beginning after December 15, 2005. FSP FAS 13-1 was
effective for our Company as of the first quarter of fiscal 2006. We evaluated
the provisions of FSP FAS 13-1 and have adopted the guidance. This adoption did
not have a material impact on our Company's financial position or results of
operations.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes--an Interpretation of FASB Statement 109 ("FIN 48"),
which clarifies the accounting for uncertainty in tax positions. This
Interpretation provides that the tax effects from an uncertain tax position can
be recognized in our financial statements, only if the position is more likely
than not of being sustained on audit, based on the technical merits of the
position. The provisions of FIN 48 are effective as of the beginning of fiscal
2007, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. We are currently evaluating the
impact of adopting FIN 48 on our financial statements.
57
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value,
establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value
measurements. The provisions of SFAS 157 are effective for fiscal years
beginning after November 15, 2007 (our year ended February 28, 2009). Our
Company is currently evaluating the impact, if any, of the provisions of SFAS
157.
In September 2006, the FASB issued SFAS 158, "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106 and 132(R)" ("SFAS 158") and is effective for our fiscal year
ended February 24, 2007. SFAS 158 was issued to improve the overall financial
statement presentation of pension and other postretirement plans and does not
impact the determination of net periodic benefit cost or the measurement of plan
assets or obligations. This standard requires companies to recognize the funded
status of their defined benefit pension and other postretirement benefit plans
as a net liability or asset on their balance sheets and requires any
unrecognized prior service costs and actuarial gains or losses to be recognized
as a component of accumulated other comprehensive income or loss. Additionally,
SFAS 158 no longer allows companies to measure their plans as of any date other
than the end of their fiscal year; however, this provision is not effective for
companies until fiscal years ending after December 15, 2008 (our year ended
February 28, 2009). We currently measure our plan assets and obligations using a
December 31 measurement date. Had this new standard been in effect for our
fiscal year ended February 25, 2006, we estimate that our stockholders' equity
would have been increased by approximately $17 million. The impact of adoption
could differ materially from this estimate as it will reflect asset performance
through the end of the calendar year as well as interest rates and other factors
that will be applicable as of December 31, 2006.
In September 2006, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). This bulletin provides guidance on the consideration of
the effects of prior year misstatements in quantifying current year
misstatements for the purpose of materiality assessment. SAB 108 is effective
for our fiscal year ending February 24, 2007. The cumulative effect, if any, of
applying the provisions of SAB 108 will be reported as an adjustment to
beginning-of-year retained earnings. We are currently evaluating the impact of
SAB 108.
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 such risk in the areas of
interest rates and foreign currency exchange rates.
58
From time to time, we may enter hedging agreements in order to manage risks
incurred in the normal course of business including forward exchange contracts
to manage our exposure to fluctuations in foreign exchange rates.
INTEREST RATES
--------------
Our exposure to market risk for changes in interest rates relates primarily to
our debt obligations. We do not have cash flow exposure due to rate changes on
our $374.9 million in total indebtedness as of December 2, 2006 because they are
at fixed interest rates. However, we do have cash flow exposure on our committed
bank lines of credit due to our variable floating rate pricing. Accordingly,
during the 12 and 40 weeks ended December 2, 2006, a presumed 1% change in the
variable floating rate would have impacted interest expense by $0.3 million and
$0.6 million, respectively. During the 12 and 40 weeks ended December 3, 2005, a
presumed 1% change in variable floating rate would not have impacted interest
expense as there were no borrowings on our committed bank lines of credit.
FOREIGN EXCHANGE RISK
---------------------
We are exposed to foreign exchange risk to the extent of adverse fluctuations in
the Canadian dollar. A change in the Canadian currency of 10% would have
resulted in a fluctuation in our investment in Metro, Inc. of $36.7 million at
December 2, 2006. During the 12 and 40 weeks ended December 3, 2005, a change in
the Canadian currency of 10% would have resulted in a fluctuation in net income
of nil and $3.0 million, respectively.
During the first quarter of fiscal 2005, we entered into a six month currency
exchange forward contract totaling $900 million Canadian dollar notional value
to hedge our net investment in our Canadian foreign operation against adverse
movements in exchange rates. In the second quarter of fiscal 2005 and upon
completion of the sale of our Canadian operations, this forward contract was
terminated prior to its expiration.
