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 JUNE 16, 2007
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 A LARGE ACCELERATED FILER, AN
ACCELERATED FILER, OR A NON-ACCELERATED FILER. SEE DEFINITION OF "ACCELERATED
FILER AND LARGE ACCELERATED FILER" IN RULE 12B-2 OF THE EXCHANGE ACT. (CHECK
ONE):
LARGE ACCELERATED FILER [ ] ACCELERATED FILER [X] NON-ACCELERATED FILER [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN
RULE 12B-2 OF THE EXCHANGE ACT). YES [ ] NO [X]
AS OF JULY 20, 2007 THE REGISTRANT HAD A TOTAL OF 41,918,030 SHARES OF COMMON
STOCK - $1 PAR VALUE OUTSTANDING.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
(Unaudited)
16 Weeks Ended
-----------------------------
June 16, 2007 June 17, 2006
------------- -------------
Sales $ 1,986,925 $ 1,994,428
Cost of merchandise sold (1,386,601) (1,391,427)
----------- -----------
Gross margin 600,324 603,001
Store operating, general and administrative
expense (714,519) (613,885)
----------- -----------
Loss from operations (114,195) (10,884)
Loss on sale of Canadian operations (281) (326)
Gain on sale of shares of Metro, Inc. 78,388 --
Interest expense (21,419) (21,371)
Interest and dividend income 4,666 4,503
Equity in earnings of Metro, Inc. 7,869 7,947
----------- -----------
Loss from continuing operations before income
taxes (44,972) (20,131)
Benefit from income taxes 18,830 11,492
----------- -----------
Loss from continuing operations (26,142) (8,639)
Discontinued operations:
(Loss) income from operations of discontinued
businesses, net of tax benefit of $0 for
the 16 weeks ended June 16, 2007 and net
of tax provision of $1,839 for the 16
weeks ended June 17, 2006 (1,829) 2,540
Loss on disposal of discontinued operations,
net of tax benefit of $0 and $7 for the 16
weeks ended June 16, 2007 and June 17,
2006, respectively (15,192) (10)
----------- -----------
(Loss) income from discontinued operations (17,021) 2,530
----------- -----------
Net loss $ (43,163) $ (6,109)
=========== ===========
Net (loss) income per share - basic and diluted:
Continuing operations $ (0.62) $ (0.21)
Discontinued operations (0.41) 0.06
----------- -----------
Net loss per share - basic and diluted $ (1.03) $ (0.15)
=========== ===========
Weighted average number of common shares
outstanding 41,801,381 41,280,600
Common stock equivalents 458,456 558,704
----------- -----------
Weighted average number of common and common
equivalent shares outstanding 42,259,837 41,839,304
=========== ===========
See Notes to Quarterly Report
2
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Common Stock Additional Accumulated Other Total
-------------------- Paid-in Retained Comprehensive Stockholders'
Shares Amount Capital Earnings Income Equity
---------- ------- ---------- --------- ----------------- -------------
16 WEEK PERIOD ENDED JUNE 16, 2007
Balance at February 24, 2007,
as previously reported 41,589,195 $41,589 $212,868 $ 153,325 $ 22,888 $ 430,670
Cumulative impact of
the adoption of FIN 48 24,421 24,421
---------- ------- -------- --------- -------- ---------
Balance at beginning of period,
as adjusted 41,589,195 41,589 212,868 177,746 22,888 455,091
Net loss (43,163) (43,163)
Other comprehensive income 137,408 137,408
Stock options exercised 324,431 325 5,299 5,624
Tax benefit on stock options 1,701 1,701
Other share based awards 2,821 2,821
---------- ------- -------- --------- -------- ---------
Balance at end of period 41,913,626 $41,914 $222,689 $ 134,583 $160,296 $ 559,482
========== ======= ======== ========= ======== =========
16 WEEK PERIOD ENDED JUNE 17, 2006
Balance at beginning of period 41,148,987 $41,149 $497,193 $ 126,432 $ 6,953 $ 671,727
Net loss (6,109) (6,109)
Other comprehensive income 11,415 11,415
Cash dividends on common stock -
$7.25 per share (299,089) (299,089)
Stock options exercised 295,298 295 4,307 4,602
Other share based awards 3,337 3,337
---------- ------- -------- --------- -------- ---------
Balance at end of period 41,444,285 $41,444 $205,748 $ 120,323 $ 18,368 $ 385,883
========== ======= ======== ========= ======== =========
COMPREHENSIVE INCOME (LOSS)
16 Weeks Ended
----------------------------
June 16, 2007 June 17, 2006
------------- -------------
Net loss $(43,163) $(6,109)
-------- -------
Foreign currency translation adjustment 16,045 11,529
Net unrealized gain on investment securities, net
of tax 121,740 --
Net unrealized gain (loss) on marketable
securities, net of tax 22 (114)
Pension and other post-retirement benefits, net
of tax (399) --
-------- -------
Other comprehensive income, net of tax 137,408 11,415
-------- -------
Total comprehensive income $ 94,245 $ 5,306
======== =======
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BALANCES
Net Net Pension
Unrealized Unrealized & Other Accumulated
Foreign Gain on (Loss) Income Post- Other
Currency Investment on Marketable retirement Comprehensive
Translation Securities Securities Benefits Income
----------- ---------- ------------- ---------- -------------
Balance at February 24, 2007 $ 9,710 $ -- $ (22) $13,200 $ 22,888
Current period change 16,045 121,740 22 (399) 137,408
------- -------- ------- ------- --------
Balance at June 16, 2007 $25,755 $121,740 $ -- $12,801 $160,296
======= ======== ======= ======= ========
Balance at February 25, 2006 $12,874 $ -- $(1,015) $(4,906) $ 6,953
Current period change 11,529 -- (114) -- 11,415
------- -------- ------- ------- --------
Balance at June 17, 2006 $24,403 $ -- $(1,129) $(4,906) $ 18,368
======= ======== ======= ======= ========
See Notes to Quarterly Report
3
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share amounts)
February 24,
June 16, 2007 2007
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 94,202 $ 86,194
Restricted cash 194,087 51,176
Restricted marketable securities -- 20,335
Accounts receivable, net of allowance for doubtful accounts of
$4,796 and $4,514 at June 16, 2007 and February 24, 2007,
respectively 89,225 117,082
Inventories 314,787 411,370
Prepaid expenses and other current assets 87,582 62,751
Assets held for sale 164,450 --
---------- ----------
Total current assets 944,333 748,908
---------- ----------
Non-current assets:
Property:
Property owned 771,510 919,322
Property leased under capital leases, net 14,148 20,676
---------- ----------
Property - net 785,658 939,998
Investment in Metro, Inc. 411,253 --
Equity investment in Metro, Inc. -- 368,871
Other assets 166,643 53,846
---------- ----------
Total assets $2,307,887 $2,111,623
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 89 $ 32,069
Current portion of obligations under capital leases 1,571 1,554
Accounts payable 181,366 197,500
Book overdrafts 33,331 31,833
Accrued salaries, wages and benefits 119,678 115,719
Accrued taxes 39,241 34,452
Other accruals 138,426 145,264
---------- ----------
Total current liabilities 513,702 558,391
---------- ----------
Non-current liabilities:
Long-term debt 254,183 284,214
Long-term obligations under capital leases 29,491 29,938
Long-term real estate liabilities 302,997 300,832
Other non-current liabilities 648,032 507,578
---------- ----------
Total liabilities 1,748,405 1,680,953
---------- ----------
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 - 41,913,626 and 41,589,195 shares
at June 16, 2007 and February 24, 2007, respectively 41,914 41,589
Additional paid-in capital 222,689 212,868
Accumulated other comprehensive income 160,296 22,888
Retained earnings 134,583 153,325
---------- ----------
Total stockholders' equity 559,482 430,670
---------- ----------
Total liabilities and stockholders' equity $2,307,887 $2,111,623
========== ==========
See Notes to Quarterly Report
4
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
16 Weeks Ended
-----------------------------
June 16, 2007 June 17, 2006
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (43,163) $ (6,109)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Asset disposition initiatives 105,560 7,251
Depreciation and amortization 56,349 54,947
Income tax benefit (21,978) (11,300)
Loss (gain) on disposal of owned property and write-down of
property, net 1,161 (9,693)
Loss on disposal of discontinued operations 15,192 10
Other property impairments 451 1,221
Loss on sale of Canadian operations 281 326
Other share based awards 2,821 3,337
Equity in earnings of Metro, Inc. (7,869) (7,947)
Proceeds from dividends from Metro, Inc. -- 1,702
Gain on sale of shares of Metro, Inc. (78,388) --
Other changes in assets and liabilities:
Decrease in receivables 27,880 44,021
Decrease in inventories 24,099 3,866
Increase in prepaid expenses and other current assets (7,244) (4,058)
Increase in other assets (11,446) (2,620)
(Decrease) increase in accounts payable (11,933) 1,766
Decrease in accrued salaries, wages and benefits, and taxes (16,239) (19,387)
Decrease in other accruals (6,842) (47,337)
Decrease in other non-current liabilities (809) (14,220)
Other operating activities, net (252) 1,456
--------- ---------
Net cash provided by (used in) operating activities 27,631 (2,768)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (50,916) (68,129)
Proceeds from disposal of property 3,070 10,384
Disposal related expenditures for sale of Canadian operations (281) (326)
(Increase) decrease in restricted cash (142,911) 76,827
Proceeds from the sale of shares of Metro, Inc. 203,492 --
Purchases of marketable securities -- (148,700)
Proceeds from maturities of marketable securities 20,446 219,404
--------- ---------
Net cash provided by investing activities 32,900 89,460
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds under revolving lines of credit 295,100 288,300
Principal payments on revolving lines of credit (325,100) (217,800)
Principal payments on long-term borrowings (31,933) (26)
Long-term real estate liabilities 2,165 (920)
Principal payments on capital leases (1,549) (1,974)
Tax benefit on stock options 1,701 --
Increase in book overdrafts 1,498 7,612
Deferred financing fees (36) (75)
Dividends paid -- (299,089)
Proceeds from stock options exercised 5,624 4,602
--------- ---------
Net cash used in financing activities (52,530) (219,370)
Effect of exchange rate changes on cash and cash equivalents 7 110
--------- ---------
Net increase (decrease) in cash and cash equivalents 8,008 (132,568)
Cash and cash equivalents at beginning of period 86,194 229,589
--------- ---------
Cash and cash equivalents at end of period $ 94,202 $ 97,021
========= =========
SUPPLEMENTAL DISCOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 7,531 $ 6,868
========= =========
Cash paid during the year for income taxes $ 1,608 $ 2,556
========= =========
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)
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying Consolidated Statements of Operations, Consolidated Statements
of Stockholders' Equity and Comprehensive Income (Loss), and Consolidated
Statements of Cash Flows for the 16 weeks ended June 16, 2007 and June 17, 2006,
and the Consolidated Balance Sheets at June 16, 2007 and February 24, 2007 of
The Great Atlantic & Pacific Tea Company, Inc. ("We," "Our," 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 2006 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 used the equity method of accounting for our investment in Metro,
Inc. through March 13, 2007 as we exerted significant influence over substantive
operating decisions made by Metro, Inc. through our membership on Metro, Inc.'s
Board of Directors and its committees and through an information technology
services agreement with Metro, Inc. However, as a result of the sale of
6,350,000 shares of our holdings in Metro, Inc. on March 13, 2007, our Company
currently records our investment in Metro, Inc. under Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). We classify our investment as an
available-for-sale security in non-current assets on our Consolidated Balance
Sheet at June 16, 2007 on the basis that we no longer exert significant
influence over substantive operating decisions made by Metro, Inc.