ITEM 4 - CONTROLS AND PROCEDURES
We have established and maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our Company's
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to our Company's management, including our
President and Chief Executive Officer and Senior Vice President, Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
We carried out an evaluation, under the supervision and with the participation
of our Company's management, including our Company's President and Chief
Executive Officer along with our Company's Senior Vice President, Chief
Financial Officer, of the effectiveness of the design and operation of our
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15(b). Based upon the foregoing, our Company's President and Chief Executive
Officer along with our Company's Senior Vice President, Chief Financial Officer,
concluded that our Company's disclosure controls and procedures were effective
as of the end of the period covered by this report.
There have been no changes during our Company's fiscal quarter ended December 2,
2006 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.
59
CAUTIONARY NOTE
---------------
This presentation may contain forward-looking statements about the future
performance of our Company, and is based on our assumptions and beliefs in light
of information currently available. We assume no obligation to update this
information. These forward-looking statements are subject to uncertainties and
other factors that could cause actual results to differ materially from such
statements including but not limited to: competitive practices and pricing in
the food industry generally and particularly in our principal markets; our
relationships with our employees; the terms of future collective bargaining
agreements; the costs and other effects of lawsuits and administrative
proceedings; the nature and extent of continued consolidation in the food
industry; changes in the financial markets which may affect our cost of capital
or the ability to access capital; supply or quality control problems with our
vendors; and changes in economic conditions, which may affect the buying
patterns of our customers.
60
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 1A - RISK FACTORS
Set forth below is a summary of the material risks to an investment in our
securities.
o Actions of competitors could adversely affect our sales and future profits.
The grocery retailing industry continues to experience fierce competition
from other food retailers, super-centers, mass merchandisers, warehouse
clubs, drug stores, dollar stores and restaurants. Our continued success is
dependent upon our ability to effectively compete in this industry and to
reduce operating expenses, including managing health care and pension costs
contained in our collective bargaining agreements. The competitive
practices and pricing in the food industry generally and particularly in
our principal markets may cause us to reduce our prices in order to gain or
maintain share of sales, thus reducing margins.
o Changes in the general business and economic conditions in our operating
regions, including the rate of inflation, population growth, the rising
prices of oil and gas, the nature and extent of continued consolidation in
the food industry and employment and job growth in the markets in which we
operate, may affect our ability to hire and train qualified employees to
operate our stores. This would negatively affect earnings and sales growth.
General economic changes may also affect the shopping habits and buying
patterns of our customers, which could affect sales and earnings. We have
assumed economic and competitive situations will not worsen in fiscal 2006
and 2007. However, we cannot fully foresee the effects of changes in
economic conditions, inflation, population growth, the rising prices of oil
and gas, customer shopping habits and the consolidation of the food
industry on our business.
o Our capital expenditures could differ from our estimate if we are
unsuccessful in acquiring suitable sites for new stores, or if development
and remodel costs vary from those budgeted or if performance varies
significantly from expectations.
o Our ability to achieve our profit goals will be affected by (i.) our
success in executing category management and purchasing programs that we
have underway, which are designed to improve our gross margins and reduce
product costs while making our product selection more attractive to
consumers, (ii.) our ability to achieve productivity improvements and
reduce shrink in our stores, (iii.) our success in generating efficiencies
in our supporting activities, and (iv.) our ability to eliminate or
maintain a minimum level of supply and/or quality control problems with our
vendors.
o The vast majority of our employees are members of labor unions. While we
believe that our relationships with union leaderships and our employees are
satisfactory, we operate under collective bargaining agreements which
periodically must be renegotiated. In the coming year, we have several
contracts expiring and under negotiation. In each of these negotiations
rising health care and pension costs will be an important issue, as will
the nature and structure of work rules. We are hopeful, but cannot be
certain, that we can reach satisfactory agreements without work stoppages
in these markets. However, the actual terms of the renegotiated collective
bargaining agreements, our future relationships with our employees and/or a
prolonged work stoppage affecting a substantial number of stores could have
a material effect on our results.