Certain reclassifications have been made to prior year amounts to conform to
current year presentation.
2. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board ("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. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 requires
that we determine whether the benefits of our tax positions are more likely than
not of being sustained upon audit based on the technical merits of the tax
position. For tax positions that are more likely than not of being sustained
upon audit, we recognize the largest amount of the benefit that is more likely
than not of being sustained in our consolidated financial statements. For tax
positions that are not more likely than not of being sustained upon audit, we do
not recognize any portion of the benefit in our consolidated financial
statements. The provisions of FIN 48 also provide guidance on derecognition,
classification, interest and penalties, accounting in interim periods, and
disclosure. We adopted these requirements as of February 25, 2007.
6
The cumulative effect of the adoption of the recognition and measurement
provisions of FIN 48 resulted in a $24 million increase to the February 25, 2007
balance of retained earnings. Results of prior periods have not been restated.
Our policy for interest and penalties under FIN 48 related to income tax
exposures was not impacted as a result of the adoption of the recognition and
measurement provisions of FIN 48. Therefore, we continue to recognize interest
and penalties as incurred within "Benefit from income taxes" in our Consolidated
Statements of Operations. We do not expect a material impact on our effective
tax rate as a result of the adoption of FIN 48. Refer to Note 13 - Income Taxes
for further discussion.
In October 2004, the government passed the Homeland Investment Act which allows
companies to repatriate cash balances from their controlled foreign subsidiaries
at a reduced rate. This was achieved by permitting a one time 85% dividends
received deduction. Our Company completed the sale of our Canadian subsidiary to
Metro, Inc. during fiscal 2005. As a result of this transaction, our Company
repatriated $949.0 million from our foreign subsidiaries, of which $500.0
million is intended to qualify for the 85% dividends received deduction. Until
such time as the taxing authorities have affirmed the adequacy of our Company's
Domestic Reinvestment Plan, the balance sheet is and will be grossed-up to
reflect liabilities for uncertain tax positions and deferred tax assets for net
operating losses in accordance with FIN 48.
In September 2006, the FASB issued SFAS 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 No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). 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. We adopted these requirements of SFAS 158 as of
February 24, 2007. 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. We are
currently evaluating which of the two transition methods to use and when we will
adopt the change in measurement date. Refer to Note 11 - Retirement Plans and
Benefits for further discussion.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities--including an amendment of FASB
Statement No. 115." SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected will be
recognized in earnings at each subsequent reporting date. The provisions of SFAS
159 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 159.
7
3. DEFINITIVE MERGER AGREEMENT WITH PATHMARK STORES, INC.
On March 5, 2007, our Company announced that we have reached a definitive merger
agreement with Pathmark Stores, Inc. in which we will acquire Pathmark Stores,
Inc., ("Pathmark") for $1.5 billion in cash, stock, and debt assumption or
retirement. For further details surrounding the Pathmark transaction, refer to
our Company's Form 8-K and the accompanying exhibits filed with the U.S.
Securities and Exchange Commission on March 6, 2007.
Under the terms of the transaction, The Tengelmann Group, currently A&P's
majority shareholder will remain the largest single shareholder of the combined
entity. Christian Haub, Executive Chairman of A&P, will continue as Executive
Chairman of the combined company; Eric Claus, President and CEO of A&P, will
also maintain the same position in the combined company.
Pathmark shareholders will receive $9.00 in cash and 0.12963 shares of A&P stock
for each Pathmark share. As a result, Pathmark shareholders, including its
largest investor, The Yucaipa Companies LLC ("Yucaipa Companies"), will receive
a stake in the combined companies.
The boards of both A&P and Pathmark have unanimously approved the transaction.
Both Yucaipa Companies and Tengelmann have entered into voting agreements to
support the transaction. This transaction is expected to be completed during the
second half of our fiscal year 2007 and is subject to the completion of
shareholder and regulatory approvals, as well as other customary closing
conditions.
4. ASSETS HELD FOR SALE
On April 24, 2007, based upon unsatisfactory operating trends and the need to
devote resources to our expanding Northeast core business, our Company announced
we are in negotiations for the potential sale of our non-core stores within our
Midwest operations, including inventory related to these stores. Sale
transactions for a majority of these stores have been completed, with final
negotiations pending on several additional locations. Further, our Company has
ceased sales operations in all stores as of July 7, 2007. In connection with the
shutdown of these operations, we estimate that we will record occupancy costs in
excess of $50 million in the second quarter of fiscal 2007 for closed stores and
warehouses not sold. As we continue to market these stores and warehouses for
sale, negotiate lease terminations as well as sublease some of these locations,
this estimate may vary.
On May 30, 2007, our Company announced that we are in advanced negotiations for
the sale of our non-core stores located within the Greater New Orleans area,
including inventory related to these stores. There is no guarantee that these
stores will be sold and we do not intend to dispose of these assets unless the
terms and conditions are reasonable to our Company, shareholders and our
employees. In connection with this potential sale, it is possible that
liabilities may be recorded in the near term.
Expected proceeds for the both of these divestitures are estimated to be in the
range of $160 million to $180 million.
Upon the decision to pursue selling these stores, we applied the provisions of
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144") to these businesses. SFAS 144 requires that once properties are
identified as held for sale, they are no longer depreciated, valued on an
8
asset-by-asset basis at the lower of carrying amount or fair value less costs to
sell, and reclassified as a current asset to "Assets held for sale" on our
Consolidated Balance Sheets. As of our balance sheet date, the criteria set
forth by SFAS 144 to reclassify these assets as properties held for sale had
been met for a majority of the stores in the Midwest and all stores in the
Greater New Orleans area. These assets, including inventory relating to these
properties held for sale, have been aggregated and presented on the Consolidated
Balance Sheet as "Assets held for sale" at June 16, 2007. In addition, in
accordance with SFAS 144, the criteria necessary to classify these operations as
discontinued have been satisfied for the Greater New Orleans area only and
reclassified as such in our Consolidated Statements of Operations for the 16
weeks ended June 16, 2007 and June 17, 2006. The Midwest has not been classified
as discontinued due to our Company's continuing involvement in the operations of
this business as of June 16, 2007. Refer to Note 8 - Discontinued Operations for
further discussion.
In applying the provisions of SFAS 144, we estimated the assets' fair market
value based upon expected proceeds less costs to sell and recorded impairment
losses on the property, plant and equipment of $52.8 million, of which $15.3
million is included in "Loss on disposal of discontinued businesses, net of tax"
and $37.5 million is included in "Store operating, general and administrative
expense" on our Consolidated Statements of Operations for first quarter ended
June 16, 2007.
An analysis of Assets held for sale at June 16, 2007 is as follows:
Inventories $ 67,575
Property owned, net 96,875
--------
$164,450
========
5. INVESTMENT IN METRO, INC.
On March 13, 2007, in connection with our agreement to acquire Pathmark Stores,
Inc., our Company sold 6,350,000 shares of our holdings in Metro, Inc. for
proceeds of approximately $203.5 million resulting in a net gain of $78.4
million. Of the total proceeds received, $190.4 million are being held as
restricted cash to collateralize our outstanding letters of credit. After the
sale, our Company continues to hold 11,726,645 Class A subordinate shares of
Metro, Inc, representing approximately 10.18% of the outstanding shares of
Metro, Inc. as of its first quarter ended March 17, 2007.
Beginning March 13, 2007, as a result of the sale of 6,350,000 shares of Metro,
Inc., our Company records our investment in Metro, Inc. under SFAS 115 and
classifies our investment as an available-for-sale security in non-current
assets on our Consolidated Balance Sheet at June 16, 2007 on the basis that we
no longer exert significant influence over substantive operating decisions made
by Metro, Inc. Previous to March 13, 2007, we used the equity method of
accounting to account for our investment in Metro, Inc. on the basis that we
exerted significant influence over substantive operating decisions made by
Metro, Inc. through our membership on Metro, Inc.'s Board of Directors and its
committees and through an information technology services agreement.
9
The following table summarizes the status and results of our Company's
investment in Metro, Inc. from February 24, 2007 through June 16, 2007:
Equity investment at February 24, 2007 $ 368,871
Equity earnings in Metro, Inc. 7,869
---------
Equity investment at March 13, 2007 376,740
Sale of shares of Metro, Inc. (128,298)
Unrealized gain on investment 140,793
Foreign currency translation 22,018
---------
Investment at June 16, 2007 $ 411,253
=========
Through March 13, 2007, we recorded our pro-rata equity earnings 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 first quarter ended June 16, 2007 and June 17, 2006, we
recorded $7.9 million and $7.9 million, respectively, in equity earnings
relating to our equity investment in Metro, Inc. and included this amount in
"Equity in earnings of Metro, Inc." on our Consolidated Statements of
Operations. In accordance with SFAS 115, we recorded dividend income of $1.3
million based on Metro, Inc.'s dividend declaration on April 17, 2007 and
included this amount in "Interest and dividend income" on our Consolidated
Statements of Operations for the first quarter ended June 16, 2007.
Metro, Inc.'s summarized financial information, derived from its unaudited
second quarter ended March 17, 2007 and March 11, 2006 financial statements, is
as follows (in millions):
12 Weeks Ended 12 Weeks Ended
March 17, 2007 March 11, 2006
-------------- --------------
Income statement:
Net sales $2,096.5 $2,129.9
======== ========
Cost of sales and operating expenses $1,967.1 $2,003.6
======== ========
Net income $ 55.0 $ 50.3
======== ========
6. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND AVAILABLE-FOR-SALE SECURITIES
At June 16, 2007 and February 24, 2007, we had $194.1 million and $51.2 million,
respectively, in restricted cash of which $190.4 million and $47.6 million,
respectively, was held in a money market fund, and can only be used as
collateral for our Letter of Credit Agreement that we entered into during fiscal
2005. The remaining $3.7 million and $3.6 million, respectively, represented
monies held in escrow for services which our Company is required to perform in
connection with the sale of our real estate properties.
Effective March 13, 2007, in accordance with FAS 115, we record changes in the
fair value of Metro, Inc. as unrealized gains or losses, net of tax, as a
component of accumulated other comprehensive income (loss) in our Consolidated
Balance Sheets based on the close price of Metro, Inc. at the end of our
reporting period.
10
The following is a summary of cash, cash equivalents, restricted cash and
available-for-sale securities at June 16, 2007 and February 24, 2007:
At June 16, 2007
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Costs Gains Losses Value
--------- ---------- ---------- ---------
CLASSIFIED AS:
Cash $ 83,620 $ -- $-- $ 83,620
Cash equivalents:
Money market funds 5,083 -- -- 5,083
Commercial paper 5,499 -- -- 5,499
-------- -------- --- --------
Total cash equivalents 10,582 -- -- 10,582
-------- -------- --- --------
Total cash and cash equivalents 94,202 -- -- 94,202
-------- -------- --- --------
Restricted cash 194,087 -- -- 194,087
Available-for-sale securities:
Investment in Metro, Inc. 270,460 140,793 -- 411,253
-------- -------- --- --------
Total cash, cash equivalents, restricted cash
and available-for-sale securities $558,749 $140,793 $-- $699,542
======== ======== === ========
At February 24, 2007
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Costs Gains Losses Value
--------- ---------- ---------- ---------
CLASSIFIED AS:
Cash $ 81,137 $-- $ -- $ 81,137
Cash equivalents:
Money market funds 5,057 -- -- 5,057
-------- --- ---- --------
Total cash and cash equivalents 86,194 -- -- 86,194
-------- --- ---- --------
Restricted cash 51,176 -- -- 51,176
Available-for-sale securities:
Corporate bonds 20,357 -- (22) 20,335
-------- --- ---- --------
Total cash, cash equivalents, restricted cash
and available-for-sale securities $157,727 $-- $(22) $157,705
======== === ==== ========
SECURITIES AVAILABLE-FOR-SALE:
Maturing within one year $ 20,357 $ 20,335
======== ========
Maturing greater than one year $ -- $ --
======== ========
The following table provides the breakdown of the investments with unrealized
losses at February 24, 2007:
February 24, 2007
-----------------------------------------------------------------
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 $20,335 $(22) $-- $-- $20,335 $(22)
11
Corporate bonds: Our unrealized losses on investments in corporate bonds were
caused by interest rate increases by the Federal Reserve. The contractual terms
of those investments did not permit the issuer to settle the security at a price
less than the amortized cost of the investment. We did not believe it was
probable that we would be unable to collect all amounts due according to the
contractual terms of these investments. Therefore, it was expected that the
debentures would not be settled at a price less than the amortized cost of the
investment. Because we had the ability and intent to hold those investments
until a recovery of fair value, which may be maturity, we did not consider those
investments to be other-than-temporarily impaired at February 24, 2007.
Gross realized gains or losses on sales of investments were $78.5 million and
$0.05 million for the 16 weeks ended June 16, 2007 and June 17, 2006,
respectively.
7. VALUATION OF LONG-LIVED ASSETS
In accordance with 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 7 year U.S. Treasury risk-free rate.
During the 16 weeks ended June 16, 2007 and June 17, 2006, we recorded
impairment losses on long-lived assets of $53.3 million and $2.3 million,
respectively, as follows:
Impairments due to closure or conversion in the normal course of business
We review assets in stores planned for closure or conversion for impairment upon
determination that such assets will not be used for their intended useful life.
During the 16 weeks ended June 16, 2007 and June 17, 2006, we recorded
impairment losses on property, plant and equipment of $0.5 million and $1.2
million, respectively, related to stores that were or will be closed or
converted in the normal course of business. This amount was included in "Store
operating, general and administrative expense" in our Consolidated Statements of
Operations.
Impairments related to our Asset Disposition Initiatives
During the 16 weeks ended June 16, 2007 and June 17, 2006, we recorded
impairment losses on property, plant and equipment of $37.5 million and $1.1
million, respectively, related to property write-downs as a result of our asset
disposition initiatives as discussed in Note 9 - Asset Disposition Initiatives.
These amounts were included in "Store operating, general and administrative
expense" in our Consolidated Statements of Operations.
Impairments related to our exit of stores in the Greater New Orleans Area
During the 16 weeks ended June 16, 2007, we recorded impairment losses of $15.3
million related to the potential sale of our non-core stores in the Greater New
Orleans area as a result of our exit of the Greater New Orleans market as
discussed in Note 4 - Assets held for sale and Note 8 - Discontinued Operations.
This amount was included in our Consolidated Statements of Operations under the
caption "Loss on disposal of discontinued operations, net of tax".
12
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
8. DISCONTINUED OPERATIONS
On May 30, 2007, our Company announced that we are in advanced negotiations for
the sale of our non-core stores located within the Greater New Orleans area.
There is no guarantee that these stores will be sold and we do not intend to
dispose of these assets unless the terms and conditions are reasonable to our
Company, shareholders and our employees. In connection with this potential sale,
it is possible that liabilities may be recorded in the near term.
As of our balance sheet date, the criteria set forth by SFAS 144 to reclassify
these assets as properties held for sale had been met for our non-core stores in
the Greater New Orleans area. These assets, including inventory relating to
these properties held for sale, have been aggregated and presented on the
Consolidated Balance Sheet as "Assets held for sale" at June 16, 2007.
We have accounted for this separate business component as discontinued
operations in accordance with SFAS 144 in our Consolidated Statements of
Operations for the 16 weeks ended June 16, 2007 and June 17, 2006. In
determining whether a store or group of stores qualifies as discontinued
operations treatment, we include only those stores for which (i.) the operations
and cash flows will be eliminated from our ongoing operations as a result of the
disposal and (ii.) we will not have any significant continuing involvement in
the operations of the stores after the disposal. In making this determination,
we consider the geographic location of the stores. If stores to be disposed of
are replaced by other stores in the same geographic district, we would not
include the stores as discontinued operations.
In applying the provisions of SFAS 144, we estimated the assets' fair market
value based upon expected proceeds less costs to sell and recorded impairment
losses on the property, plant and equipment of $15.3 million, which is included
in "Loss on disposal of discontinued operations, net of tax" on our Consolidated
Statements of Operations for first quarter ended June 16, 2007.
During fiscal 2003, we adopted a formal plan to exit the New England and
Wisconsin markets through the sale and/or disposal of these assets.
In February 2003, we announced the sale of a portion of our non-core assets,
including 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.
13
Summarized below are the operating results for these discontinued businesses,
which are included in our Consolidated Statements of Operations, under the
captions "(Loss) income from operations of discontinued businesses, net of tax"
and "Loss on disposal of discontinued operations, net of tax" for the 16 weeks
ended June 16, 2007 and June 17, 2006.
16 weeks ended June 16, 2007
---------------------------------------------
Greater
New Northern
Orleans New England Kohl's Total
--------- ----------- ------- ---------
LOSS FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ 114,571 $-- $ -- $ 114,571
Operating expenses (115,072) -- (1,328) (116,400)
--------- --- ------- ---------
Loss from operations of
discontinued businesses, before tax (501) -- (1,328) (1,829)
--------- --- ------- ---------
Tax benefit -- -- -- --
--------- --- ------- ---------
Loss from operations of
discontinued businesses,
net of tax $ (501) $-- $(1,328) $ (1,829)
========= === ======= =========
DISPOSAL RELATED COSTS INCLUDED
IN OPERATING EXPENSES ABOVE:
Severance and benefits $ (403) $-- $ -- $ (403)
Non-accruable closing costs (7) -- -- $ (7)
Occupancy related costs (738) -- (1,232) (1,970)
Gain on sale of pharmacy scripts 375 -- -- 375
Interest accretion on present value
of future occupancy costs (279) -- (96) (375)
--------- --- ------- ---------
Total disposal related costs $ (1,052) $-- $(1,328) $ (2,380)
========= === ======= =========
(LOSS) GAIN ON DISPOSAL OF
DISCONTINUED OPERATIONS
Property impairments $ (15,271) $-- $ -- $ (15,271)
Gain on sale of fixed assets 79 -- -- 79
--------- --- ------- ---------
Loss on disposal of discontinued
business, before tax (15,192) -- -- (15,192)
--------- --- ------- ---------
Tax benefit -- -- -- --
--------- --- ------- ---------
Loss on disposal of discontinued
operations, net of tax $ (15,192) $-- $ -- $ (15,192)
========= === ======= =========
14
16 weeks ended June 17, 2006
---------------------------------------------
Greater
New Northern
Orleans New England Kohl's Total
--------- ----------- ------- ---------
INCOME (LOSS) FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ 132,468 $ -- $ -- $ 132,468
Operating expenses (127,406) (14) (669) (128,089)
--------- ---- ----- ---------
Gain (loss) from operations of
discontinued business, before tax 5,062 (14) (669) 4,379
--------- ---- ----- ---------
Tax (provision) benefit (2,126) 6 281 (1,839)
--------- ---- ----- ---------
Income (loss) from operations of
discontinued business, net of tax $ 2,936 $ (8) $(388) $ 2,540
========= ==== ===== =========
DISPOSAL RELATED COSTS INCLUDED
IN OPERATING EXPENSES ABOVE:
Non-accruable closing costs $ (158) $(14) $ 4 $ (168)
Occupancy related costs (86) -- (541) (627)
Interest accretion on present value
of future occupancy costs (394) -- (132) (526)
--------- ---- ----- ---------
Total disposal related costs $ (638) $(14) $(669) $ (1,321)
========= ==== ===== =========
LOSS ON DISPOSAL OF
DISCONTINUED OPERATIONS
Loss on sale of fixed assets $ (17) $ -- $ -- $ (17)
--------- ---- ----- ---------
Loss on disposal of discontinued
operations, before tax (17) -- -- (17)
--------- ---- ----- ---------
Tax benefit 7 -- -- 7
--------- ---- ----- ---------
Loss on disposal of discontinued
operations, net of tax $ (10) $ -- $ -- $ (10)
========= ==== ===== =========
GREATER NEW ORLEANS
As previously stated, on May 30, 2007, our Company announced that we are in
advanced negotiations for the sale of our non-core stores located within the
Greater New Orleans area. There is no guarantee that these stores will be sold
and we do not intend to dispose of these assets unless the terms and conditions
are reasonable to our Company, shareholders and our employees. In connection
with this potential sale, it is possible that liabilities may be recorded in the
near term.
During the first quarter of fiscal 2007, we incurred disposal related costs for
our operations in this region of $1.1 million related to severance and benefits
and occupancy related costs partially offset by proceeds from the sale of
pharmacy scripts. During the first quarter of fiscal 2006, we incurred disposal
related costs for our operations in this region of $0.6 million related to
occupancy related costs. These amounts were included in "(Loss) income from
operations of discontinued businesses, net of tax" on our Consolidated
Statements of Operations. Additionally, we incurred pre-tax costs for property
impairments of $15.3 million and recorded a gain on the sale of fixed assets of
$0.1 million for the first quarter of fiscal 2007 and a loss on the sale of
fixed assets of $0.02 million, for the first quarter of fiscal 2006, which were
included in "Loss on disposal of discontinued operations, net of tax" on our
Consolidated Statements of Operations.
15
The following table summarizes the activity to date related to the charges
recorded for these facilities.
Severance
and
Occupancy Benefits Total
--------- --------- -----
Original charge (1) $-- $ 403 $ 403
Utilization (2) -- (126) (126)
--- ----- -----
Balance at
June 16, 2007 $-- $ 277 $ 277
=== ===== =====
(1) The original charge to severance and benefits during the first quarter of
fiscal 2007 of $0.4 million related to individual severings.
(2) Severance and benefits utilization represents payments made to terminated
employees during the period.
We paid $0.1 million of the total net severance and benefits charges from the
time of the original charges through June 16, 2007. The remaining severance
liability of $0.3 million relates to expected future payments for severance and
benefits payments to individual employees which will be fully paid out by 2008.
As of June 16, 2007, $0.3 million was included in "Accrued salaries, wages and
benefits" on our Consolidated Balance Sheets.
We have evaluated the reserve balances as of June 16, 2007 of $0.3 million based
on current information and have concluded that it is adequate to cover expected
future costs. We will continue to monitor the status of the severance and
benefits and adjustments to the reserve balances may be recorded in the future,
if necessary.
NORTHERN NEW ENGLAND
During the first quarter of fiscal 2006, we incurred additional costs to wind
down our operations in this region subsequent to the sale of these stores of
$0.01 million, primarily related to non-accruable closing costs, which were
included in "(Loss) income from operations of discontinued businesses, net of
tax" on our Consolidated Statements of Operations. All disposition activities
have been completed as of February 24, 2007.