61
o The amount of contributions made to our pension and multi-employer plans
will be affected by the performance of investments made by the plans and
the extent to which trustees of the plans reduce the costs of future
service benefits.
o Our Company is currently required to acquire a significant amount of our
saleable inventory from one supplier, C&S Wholesale Grocers, Inc. Although
there are a limited number of distributors that can supply our stores, we
believe that other suppliers could provide similar product on reasonable
terms. However, a change in suppliers could cause a delay in distribution
and a possible loss of sales, which would affect operating results
adversely.
o We have estimated our exposure to claims, administrative proceedings and
litigation and believe we have made adequate provisions for them, where
appropriate. Unexpected outcomes in both the costs and effects of these
matters could result in an adverse effect on our earnings.
Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. Accordingly, actual events and results may vary significantly from
those included in or contemplated or implied by forward-looking statements made
by us or our representatives.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
62
ITEM 6 - EXHIBITS
(a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT NO. DESCRIPTION
---------- -----------
2.1 Stock Purchase Agreement, dated as of July 19, 2005, by and
among the Company, A&P Luxembourg S.a.r.l., Metro Inc. and
4296711 Canada Inc. (incorporated herein by reference to
Exhibit 2.1 to Form 8-K filed on July 22, 2005)
3.1 Articles of Incorporation of The Great Atlantic & Pacific Tea
Company, Inc., as amended through July 1987 (incorporated
herein by reference to Exhibit 3(a) to Form 10-K filed on May
27, 1988)
3.2 By-Laws of The Great Atlantic & Pacific Tea Company, Inc., as
amended and restated through October 6, 2005 (incorporated
herein by reference to Exhibit 3.1 to Form 8-K filed on
October 11, 2005)
4.1 Indenture, dated as of January 1, 1991 between the Company and
JPMorgan Chase Bank (formerly The Chase Manhattan Bank as
successor by merger to Manufacturers Hanover Trust Company),
as trustee (the "Indenture") (incorporated herein by reference
to Exhibit 4.1 to Form 8-K)
4.2 First Supplemental Indenture, dated as of December 4, 2001, to
the Indenture, dated as of January 1, 1991 between our Company
and JPMorgan Chase Bank, relating to the 7.70% Senior Notes
due 2004 (incorporated herein by reference to Exhibit 4.1 to
Form 8-K filed on December 4, 2001)
4.3 Second Supplemental Indenture, dated as of December 20, 2001,
to the Indenture between our Company and JPMorgan Chase Bank,
relating to the 9 (1)/8% Senior Notes due 2011 (incorporated
herein by reference to Exhibit 4.1 to Form 8-K filed on
December 20, 2001)
4.4 Successor Bond Trustee (incorporated herein by reference to
Exhibit 4.4 to Form 10-K filed on May 9, 2003)
4.5 Third Supplemental Indenture, dated as of August 23, 2005, to
the Indenture between the Company and Wilmington Trust Company
(as successor to JPMorgan Chase Bank) (incorporated herein by
reference to Exhibit 4.1 to Form 8-K filed on August 23, 2005)
4.6 Fourth Supplemental Indenture, dated as of August 23, 2005, to
the Indenture between the Company and Wilmington Trust Company
(as successor to JPMorgan Chase Bank). (incorporated herein by
reference to Exhibit 4.2 to Form 8-K filed on August 23, 2005)
63
4.7 Credit Agreement dated as of November 15, 2005 between the
Company and Bank of America, N.A. as Administrative Agent and
Collateral Agent, JPMorgan Chase Bank, N.A. as Syndication
Agent, Wachovia Bank, National Association as Documentation
Agent and Banc of America Securities LLC as Lead Arranger
(incorporated herein by reference to Exhibit 4.1 to Form 8-K
filed on November 18, 2005 and Item 8.01 to Form 8-K filed
April 10, 2006)
10.1 Executive Employment Agreement, made and entered into as of
the 15th day of August, 2005, by and between the Company and
Mr. Eric Claus (incorporated herein by reference to Exhibit
10.1 to Form 8-K filed on September 9, 2005) and a technical
amendment (incorporated herein by reference to Exhibit 10.1 to
Form 10-K filed on May 9, 2006)
10.2 Employment Agreement, made and entered into as of the 1st day
of November, 2000, by and between the Company and William P.