KOHL'S MARKET
During the first quarter of fiscal 2007 and fiscal 2006, we recorded costs of
$1.3 million and $0.7 million, respectively, primarily relating to additional
occupancy related costs that were recorded due to changes in our estimation of
such future costs as well as additional costs to wind down this business. These
amounts were recorded in "(Loss) income from operations of discontinued
businesses, net of tax" on our Consolidated Statements of Operations for the 16
weeks ended June 16, 2007 and June 17, 2006.
16
The following table summarizes the reserve activity related to the exit of the
Kohl's market over the last three fiscal years:
Severance
and Fixed
Occupancy Benefits Assets Total
--------- --------- ------ -------
Balance at February 28, 2004 $19,039 $ 4,834 $ -- $23,873
Additions (1) 688 52 602 1,342
Utilization (2) (1,918) (2,201) (602) (4,721)
Adjustments (3) (354) -- -- (354)
------- ------- ----- -------
Balance at February 26, 2005 $17,455 $ 2,685 $ -- $20,140
Additions (1) 562 44 -- 606
Utilization (2) (3,235) (2,128) -- (5,363)
Adjustments (3) (4,299) 582 -- (3,717)
------- ------- ----- -------
Balance at February 25, 2006 $10,483 $ 1,183 $ -- $11,666
Additions (1) 385 4 -- 389
Utilization (2) (2,504) (1,041) -- (3,545)
Adjustments (3) (416) (146) -- (562)
------- ------- ----- -------
Balance at February 24, 2007 $ 7,948 $ -- $ -- $ 7,948
Additions (1) 96 -- -- 96
Utilization (2) (608) -- -- (608)
Adjustments (3) 1,232 -- -- 1,232
------- ------- ----- -------
Balance at June 16, 2007 $ 8,668 $ -- $ -- $ 8,668
======= ======= ===== =======
(1) The fiscal 2004, fiscal 2005, fiscal 2006 and the first quarter of fiscal
2007 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. In fiscal
2004, 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.
(2) 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.
(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 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 fiscal 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. During the first quarter of fiscal 2007, we recorded adjustments for
additional vacancy related costs for our properties of $1.2 million due to
changes in our estimation of such future costs.
We paid $13.6 million of the total occupancy charges from the time of the
original charge through June 16, 2007 which was primarily for occupancy related
costs such as rent, common area maintenance, real estate
17
taxes and lease termination costs. The remaining occupancy liability of $8.7
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 original severance and benefits charges from
the time of the original charges through June 16, 2007, which resulted from the
termination of approximately 2,000 employees. At June 16, 2007, there are no
future obligations for severance and benefits.
At June 16, 2007 and February 24, 2007, $2.2 million and $2.3 million,
respectively, of the Kohl's exit reserves was included in "Other accruals" and
$6.5 million and $5.6 million, respectively, was included in "Other non-current
liabilities" on our Consolidated Balance Sheets. We have evaluated the liability
balance of $8.7 million as of June 16, 2007 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.
9. ASSET DISPOSITION INITIATIVES
In fiscal 1998 and fiscal 1999, we announced a plan to close two warehouse
facilities and a coffee plant in the U.S., a bakery plant in Canada and 166
stores including the exit of the Richmond, Virginia and Atlanta, Georgia markets
(Project Great Renewal). In addition, during fiscal 2001, we announced that
certain underperforming operations, including 39 stores (30 in the United States
and 9 in Canada) and 3 warehouses (2 in the United States and 1 in Canada) would
be closed and/or sold, and certain administrative streamlining would take place
(2001 Asset Disposition). During fiscal 2003, we announced an initiative to
close 6 stores and convert 13 stores to our Food Basics banner in the Detroit,
Michigan and Toledo, Ohio markets (Midwest 2004). In fiscal 2005, we closed 35
stores in the Midwest (Midwest 2005). In fiscal 2005, we sold our U.S.
distribution operations and some warehouse facilities to C&S Wholesale Grocers,
Inc and subsequently closed those warehouses that were not included in the sale
(U.S. Distribution Operations and Warehouses).
On April 24, 2007, based upon unsatisfactory operating trends and the need to
devote resources to our expanding Northeast core business, our Company announced
we are in negotiations for the potential sale of our non-core stores within our
Midwest operations, including inventory related to these stores. Sale
transactions for a majority of these stores have been completed, with final
negotiations pending on several additional locations. Further, our Company has
ceased sales operations in all stores as of July 7, 2007. In connection with the
shutdown of these operations, we estimate that we will record occupancy costs in
excess of $50 million in the second quarter of fiscal 2007 for closed stores and
warehouses not sold. As we continue to market these stores and warehouses for
sale, negotiate lease terminations as well as sublease some of these locations,
this estimate may vary.
18
Presented below is a reconciliation of the charges recorded on our Consolidated
Balance Sheets, Consolidated Statements of Operations and Consolidated
Statements of Cash Flows for the 16 weeks ended June 16, 2007 and June 17, 2006.
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".
16 weeks ended June 16, 2007
------------------------------------------------------------------------------
U.S.
Distribution
Project 2001 Operations
Great Asset and Midwest Midwest Midwest
Renewal Disposition Warehouses 2004 2005 2007 Total
------- ----------- ------------ ------- ------- -------- --------
BALANCE SHEET ACCRUALS
Vacancy $(351) $(232) $ (848) $ (80) $(1,383) $ -- $ (2,894)
PV interest 174 366 71 220 1,088 -- 1,919
Severance -- -- 1,485 -- -- 23,501 24,986
Pension withdrawal -- -- -- -- -- 43,007 43,007
----- ----- ------ ----- ------- -------- --------
Total accrued to balance
sheet (177) 134 708 140 (295) 66,508 67,018
----- ----- ------ ----- ------- -------- --------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Property write-offs -- -- -- -- -- 37,464 37,464
Inventory related costs -- -- -- -- -- 4,910 4,910
Lease termination costs -- -- -- -- -- 845 845
Gain on sale of pharmacy scripts -- -- -- -- -- (2,656) (2,656)
Loss (gain) on sale of property -- -- 98 -- -- (2,856) (2,758)
Closing costs -- -- 49 -- -- 34 83
----- ----- ------ ----- ------- -------- --------
Total non-accruable items -- -- 147 -- -- 37,741 37,888
----- ----- ------ ----- ------- -------- --------
Less PV interest (174) (366) (71) (220) (1,088) -- (1,919)
----- ----- ------ ----- ------- -------- --------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF OPERATIONS
EXCLUDING PV INTEREST (351) (232) 784 (80) (1,383) 104,249 102,987
----- ----- ------ ----- ------- -------- --------
Less gain on sale of
pharmacy scripts -- -- -- -- -- 2,656 2,656
Less closing costs -- -- (49) -- -- (34) (83)
----- ----- ------ ----- ------- -------- --------
TOTAL AMOUNT RECORDED ON
STATEMENTS OF CASH FLOWS $(351) $(232) $ 735 $ (80) $(1,383) $106,871 $105,560
===== ===== ====== ===== ======= ======== ========
19
16 weeks ended June 17, 2006
-------------------------------------------------------------------
U.S.
Distribution
Project 2001 Operations
Great Asset and Midwest Midwest
Renewal Disposition Warehouses 2004 2005 Total
------- ----------- ------------ ------- ------- --------
BALANCE SHEET ACCRUALS
Vacancy $(1,165) $4,433 $ 873 $(3,021) $ 5,040 $ 6,160
PV interest 344 526 79 234 1,141 2,324
Severance -- -- 541 -- (20) 521
------- ------ ------- ------- ------- -------
Total accrued to balance
sheet (821) 4,959 1,493 (2,787) 6,161 9,005
------- ------ ------- ------- ------- -------
NON-ACCRUABLE ITEMS RECORDED ON
STATEMENTS OF OPERATIONS
Property write-offs -- -- 1,049 -- -- 1,049
Inventory related costs -- -- (571) -- -- (571)
Loss on sale of property -- -- -- -- 92 92
Closing costs -- -- 1,919 -- 69 1,988
------- ------ ------- ------- ------- -------
Total non-accruable items -- -- 2,397 -- 161 2,558
------- ------ ------- ------- ------- -------
Less PV interest (344) (526) (79) (234) (1,141) (2,324)
------- ------ ------- ------- ------- -------
TOTAL AMOUNT RECORDED ON
STATEMENTS OF OPERATIONS
EXCLUDING PV INTEREST (1,165) 4,433 3,811 (3,021) 5,181 9,239
------- ------ ------- ------- ------- -------
Less closing costs -- -- (1,919) -- (69) (1,988)
------- ------ ------- ------- ------- -------
TOTAL AMOUNT RECORDED ON
STATEMENTS OF CASH FLOWS $(1,165) $4,433 $ 1,892 $(3,021) $ 5,112 $ 7,251
======= ====== ======= ======= ======= =======
20
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 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) 894 -- 894 -- -- -- 894 -- 894
Utilization (2) (4,428) -- (4,428) (132) -- (132) (4,560) -- (4,560)
Adjustments (3) (5,429) -- (5,429) (95) -- (95) (5,524) -- (5,524)
------- ----- ------- ------ --- ------ ------- ----- --------
Balance at
February 24, 2007 $11,036 $ -- $11,036 $1,210 $-- $1,210 $12,246 $ -- $ 12,246
Addition (1) 174 -- 174 -- -- -- 174 -- 174
Utilization (2) (915) -- (915) (59) -- (59) (974) -- (974)
Adjustments (3) (351) -- (351) -- -- -- (351) -- (351)
------- ----- ------- ------ --- ------ ------- ----- --------
Balance at
June 16, 2007 $ 9,944 $ -- $ 9,944 $1,151 $-- $1,151 $11,095 $ -- $ 11,095
======= ===== ======= ====== === ====== ======= ===== ========
(1) The additions to store occupancy represent the interest accretion on future
occupancy costs which were recorded at present value at the time of the
original charge.
(2) Occupancy utilization represents payments made during those periods for
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. Severance utilization 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. In addition, we sold our Canadian business and as a result, the
Canadian occupancy accruals of $0.1 million are no longer consolidated in
our Consolidated Balance Sheet at February 25, 2006. During fiscal 2006, we
recorded adjustments for a reduction in vacancy related costs for our
properties of $5.4 million due to lease terminations for two properties,
assignment of one property and 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. During the first quarter of fiscal
2007, we recorded adjustments for a reduction in vacancy related costs for
our properties of $0.4 million due to changes in our estimation of such
future costs.
We paid $109.7 million of the total occupancy charges from the time of the
original charges through June 16, 2007 which was primarily for occupancy related
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $30.3 million of the total net severance charges from
the time of the original charges through June 16, 2007, which resulted from the
termination of approximately 3,400 employees. The remaining occupancy liability
of $9.9 million relates to expected future payments under long term leases and
is expected to be paid in full by 2015. The remaining severance liability of
$1.2 million primarily relates to expected future payments for early withdrawals
from multi-employer union
21
pension plans and will be fully paid out in 2020. None of these stores were open
during either of the first quarters of fiscal 2007 or fiscal 2006.
At June 16, 2007 and February 24, 2007, approximately $2.9 million and $3.0
million, respectively, of the reserve was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
We have evaluated the reserve balances as of June 16, 2007 of $11.1 million
based on current information and have concluded that it is 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 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) 1,444 -- 1,444 -- -- -- 1,444 -- 1,444
Utilization (2) (11,875) -- (11,875) (17) -- (17) (11,892) -- (11,892)
Adjustments (3) 4,299 -- 4,299 -- -- -- 4,299 -- 4,299
-------- ----- -------- ------- ---- ------- -------- ----- --------
Balance at
February 24, 2007 $ 20,586 $ -- $ 20,586 $ -- $ -- $ -- $ 20,586 $ -- $ 20,586
Addition (1) 366 -- 366 -- -- -- 366 -- 366
Utilization (2) (716) -- (716) -- -- -- (716) -- (716)
Adjustments (3) (232) -- (232) -- -- -- (232) -- (232)
-------- ----- -------- ------- ---- ------- -------- ----- --------
Balance at
June 16, 2007 $ 20,004 $ -- $ 20,004 $ -- $ -- $ -- $ 20,004 $ -- $ 20,004
======== ===== ======== ======= ==== ======= ======== ===== ========
(1) The additions to store occupancy represent the interest accretion on future
occupancy costs which were recorded at present value at the time of the
original charge.
(2) Occupancy utilization represents payments made during those periods for
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. Severance utilization represents 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 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
22
subleasing one of the closed properties and changes in our original
estimate of our future vacancy obligations for closed stores. During fiscal
2006, we recorded adjustments for additional vacancy related costs of $4.3
million due to changes in our estimate to terminate certain leases and
changes in our estimation of future costs. During the first quarter of
fiscal 2007, we recorded adjustments for a reduction in vacancy related
costs of $0.2 million due to changes in our estimation of such future
costs.
We paid $57.0 million ($54.0 million in the U.S. and $3.0 million in Canada) of
the total occupancy charges from the time of the original charges through June
16, 2007 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 June 16, 2007,
which resulted from the termination of approximately 1,100 employees. The
remaining occupancy liability of $20.0 million primarily relates to expected
future payments under long term leases through 2022. The severance liability has
been fully utilized as of June 16, 2007 and no additional future payments for
severance and benefits to individual employees will be paid out. None of these
stores were open during either of the first quarters of fiscal 2007 or 2006.
At June 16, 2007 and February 24, 2007, approximately $2.8 million and $3.0
million of the reserve, respectively, was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
We have evaluated the reserve balances as of June 16, 2007 of $20.0 million
based on current information and have concluded that it is 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.
U.S DISTRIBUTION OPERATIONS AND WAREHOUSES
During fiscal 2005, our Company sold our U.S. distribution operations and some
warehouse facilities and related assets to C&S Wholesale Grocers, Inc. On June
27, 2005, the definitive agreements, including an Asset Purchase Agreement and a
15 year Supply Agreement, were finalized and signed. 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.
23
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) 244 32 276
Utilization (3) (12,075) (2,780) (14,855)
Adjustment (4) 2,198 1 2,199
-------- -------- --------
Balance at
February 24, 2007 $ 5,450 $ 876 $ 6,326
Additions (2) 71 1,485 1,556
Utilization (3) (348) (424) (772)
Adjustment (4) (848) -- (848)
-------- -------- --------
Balance at
June 16, 2007 $ 4,325 $ 1,937 $ 6,262
======== ======== ========
(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 fiscal 2006 and the 16 weeks ended June
16, 2007 represent interest accretion on future occupancy costs which were
recorded at present value at the time of the original charge. The additions
to severance and benefits represented charges related to additional
individual severings as well as retention and productivity incentives that
were accrued as earned.
(3) Occupancy utilization represents payments made during those periods for
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. Severance and benefits utilization 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 fiscal 2006, we recorded adjustments for
additional vacancy related costs for our properties of $2.2 million due to
changes in our estimation of such future costs. During the first quarter of
fiscal 2007, we recorded adjustments for a reduction in vacancy related
costs for our properties of $0.8 million due to changes in our estimation
of such future costs. We also recorded additions to severance and benefits
of $1.5 million for health and welfare benefits for warehouse retirees.
We paid $12.8 million of the total occupancy charges from the time of the
original charge through June 16, 2007 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 $4.3 million relates to
expected future payments under long term leases and is expected to be paid out
in full by 2021. We paid $46.8 million of the total net severance and benefits
charges from the time of the original charges through June 16, 2007. The
remaining severance liability of $1.9 million relates to expected future
payments for early withdrawals from multi-employer union pension plans and
expected future payments for severance and benefits payments to individual
employees which will be fully paid out by 2015.
24
As of June 16, 2007 and February 24, 2007, approximately $0.9 million and $1.7
million, respectively, of the liability was included in "Other Accruals" and the
remaining amount was included in "Other non-current liabilities" on our
Consolidated Balance Sheets.
We have evaluated the reserve balances as of June 16, 2007 of $6.3 million based
on current information and have concluded that it is 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.
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 comparable terms. However, a change
in suppliers could cause a delay in distribution and a possible loss of sales,
which would affect operating results adversely.
MIDWEST 2004
The following table summarizes the activity related to this phase of the
initiative over the last three fiscal years:
Severance
and
Occupancy Benefits Total
--------- --------- -------
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) 741 -- 741
Utilization (2) (1,656) -- (1,656)
Adjustment (3) (3,021) -- (3,021)
-------- ------- --------
Balance at February 24, 2007 $ 14,314 $ -- $ 14,314
Addition (1) 220 -- 220
Utilization (2) (298) -- (298)
Adjustment (3) (80) -- (80)
-------- ------- --------
Balance at June 16, 2007 $ 14,156 $ -- $ 14,156
======== ======= ========
(1) The additions to store occupancy represent the interest accretion on future
occupancy costs which were recorded at present value at the time of the
original charge.
(2) Occupancy utilization represents payments made during those periods for
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. Severance utilization represents 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 fiscal 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. During the first quarter of fiscal 2007, we recorded adjustments for
25
a reduction in vacancy related costs for our properties of $0.1 million due
to changes in our estimation of such future costs.
We paid $10.5 million of the total occupancy charges from the time of the
original charge through June 16, 2007 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 $14.2 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 June 16, 2007, which resulted from the
termination of approximately 300 employees. The severance liability has been
fully utilized and no additional future payments for severance and benefits to
individual employees will be paid out. None of these stores were open during
either of the first quarters of fiscal 2007 or 2006.
At June 16, 2007 and February 24, 2007, approximately $1.3 million and $1.3
million, respectively, of the liability was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on our
Consolidated Balance Sheets.
We have evaluated the reserve balances as of June 16, 2007 of $14.2 million
based on current information and have concluded that it is 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.
MIDWEST 2005
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 June 16, 2007.
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) 3,567 -- 3,567
Utilization (3) (14,065) (211) (14,276)
Adjustment (4) 3,969 (16) 3,953
-------- ------- --------
Balance at February 24, 2007 $ 83,111 $ -- $ 83,111
Additions (2) 1,088 -- 1,088
Utilization (3) (4,469) -- (4,469)
Adjustment (4) (1,383) -- (1,383)
-------- ------- --------
Balance at June 16, 2007 $ 78,347 $ -- $ 78,347
======== ======= ========
(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.
26
(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 store occupancy during fiscal 2006 and the first quarter 2007
represent the interest accretion on future occupancy costs which were
recorded at present value at the time of the original charge. The
additional charge to severance during fiscal 2005 of $1.3 million related
to individual severings as a result of the additional stores identified for
closures.
(3) Occupancy utilization represents payments made during those periods for
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. Severance utilization 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 $0.05 million for the reversal of previously accrued
severance and benefits due to changes in individual severings and
associated benefit costs. During fiscal 2006, we recorded adjustments for
additional vacancy related costs for our properties of $4.0 million due to
changes in our estimation of such future costs and changes to our estimate
to terminate certain leases, partially offset by the favorable result of
terminating a lease on one property. We also recorded a decrease of $0.02
million for the reversal of previously accrued severance and benefits due
to changes in individual severings and associated benefit costs. During the
first quarter of fiscal 2007, we recorded adjustments for a reduction in
vacancy related costs for our properties of $1.4 million due to changes in
our estimation of such future costs.
We paid $28.1 million of the total occupancy charges from the time of the
original charge through June 16, 2007 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 $78.3 million relates to
expected future payments under long term leases and is expected to be paid out
in full by 2025. We paid $2.6 million of the total net severance charges from
the time of the original charges through June 16, 2007, which resulted from the
termination of approximately 125 employees. The severance liability has been
fully utilized as of June 16, 2007 and no additional future payments for
severance and benefits to individual employees will be paid out. None of these
stores were open during either of the first quarters of fiscal 2007 or 2006.
At June 16, 2007 and February 24, 2007, approximately $21.0 million and $22.4
million of the liability was included in "Other accruals" and the remaining
amount was included in "Other non-current liabilities" on our Consolidated
Balance Sheets.
We have evaluated the reserve balances as of June 16, 2007 of $78.3 million
based on current information and have concluded that it is 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.
MIDWEST 2007
On April 24, 2007, based upon unsatisfactory operating trends and the need to
devote resources to our expanding Northeast core business, our Company announced
we are in negotiations for the potential sale of our non-core stores within our
Midwest operations, including inventory related to these stores. Sale
transactions for a majority of these stores have been completed, with final
negotiations pending on several additional locations. Further, our Company has
ceased sales operations in all stores as of July 7, 2007. In connection with the
shutdown of these operations, we estimate that we will record occupancy costs in
excess of $50 million in the second quarter of fiscal 2007 for closed stores and
warehouses not sold. As we continue to market these stores and warehouses for
sale, negotiate lease terminations as well as sublease some of these locations,
this estimate may vary.
27
The following table summarizes the activity to date related to the charges
recorded for the sale or closing of these facilities:
Severance
and
Occupancy Benefits Total
--------- --------- -------
Original charge (1) $-- $66,508 $66,508
Utilization (2) -- (88) (88)
--- ------- -------
Balance at
June 16, 2007 $-- $66,420 $66,420
=== ======= =======
(1) The original charge to severance and benefits during the first quarter of
fiscal 2007 of $66.5 million related to (i.) individual severings and
retention incentives that were accrued as earned of $23.5 million as a
result of the sale or closing of these facilities and (ii.) costs for
future obligations for early withdrawal from multi-employer union pension
plans of $43.0 million.
(2) Severance and benefits utilization represents payments made to terminated
employees during the period.
We paid $0.1 million of the total net severance and benefits charges from the
time of the original charges through June 16, 2007. The remaining severance and
benefits liability of $66.4 million relates to expected future payments for
early withdrawals from multi-employer union pension plans and expected future
payments for severance and benefits payments to individual employees which will
be fully paid out by 2024.
Included in the Statements of Consolidated Operations for the first quarters of
fiscal 2007 and 2006 are the sales and operating results of the non-core stores
that will be sold or closed from our Midwestern operations. The results of these
operations are as follows:
16 Weeks Ended
--------------------
June 16, June 17,
2007 2006
--------- --------
Sales $307,756 $341,333
======== ========
Loss from operations $(107,821) $ (2,908)
======== ========
As of June 16, 2007 approximately $23.4 million of the liability was included in
"Accrued salaries, wages and benefits" and the remaining amount was included in
"Other non-current liabilities" on our Consolidated Balance Sheets.
We have evaluated the reserve balances as of June 16, 2007 of $66.4 million
based on current information and have concluded that it is adequate to cover
expected future costs. We will continue to monitor the status of the severance
and benefits and pension withdrawal liabilities and adjustments to the reserve
balances may be recorded in the future, if necessary.