Costantini (incorporated herein by reference to Exhibit 10 to
Form 10-Q filed on January 16, 2001) ("Costantini Agreement")
10.3 Amendment to Costantini Agreement dated April 30, 2002
(incorporated herein by reference to Exhibit 10.7 to Form 10-K
filed on July 5, 2002)
10.4 Confidential Separation and Release Agreement by and between
William P. Costantini and The Great Atlantic & Pacific Tea
Company, Inc. dated November 4, 2004 (incorporated herein by
reference to Exhibit 10.4 to Form 10-Q filed on January 7,
2005)
10.5 Employment Agreement, made and entered into as of the 16th day
of June, 2003, by and between our Company and Brenda Galgano
(incorporated herein by reference to Exhibit 10.9 to Form 10-Q
filed on October 17, 2003)
10.6 Employment Agreement, made and entered into as of the 24th day
of February, 2002, by and between our Company and Mitchell P.
Goldstein (incorporated herein by reference to Exhibit 10.8 to
Form 10-K filed on July 5, 2002)
10.7 Letter Agreement dated September 6, 2005, between Mitchell P.
Goldstein and our Company (incorporated herein by reference to
Exhibit 10.2 to Form 8-K filed on September 9, 2005)
10.8 Employment Agreement, made and entered into as of the 2nd day
of October, 2002, by and between our Company and Peter
Jueptner (incorporated herein by reference to Exhibit 10.26 to
Form 10-Q filed on October 22, 2002) ("Jueptner Agreement")
10.9 Amendment to Jueptner Agreement dated November 10, 2004
(incorporated herein by reference to Exhibit 10.8 to Form 10-K
filed on May 10, 2005)
64
10.10 Offer Letter dated the 18th day of September 2002, by and
between our Company and Peter Jueptner (incorporated herein by
reference to Exhibit 10.10 to Form 10-Q filed on January 10,
2003)
10.11 Employment Agreement, made and entered into as of the 14th day
of May, 2001, by and between our Company and John E. Metzger,
as amended February 14, 2002 (incorporated herein by reference
to Exhibit 10.13 to Form 10-K filed on July 5, 2002) ("Metzger
Agreement")
10.12 Amendment to John E. Metzger Agreement dated October 25, 2004
(incorporated herein by reference to Exhibit 10.12 to Form
10-K filed on May 10, 2005)
10.13 Employment Agreement, made and entered into as of the 25th day
of January, 2006, by and between our Company and Jennifer
MacLeod (incorporated herein by reference to Exhibit 10.13 to
Form 10-K filed on May 9, 2006)
10.14 Employment Agreement, made and entered into as of the 1st day
of March 2005, by and between our Company and William J. Moss
(incorporated herein by reference to Exhibit 10.13 to Form
10-K filed on May 10, 2005)
10.15 Employment Agreement, made and entered into as of the 28th day
of October, 2002, by and between our Company and Brian Piwek,
and Offer Letter dated the 23rd day of October, 2002
(incorporated herein by reference to Exhibit 10.14 to Form
10-Q filed on January 10, 2003) ("Piwek Agreement")
10.16 Amendment to Brian Piwek Agreement dated February 4, 2005
(incorporated herein by reference to Exhibit 10.15 to Form
10-K filed on May 10, 2005)
10.17 Employment Agreement, made and entered into as of the 4th of
January 2006, by and between our Company and Melissa E.