10. 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
28
our Consolidated Balance Sheets at February 24, 2007. 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 2007. 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
compensation 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 16 weeks ended June 17, 2006.
11. RETIREMENT PLANS AND BENEFITS
On February 24, 2007, we adopted SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132 (R)" ("SFAS 158") which required that we
recognize the funded status of our defined benefit pension and other
postretirement benefit plans as a net liability or asset on our balance sheets
and requires any unrecognized prior service costs and actuarial gains or losses
to be recognized as a component of accumulated other comprehensive income or
loss. Minimum pension liabilities and related intangible assets were
derecognized upon adoption. SFAS 158 also requires that beginning in our fiscal
2008, our assumptions used to measure our annual expenses be determined as of
the balance sheet date (February 28, 2009), and all plan assets and liabilities
to be reported as of that date.
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 16 Weeks
Ended
-------------------
June 16, June 17,
2007 2006
-------- --------
Service cost $ 1,515 $ 1,625
Interest cost 3,734 3,482
Expected return on plan assets (4,041) (3,800)
Amortization of unrecognized net prior service cost (gain) 79 (55)
Amortization of unrecognized net loss 30 50
Administrative expenses and other -- 78
------- -------
Net pension cost $ 1,317 $ 1,380
======= =======
CONTRIBUTIONS
We previously disclosed in our consolidated financial statements for the year
ended February 24, 2007, that we expected to contribute $5.6 million in cash to
our defined benefit plans in fiscal 2007. As of June 16, 2007, we contributed
approximately $1.5 million to our defined benefit plans. We plan to contribute
approximately $4.1 million to our plans during the remainder of fiscal 2007.
29
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 our postretirement benefits. The components of net postretirement benefits
income were as follows:
For the 16 Weeks
Ended
-------------------
June 16, June 17,
2007 2006
-------- -------
Service cost $ 100 $ 114
Interest cost 324 362
Amortization of gain (140) (69)
Prior service cost (415) (414)
----- -----
Net postretirement benefits income $(131) $ (7)
===== =====
12. STOCK BASED COMPENSATION
During the first quarter of fiscal 2007, compensation expense related to
share-based incentive plans was $2.9 million, after tax, compared to $3.3
million, after tax, during the first quarter of fiscal 2006. Included in
share-based compensation expense recorded during the first quarter of fiscal
2007 and fiscal 2006 was $0.2 million and $0.5 million, respectively, related to
expensing of stock options, $2.5 million and $2.2 million, respectively,
relating to expensing of restricted stock, and $0.2 million and $0.6 million,
respectively, relating to expensing of common stock granted to our Board of
Directors at the Annual Meeting of Stockholders.
At June 16, 2007, we had two stock-based compensation plans. The general terms
of each plan, the method of estimating fair value for each plan and fiscal 2006
and 2007 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. On June 15, 2007, the Human
Resources & Compensation Committee and the Governance Committee (together,
the "Committees") decided to recognize our Company's performance to date
for these units subject to the closing of the Pathmark transaction. Upon
the closing of the Pathmark transaction, the applicable performance
criteria will be deemed to have been met with respect to two-thirds of the
units granted in fiscal 2005. These units will vest 50% on the first day of
fiscal 2008 and the remaining 50% will vest on the first day of fiscal
2009, in accordance with and subject to all other terms, conditions,
limitations, restrictions and eligibility requirements. As two-thirds of
the units will only vest contingent upon the closing of the Pathmark
transaction, this modification of terms did not result in the recording of
any additional compensation expense during the first quarter of fiscal
2007.
30
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. On June 15, 2007, the Committees decided to recognize our
Company's performance to date for these units subject to the closing of the
Pathmark transaction. Upon the closing of the Pathmark transaction, the
applicable performance criteria will be deemed to have been met with
respect to 125% of one-third of the units granted in fiscal 2006. These
units will vest on or around May of 2009, in accordance with and subject to
all other terms, conditions, limitations, restrictions and eligibility
requirements. As one-third of the units will only vest contingent upon the
closing of the Pathmark transaction, this modification of terms did not
result in the recording of any additional compensation expense during the
first quarter of fiscal 2007.
During the first quarter of fiscal 2007, performance restricted stock units
issued under this plan are earned based on our Company achieving certain
operating targets in fiscal 2009 and are 100% vested in fiscal 2009 upon
achievement of those targets.
On June 15, 2007, the Committees also approved an Acquisition Closing and
Integration Incentive Compensation Program (the "Integration Program"). The
Integration Program is subject to: a) the closing of the Pathmark
transaction; b) the achievement of certain Pathmark transaction closing
performance criteria or certain Pathmark transaction synergy targets; c)
the achievement of certain Company stock price targets over a performance
period comprised of the three calendar years following the closing of the
Pathmark transaction; and d) other terms, conditions, limitations,
restrictions and eligibility requirements. Depending on actual performance
as compared with the foregoing targets, each executive officer can earn up
to a maximum of 200% of the performance restricted share units awarded them
under the Integration Plan. In accordance with SFAS 123R (revised 2004),
"Share-Based Payment" ("SFAS 123R"), although the Integration Program is
contingent upon the closing of the Pathmark transaction, the restricted
share units awarded to each executive officer are considered granted on
June 15, 2007; however, until such time that the Pathmark transaction
closes, no compensation expense will be recorded as these units will only
vest contingent upon the closing of the transaction and achievement of
other terms as described above.
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. Our stock options have a
contractual term of 10 years. The following assumptions were in place
during the 16 weeks ended June 16, 2007 and the 16 weeks ended June 17,
2006:
16 weeks ended 16 weeks ended
June 16, 2007 June 17, 2006
-------------- --------------
Expected life 7 years 7 years
Volatility 54% - 55% 56%
Risk-free interest rate 4.46% - 4.57% 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 and adjusted by an estimated
forfeiture rate.
31
Stock options
The following is a summary of the stock option activity during the first
quarter ended June 16, 2007:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term (years) Value
--------- -------- ------------ ---------
Outstanding at February 24, 2007 1,324,980 $15.50
Granted 84,961 32.28
Canceled or expired (18,689) 17.56
Exercised (324,431) 17.33
--------- ------
Outstanding at June 16, 2007 1,066,821 $16.24 4.4 $19,833
========= ====== === =======
Exercisable at:
June 16, 2007 917,468 $14.25 3.6 $18,877
=== =======
Nonvested at:
June 16, 2007 149,353 $28.43 9.2 $ 956
=== =======
The total intrinsic value of options exercised during the first quarter
ended June 16, 2007 was $4.9 million.
The weighted average grant date fair value of stock options granted during
the first quarter of fiscal 2007 was $19.47.
As of June 16, 2007, approximately $1.6 million, after tax, of total
unrecognized compensation expense related to unvested stock option awards
will be recognized over a weighted average period of 3.1 years.
The amount of cash received from the exercise of stock options was
approximately $5.6 million.
Performance Restricted Stock Units
During the first quarter of fiscal 2007, our Company granted 488,746 shares
of performance restricted stock units to selected employees for a total
grant date fair value of $16.2 million. Approximately $17.3 million of
unrecognized fair value compensation expense relating to all of our
performance restricted stock units, with the exception of those granted
under the Integration Program, is expected to be recognized through fiscal
2009 based on estimates of attaining vesting criteria. Upon closing of the
Pathmark transaction and achievement of other terms as described under the
Integration Program above, approximately $4.3 million of additional
unrecognized fair value compensation expense relating to the performance
restricted stock units granted on June 15, 2007 is expected to be
recognized through 2010.
The following is a summary of the performance restricted stock units
activity during the first quarter ended June 16, 2007:
Weighted
Average
Shares Fair Value
--------- ----------
Nonvested at February 24, 2007 1,767,451 $14.73
Granted 488,746 33.14
Canceled or expired (156,030) 11.62
--------- ------
Nonvested at June 16, 2007 2,100,167 $19.25
========= ======
32
II. 2004 Non-Employee Director Compensation Plan: This plan provides for the
annual grant of Company common stock equivalents 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.
13. INCOME TAXES
The income tax provision recorded for the 16 weeks ended June 16, 2007 and June
17, 2006 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 net deferred tax asset and our historic cumulative
losses, we concluded that it was appropriate to record a valuation allowance in
an amount that would reduce our net deferred tax asset to zero. For the 16 weeks
ended June 16, 2007, and June 17, 2006, the valuation allowance was decreased by
$7.0 million and $5.4 million, respectively. To the extent that our operations
generate sufficient taxable income in future periods, we will reverse the income
tax valuation allowance. In future periods, we will continue to record a
valuation allowance against net deferred tax assets that are created by losses
until such time as the certainty of future tax benefits can be reasonably
assured.
Effective February 25, 2007, we adopted FIN 48. Refer to Note 2 - Impact of New
Accounting Pronouncements for further discussion. As a result of our adoption of
FIN 48, we recorded the following transition adjustments:
- a decrease in our tax liabilities for uncertain tax positions of $24.4
million;
- a $165.0 million increase in our tax liabilities for uncertain tax
positions and deferred tax assets to gross-up our balance sheet for the tax
benefits of net operating losses ("NOLs") that had previously been netted
in our uncertain tax position liability; and
- an increase in deferred tax assets of $38.5 million related to foreign tax
credit carryforwards offset by an increase in deferred tax liabilities of
$25.1 million as a result of the book versus tax basis of our foreign
subsidiary and a corresponding increase in the valuation allowance of
$13.4 million upon initial adoption of the standard.
For the 16 weeks ended June 16, 2007 and June 17, 2006, no amounts were recorded
for interest and penalties within "Benefit from income taxes" in our
Consolidated Statements of Operations.
Our Company is subject to U.S. federal income tax, as well as income tax in
multiple state and foreign jurisdictions. As of June 16, 2007, we were subject
to examination in the U.S. federal tax jurisdiction for the 1997 to 2006 tax
years and we were also subject to examination in most state jurisdictions for
the 1997 to 2006 tax years as well.
33
For the first quarter of fiscal 2007, our effective income tax rate of 41.9%
changed from the effective income tax rate of 57.1% in the first quarter of
fiscal 2006 as follows:
16 Weeks Ended
-----------------------------------------
June 16, 2007 June 17, 2006
------------------- -------------------
Tax Effective Tax Effective
Benefit Tax Rate Benefit Tax Rate
------- --------- ------- ---------
Northeast $18,830 (41.9%) $11,492 (57.1%)
Midwest -- -- -- --
------- ----- ------- -----
Total $18,830 (41.9%) $11,492 (57.1%)
======= ===== ======= =====
The effective tax rate on continuing operations for the 16 weeks ended June 16,
2007 varied from the statutory rate of 35% primarily due to state and local
income taxes and a reduction of our valuation allowance as a result of taxes
provided on other comprehensive income and cumulative translation adjustments.
The effective tax rate for the 16 weeks ended June 17, 2006 varied from the
statutory rate of 35% primarily due to a reduction in our valuation allowance
and taxes not being provided on undistributed earnings of Metro Inc.
At June 16, 2007 and February 24, 2007, we had a net current deferred tax asset
which is included in "Prepaid expenses and other current assets" on our
Consolidated Balance Sheets of $57.8 million and $40.2 million, respectively, a
net non-current deferred tax asset which is included in "Other Assets" on our
Consolidated Balance Sheets of $107.2 million and nil, respectively, a net
non-current deferred tax liability which is included in "Other non-current
liabilities" on our Consolidated Balance Sheets of nil and $40.2 million,
respectively, and a non-current tax liability for uncertain tax positions which
is included in "Other non-current liabilities" on our Consolidated Balance
Sheets of $165.0 million and nil, respectively.
14. 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.
For the 16 weeks ended June 16, 2007, we operated in three reportable segments:
Northeast, Midwest and our investment in Metro, Inc. Our Northeast and Midwest
segments are comprised of retail supermarkets. Our investment in Metro, Inc.
represents our economic interest in Metro, Inc. and is required to be reported
as an operating segment in accordance with SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information" as our investment was greater
than 10% of our Company's combined assets of all operating segments and the
investment generated operating income during the first quarter of fiscal 2007.
The criteria necessary to classify the Greater New Orleans area as discontinued
have been satisfied and these operations have been reclassified as such in our
Consolidated Statements of Operations for the 16 weeks ended June 16, 2007 and
June 17, 2006. Refer to Note 8 - Discontinued Operations for further discussion.
Prior to the 16 weeks ended June 16, 2007, our retail supermarkets were reported
in one segment; however, during the first quarter of fiscal 2007, we announced
our intentions to sell a significant portion of our
34
operations in the Midwest and the Greater New Orleans area, resulting in a
change in management's review of these operations. Prior year information has
been restated to conform to current year presentation.
The accounting policies for these segments are the same as those described in
the summary of significant accounting policies included in our Fiscal 2006
Annual Report. We measure segment performance based upon segment income (loss).
Interim information on segments is as follows:
For the 16 weeks ended June 16, 2007
-------------------------------------------------------------
Grocery (1) Meat (2) Produce (3) Other (4) Total
----------- -------- ----------- --------- ----------
Sales by Category $1,329,483 $392,939 $259,748 $4,755 $1,986,925
========== ======== ======== ====== ==========
For the 16 weeks ended June 16, 2007
-------------------------------------------------
Northeast Midwest Metro, Inc. Total
---------- --------- ----------- ----------
Sales $1,679,169 $ 307,756 $ -- $1,986,925
========== ========= ======= ==========
Segment loss $ (3,514) $ (5,035) $ -- $ (8,549)
Reconciliation:
Midwest restructuring -- (68,797) -- (68,797)
Net restructuring (1,537) -- -- (1,537)
Pathmark acquisition (427) -- -- (427)
Real estate related activity (896) (33,989) -- (34,885)
---------- --------- ------- ----------
Loss from operations $ (6,374) $(107,821) $ -- $ (114,195)
========== ========= ======= ==========
Loss on sale of Canadian operations $ (281) $ -- $ -- $ (281)
Gain on sale of shares of Metro, Inc. -- -- 78,388 78,388
Interest expense (19,713) (1,706) -- (21,419)
Interest and dividend income 3,409 -- 1,257 4,666
Equity in earnings of Metro, Inc. -- -- 7,869 7,869
---------- --------- ------- ----------
(Loss) income from continuing
operations before income taxes $ (22,959) $(109,527) $87,514 $ (44,972)
========== ========= ======= ==========
For the 16 weeks ended June 16, 2007
-------------------------------------------
Northeast Midwest Metro, Inc. Total
--------- ------- ----------- -------
Depreciation and amortization by segment $47,712 $5,639 $ -- $53,351
======= ====== ========= -------
Depreciation and amortization for
discontinued operations 2,998
-------
Total Company $56,349
=======
Capital expenditures by segment $49,347 $1,196 $ -- $50,543
======= ====== ========= -------
Capital expenditures for discontinued
operations 373
-------
Total Company $50,916
=======
At June 16, 2007
------------------------------------------------
Northeast Midwest Metro, Inc. Total
---------- -------- ----------- ----------
Total assets by segment $1,709,047 $111,673 $411,253 $2,231,973
========== ======== ======== ----------
Total assets for discontinued operations 75,914
----------
Total Company $2,307,887
==========
35
For the 16 weeks ended June 17, 2006
-------------------------------------------------------------
Grocery (1) Meat (2) Produce (3) Other (4) Total
----------- -------- ----------- --------- ----------
Sales by Category $1,347,336 $387,859 $253,810 $5,423 $1,994,428
========== ======== ======== ====== ==========
(1) The grocery category includes grocery, frozen foods, dairy, general
merchandise/health and beauty aids, liquor and pharmacy.
(2) The meat category includes meat, deli, bakery and seafood.
(3) The produce category includes produce and floral.
(4) Other includes sales from an information technology services agreement with
Metro, Inc.
For the 16 weeks ended June 17, 2006
-------------------------------------------------
Northeast Midwest Metro, Inc. Total
----------- -------- ----------- ----------
Sales $1,653,095 $341,333 $ -- $1,994,428
========== ======== ====== ==========
Segment loss $ (2,450) $ (989) $ -- $ (3,439)
Reconciliation:
Midwest restructuring -- (49) -- (49)
Net restructuring (3,238) -- -- (3,238)
Labor buyout costs (3,688) -- -- (3,688)
Real estate related activity 1,400 (1,870) -- (470)
---------- -------- ------ ----------
Loss from operations $ (7,976) $ (2,908) $ -- $ (10,884)
========== ======== ====== ==========
Loss on sale of Canadian operations $ (326) $ -- $ -- $ (326)
Interest expense (19,701) (1,670) -- (21,371)
Interest income 4,503 -- -- 4,503
Equity in earnings of Metro, Inc. -- -- 7,947 7,947
---------- -------- ------ ----------
(Loss) income from continuing
operations before income taxes $ (23,500) $ (4,578) $7,947 $ (20,131)
========== ======== ====== ==========
For the 16 weeks ended June 17, 2006
-------------------------------------------
Northeast Midwest Metro, Inc. Total
--------- ------- ----------- -------
Depreciation and amortization by segment $45,604 $6,136 $-- $51,740
======= ====== === -------
Depreciation and amortization for
discontinued operations 3,207
-------
Total Company $54,947
=======
Capital expenditures by segments $59,579 $1,308 $-- $60,887
======= ====== === -------
Capital expenditures for discontinued
operations 7,242
-------
Total Company $68,129
=======
At February 24, 2007
------------------------------------------------
Northeast Midwest Metro, Inc. Total
---------- -------- ----------- ----------
Total assets by segment $1,464,989 $179,591 $368,871 $2,013,451
========== ======== ======== ----------
Total assets for discontinued operations 98,172
----------
Total Company $2,111,623
==========
36
15. INDEBTEDNESS
At June 16, 2007 and February 24, 2007, there were $137.5 million and $138.3
million, respectively, in letters of credit outstanding under our Letter of
Credit Agreement.
Our Company also has a $250 million Revolving Credit Agreement ("Revolver") with
four lenders enabling us to borrow funds on a revolving basis for working
capital loans and letters of credit. At June 16, 2007 and February 24, 2007,
there were no letters of credit outstanding under this agreement and there were
$40.0 million and $70.0 million, respectively, in outstanding borrowings under
our Revolver.
In March 2007, our Letter of Credit Agreement and Revolver were amended to allow
for the sale of Metro, Inc. shares provided that the net proceeds from such
sales are deposited in a restricted cash account. Refer to Note 5 - Investment
in Metro, Inc. for further discussion regarding the sale of these Metro, Inc.
shares.
During the first quarter of fiscal 2007, the outstanding principal amount of our
7.75% Notes of $31.9 million due April 15, 2007 matured and was paid in full.
16. COMMITMENTS AND CONTINGENCIES
LaMarca et al v. The Great Atlantic & Pacific Tea Company, Inc. ("Defendants")
On June 24, 2004, a class action complaint was filed in the Supreme Court of the
State of New York against The Great Atlantic & Pacific Tea Company, Inc., d/b/a
A&P, The Food Emporium, and Waldbaum's alleging violations of the overtime
provisions of the New York Labor Law. Three named plaintiffs, Benedetto Lamarca,
Dolores Guiddy, and Stephen Tedesco, alleged on behalf of a class that our
Company failed to pay overtime wages to full-time hourly employees who were
either required or permitted to work more than 40 hours per week.
In April 2006, the plaintiffs filed a motion for class certification. In July
2007, the Court granted the plaintiffs' motion and certified the class as
follows: All full-time hourly employees of Defendants who were employed in
Defendants' supermarket stores located in the State of New York, for any of the
period from June 24, 1998 through the date of the commencement of the action,
whom Defendants required or permitted to perform work in excess of 40 hours per
week without being paid overtime wages. The Court also ruled that the issue of
whether to include an "opt-in" or "opt-out" provision is premature and can be
decided after discovery has been had.
As class certification was granted only recently, and as discovery on the
prospective plaintiffs comprising the class has yet to be conducted, neither the
number of class participants nor the sufficiency of their respective claims can
be determined at this time.
Other
We are subject to various legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business. We are also subject
to certain environmental claims. While the outcome of these claims cannot be
predicted with certainty, Management does not believe that the outcome of any of
these legal matters will have a material adverse effect on our consolidated
results of operations, financial position or cash flows.
37
17. SUBSEQUENT EVENTS
As discussed in Note 9 - Asset Disposition Initiatives, based upon
unsatisfactory operating trends and the need to devote resources to our
expanding Northeast core business, our Company announced we are in negotiations
for the potential sale of our non-core stores within our Midwest operations,
including inventory related to these stores. Sale transactions for a majority of
these stores have been completed, with final negotiations pending on several
additional locations. Further, our Company has ceased sales operations in all
stores as of July 7, 2007. In connection with the shutdown of these operations,
we estimate that we will record occupancy costs in excess of $50 million in the
second quarter of fiscal 2007 for closed stores and warehouses not sold. As we
continue to market these stores and warehouses for sale, negotiate lease
terminations as well as sublease some of these locations, this estimate may
vary.
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:
- Basis of Presentation - a discussion of our Company's results during the
first quarter of fiscal 2007 and fiscal 2006.
- Overview - a general description of our business; the value drivers of our
business; measurements; opportunities; challenges and risks; and
initiatives.
- Outlook - a discussion of certain trends or business initiatives for the
remainder of fiscal 2007 that Management wishes to share with the reader to
assist in understanding the business.
- Review of Continuing Operations and Liquidity and Capital Resources -- a
discussion of results for the 16 weeks ended June 16, 2007 compared to the
16 weeks ended June 17, 2006; current and expected future liquidity; and
the impact of various market risks on our Company.
- Critical Accounting Estimates -- a discussion of significant estimates made
by Management.
- Impact of New Accounting Pronouncements - a discussion of authoritative
pronouncements that have been or will be adopted by our Company.
- 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 16 weeks ended June 16, 2007 and June 17, 2006
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 2006 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 our retail operations, which totaled 403
stores as of June 16, 2007.
39
For the 16 weeks ended June 16, 2007, we operated in three reportable segments:
Northeast, Midwest and our investment in Metro, Inc. Our Northeast and Midwest
segments are comprised of retail supermarkets. Our investment in Metro, Inc.
represents our economic interest in Metro, Inc. The criteria necessary to
classify the Greater New Orleans area as discontinued have been satisfied and
these operations have been reclassified as such in our Consolidated Statements
of Operations for the 16 weeks ended June 16, 2007 and June 17, 2006.
RECENT ANNOUNCEMENTS
On March 5, 2007, our Company announced that we have reached a definitive merger
agreement with Pathmark Stores, Inc. in which we will acquire Pathmark Stores,
Inc., ("Pathmark") for $1.5 billion in cash, stock, and debt assumption or
retirement. For further details surrounding the Pathmark transaction, refer to
our Company's Form 8-K and the accompanying exhibits filed with the U.S.