Sungela (incorporated herein by reference to Exhibit 10.17 to
Form 10-Q filed on January 6, 2006)
10.18 Employment Agreement, made and entered into as of the 12th of
September 2005, by and between our Company and Paul Wiseman
(incorporated herein by reference to Exhibit 10.17 to Form
10-Q filed on October 18, 2005)
10.19 Employment Agreement, made and entered into as of the 2nd of
December 2004, by and between our Company and Allan Richards
(incorporated herein by reference to Exhibit 10.18 to Form
10-Q filed on October 18, 2005)
10.20 Employment Agreement, made and entered into as of the 2nd of
December 2004, by and between our Company and Stephen Slade
(incorporated herein by reference to Exhibit 10.19 to Form
10-Q filed on October 18, 2005)
10.21 Supplemental Executive Retirement Plan effective as of
September 1, 1997 (incorporated herein by reference to Exhibit
10.B to Form 10-K filed on May 27, 1998)
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10.22 Supplemental Retirement and Benefit Restoration Plan effective
as of January 1, 2001 (incorporated herein by reference to
Exhibit 10(j) to Form 10-K filed on May 23, 2001)
10.23 1994 Stock Option Plan (incorporated herein by reference to
Exhibit 10(e) to Form 10-K filed on May 24, 1995)
10.24 1998 Long Term Incentive and Share Award Plan (incorporated
herein by reference to Exhibit 10(k) to Form 10-K filed on May
19, 1999, to Appendix B to the Proxy Statement dated May 27,
2005 and to Appendix B to the Proxy Statement dated May 25,
2006)
10.25 Form of Stock Option Grant (incorporated herein by reference
to Exhibit 10.20 to Form 10-K filed on May 10, 2005)
10.26 Description of 2005 Turnaround Incentive Compensation Program
(incorporated herein by reference to Exhibit 10.21 to Form
10-K filed on May 10, 2005)
10.27 Form of Restricted Share Unit Award Agreement (incorporated
herein by reference to Exhibit 10.22 to Form 10-K filed on May
10, 2005)
10.28 Description of 2006 Long Term Incentive Plan (incorporated
herein by reference to Exhibit 10.28 to Form 10-Q filed on
July 21, 2006)
10.29 Form of 2006 Restricted Share Unit Award Agreement
(incorporated herein by reference to Exhibit 10.29 to Form
10-Q filed on July 21, 2006)
10.30 1994 Stock Option Plan for Non-Employee Directors
(incorporated herein by reference to Exhibit 10(f) to Form
10-K filed on May 24, 1995)
10.31 2004 Non-Employee Director Compensation effective as of July
14, 2004 (incorporated herein by reference to Exhibit 10.15 to
Form 10-Q filed on July 29, 2004 and to Appendix C to the
Proxy Statement dated May 25, 2006)
10.32 Description of Management Incentive Plan (incorporated herein
by reference to Exhibit 10.30 to Form 10-K filed on May 9,
2006)
10.33 Asset Purchase Agreement, dated as of June 27, 2005, by and
between the Company, Ocean Logistics LLC and C&S Wholesale
Grocers, Inc. (incorporated herein by reference to Exhibit
10.38 to Form 10-Q filed on October 18, 2005)
10.34 Supply Agreement, dated as of June 27, 2005, by and between
the Company and C&S Wholesale Grocers, Inc. (incorporated
herein by reference to Exhibit 10.39 to Form 10-Q filed on
October 18, 2005)
10.35 Information Technology Transition Services Agreement by and
between The Great Atlantic and Pacific Tea Company, Limited
("A&P Canada") and Metro, Inc. entered into on August 15, 2005
(incorporated herein by reference to Exhibit 10.40 to Form
10-Q filed on October 18, 2005)
66
10.36 Investor Agreement by and between A&P Luxembourg S.a.r.l., a
wholly owned subsidiary of the Company, and Metro, Inc.
entered into on August 15, 2005 (incorporated herein by
reference to Exhibit 10.41 to Form 10-Q filed on October 18,
2005)
10.37 Letter of Credit Agreement, dated as of October 14, 2005
between the Company and Bank of America, N.A., as Issuing
Bank, (incorporated herein by reference to Exhibit 10.42 to
Form 10-Q filed on October 18, 2005)
16 Letter on Change in Certifying Accountant (incorporated herein
by reference to Forms 8-K filed on September 18, 2002 and
September 24, 2002, and Form 8-K/A filed on September 24,
2002)
18 Preferability Letter Issued by PricewaterhouseCoopers LLP
(incorporated herein by reference to Exhibit 18 to Form 10-Q
filed on July 29, 2004)
23 Consent of Independent Registered Public Accounting Firm
(incorporated herein by reference to Exhibit 23 to Form 10-K
filed on May 9, 2006)
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
67
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.
Dated: January 9, 2007 By: /s/ Melissa E. Sungela
----------------------------
Melissa E. Sungela, Vice President,
Corporate Controller (Chief
Accounting Officer)
68