Securities and Exchange Commission on March 6, 2007.
Under the terms of the transaction, The Tengelmann Group ("Tengelmann"),
currently A&P's majority shareholder, will remain the largest single shareholder
of the combined entity. Christian Haub, Executive Chairman of A&P, will continue
as Executive Chairman of the combined company; Eric Claus, President and CEO of
A&P, will also maintain the same position in the combined company.
Pathmark shareholders will receive $9.00 in cash and 0.12963 shares of A&P stock
for each Pathmark share. As a result, Pathmark shareholders, including its
largest investor, The Yucaipa Companies LLC ("Yucaipa Companies"), will receive
a stake in the combined companies.
The boards of both A&P and Pathmark have unanimously approved the transaction.
Both Yucaipa Companies and Tengelmann have entered into voting agreements to
support the transaction. This transaction is expected to be completed during the
second half of our fiscal year 2007 and is subject to the completion of
shareholder and regulatory approvals, as well as other customary closing
conditions.
On April 24, 2007, based upon unsatisfactory operating trends and the need to
devote resources to our expanding Northeast core business, our Company announced
we are in negotiations for the potential sale of our non-core stores within our
Midwest operations, including inventory related to these stores. Sale
transactions for a majority of these stores have been completed, with final
negotiations pending on several additional locations. Further, our Company has
ceased sales operations in all stores as of July 7, 2007. In connection with the
shutdown of these operations, we estimate that we will record occupancy costs in
excess of $50 million in the second quarter of fiscal 2007 for closed stores and
warehouses not sold. As we continue to market these stores and warehouses for
sale, negotiate lease terminations as well as sublease some of these locations,
this estimate may vary.
On May 30, 2007, our Company announced that we are in advanced negotiations for
the sale of our non-core stores located within the Greater New Orleans area.
There is no guarantee that these stores will be sold and we do not intend to
dispose of these assets unless the terms and conditions are reasonable to our
Company, shareholders and our employees. In connection with this potential sale,
it is possible that liabilities may be recorded in the near term.
Expected proceeds for the both of these divestitures are estimated to be in the
range of $160 million to $180 million.
40
OPERATING RESULTS
A&P's progress continued on course in the first quarter of fiscal 2007,
improving ongoing operating, merchandising, store development and cost control
strategies. Our Company also moved forward with the divestiture of non-core
operations, in line with the goal of strategic concentration and expansion in
the Northeast - underlined in March with the announcement of our definitive
agreement to acquire Pathmark. Steadily improving operating and merchandising
strategies produced positive year-over-year sales improvement in our Company's
Northeast store operations in the first quarter, although overall sales results
were impacted by activities related to the ongoing divestiture of non-core
businesses in the Midwest and Greater New Orleans area.
Ongoing improvement was driven by the continued sales improvement of core
Northeast operations, more consistent operating discipline and cost controls,
margin improvement associated with our ongoing fresh store development, and the
results achieved in our discount Food Basics operations.
In addition to ongoing fundamental operating improvements, our Company continued
its conversion of suitable locations to the successful fresh format, completing
three projects during the first quarter. In addition to sales increases, the
emphasis on fresh category distribution in those stores continues to improve
margins, underlining its top and bottom line growth potential.
The evolution and expansion of the discount Food Basics operations continued,
providing customers in certain markets with an excellent value alternative. In
concert with the fresh stores and the new gourmet Fine Food concept under
development by The Food Emporium in New York, this development stream continues
to advance the multi-tier marketing strategy initiated by executive management
in 2005.
In summary, strategic accomplishments for the quarter included the following:
- Accelerated improvement of sales trends in core Northeast operating
markets.
- Positive earnings momentum in core Northeastern operations.
- Three conversions to the Fresh store concept, generating volume and margin
improvement.
- Continued refinement of the reformatted Food Basics discount format and
Food Emporium fine foods concept in New York City.
- Continued financial benefits from previous cost reduction measures and
ongoing controls and discipline.
- Announcement of the definitive agreement to acquire Pathmark, with
completion expected during the second half of fiscal 2007.
OUTLOOK
Our objectives for the second quarter and remainder of fiscal 2007 are to
continue to improve top and bottom line performance through our operating and
merchandising strategies; maintaining cost control and reduction disciplines
throughout the business; divesting all remaining non-core operations, and
closing on the Pathmark transaction and commencing integration.
41
Chief among the pre-existing corporate and retail strategies in place are the
ongoing improvement of merchandising and operating performance, the execution of
capital improvement projects for maximum return, and general adherence to cost
control disciplines.
Key elements are:
- Continued development of merchandising, promotion and pricing strategies to
drive profitable sales growth.
- Execute core market capital plan for conversion of conventional locations
to fresh or discount formats, fine-tune and monitor gourmet format
development.
- Ongoing disposition of closed store leaseholds.
In preparation for the anticipated acquisition of Pathmark pending regulatory
approval, our Company has developed comprehensive plans for the integration of
its operations upon completion of the transaction.
Primary initial objectives are to ensure:
- Continuity of all retail operations during integration process.
- Efficient consolidation of headquarters personnel and support functions at
present A&P headquarters in Montvale.
- Timely achievement of significant synergies identified as result of merging
the two businesses.
- Communication to both organizations regarding process, timetable for
integration and related changes.
- Consumer communication regarding the continuation of both the A&P-operated
and Pathmark banners and store formats, and related marketing and
promotional efforts.
Overall, the balance of fiscal 2007 will continue to reflect both continuity and
change, as our focus is on sustaining the improvement of our core A&P,
Waldbaum's, Super Fresh, Food Basics and Food Emporium operations - and
strengthening our market presence through the addition of Pathmark's operations
- creating a larger and more profitable chain with critical mass in our core
northeast region, and improved positions in Metro New York/New Jersey and
greater Philadelphia.
Various factors could cause us to fail to achieve these goals. These include,
among others, the following:
- 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 our market share of sales, thus reducing margins.
42
- 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 2007
and fiscal 2008. 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.
- Our capital expenditures could differ from our estimate if development and
remodel costs vary from those budgeted, or if performance varies
significantly from expectations or if we are unsuccessful in acquiring
suitable sites for new stores.
- 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.
- 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.
- 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.
- 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.
- 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.
43
- Completion of the acquisition of Pathmark is conditioned upon the receipt
of certain governmental authorizations, consents, orders and approvals,
including the expiration or termination of the applicable waiting period
(and any extension of the waiting period) under the Hart-Scott-Rodino Act.
The success of the acquisition will depend, in part, on our Company's
ability to realize the anticipated benefits from combining the business of
A&P and Pathmark. If our Company is not able to achieve these objectives,
the anticipated benefits of the acquisition may not be realized fully or at
all or may take longer to realize than expected. Our Company will take on
substantial additional indebtedness to finance this acquisition, which will
decrease our business flexibility and increase our borrowing costs.
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.
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. All amounts are in millions, except share and per share
amounts.
16 WEEKS ENDED JUNE 16, 2007 COMPARED TO THE 16 WEEKS ENDED JUNE 17, 2006
OVERALL
Sales for the first quarter of fiscal 2007 were $1,986.9 million, compared with
$1,994.4 million in the first quarter of fiscal 2006; comparable store sales,
which includes stores that have been in operation for two full fiscal years and
replacement stores, decreased 0.7%. Loss from continuing operations increased
from $8.6 million for the first quarter of fiscal 2006 to $26.1 million for the
first quarter of fiscal 2007. Net loss per share - basic & diluted for the first
quarter of fiscal 2007 was $1.03 compared to net loss per share - basic &
diluted of $0.15 for the first quarter of fiscal 2006.
16 Weeks 16 Weeks
Ended Ended
June 16, 2007 June 17, 2006 Unfavorable % Change
------------- ------------- ----------- ---------
Sales $1,986.9 $1,994.4 $ (7.5) (0.4%)
(Decrease)increase in comparable
store sales (0.7%) 1.5% NA NA
Loss from continuing operations (26.1) (8.6) (17.5) >(100.0%)
(Loss) income from discontinued operations (17.0) 2.5 (19.5) >(100.0%)
Net loss (43.1) (6.1) (37.0) >(100.0%)
Net loss per share - basic and diluted (1.03) (0.15) (0.88) >(100.0%)
44
SALES
Sales for the first quarter of fiscal 2007 of $1,986.9 million decreased $7.5
million or 0.4% from sales of $1,994.4 million for first quarter of fiscal 2006.
The following table presents sales for each of our reportable operating segments
for the 16 weeks ended June 16, 2007 and the 16 weeks ended June 17, 2006:
16 Weeks Ended 16 Weeks Ended Increase
June 16, 2007 June 17, 2006 (Decrease) % Change
-------------- -------------- ---------- --------
Northeast $1,679.2 $1,653.1 $ 26.1 1.6%
Midwest 307.7 341.3 (33.6) (9.8)
-------- -------- ------ ----
Total $1,986.9 $1,994.4 $ (7.5) (0.4%)
======== ======== ====== ====
The following details the dollar impact of several items affecting the increase
(decrease) in sales by reportable operating segment from the first quarter of
fiscal 2006 to the first quarter of fiscal 2007:
Impact of Impact of Comparable
New Closed Store
Stores Stores Sales Other Total
--------- --------- ---------- ----- ------
Northeast $25.6 $(21.8) $ 23.0 $(0.7) $ 26.1
Midwest -- (3.1) (30.5) -- (33.6)
----- ------ ------ ----- ------
Total $25.6 $(24.9) $ (7.5) $(0.7) $ (7.5)
===== ====== ====== ===== ======
The increase in sales in the Northeast was primarily attributable to the
increase in comparable stores sales for the first quarter of fiscal 2007 of
$23.0 million or 1.0% as compared with the first quarter of fiscal 2006 and the
opening or reopening of 12 new stores since the beginning of fiscal 2006, of
which 2 were opened in the first quarter of fiscal 2007, increasing sales by
$25.6 million. Included in the 12 stores opened since the beginning of fiscal
2006 was 6 Clemens Markets stores we purchased during the third quarter of
fiscal 2006. This increase was partially offset by the closing of 11 stores
since the beginning of fiscal 2006, of which 3 were closed in the first quarter
of fiscal 2007, decreasing sales by $21.8 million and the decrease in sales
relating to an information technology services agreement with Metro, Inc. of
$0.7 million.
Average weekly sales per supermarket for the Northeast were approximately
$348,700 for the first quarter of fiscal 2007 versus $344,600 for the
corresponding period of the prior year, an increase of 1.2% primarily due to the
impact of closing smaller stores and positive comparable store sales.
The decrease in sales in the Midwest was primarily attributable to the decrease
in comparable store sales for the first quarter of fiscal 2007 of $30.5 million
or 9.2% driven by the closure of the business and the closing of 1 store since
the beginning of fiscal 2006, of which none were closed in the first quarter of
fiscal 2007, decreasing sales by $3.1 million.
Average weekly sales per supermarket for the Midwest were approximately $291,400
for the first quarter of fiscal 2007 versus $318,400 for the corresponding
period of the prior year, a decrease of 8.5% primarily due to negative
comparable store sales.
45
GROSS MARGIN
Gross margin of $600.3 million decreased 2 basis points as a percentage of sales
to 30.21% for the first quarter of fiscal 2007 from gross margin of $603.0
million or 30.23% for the first quarter of fiscal 2006. We believe the impact on
margin for changes in costs and special reductions was not significant.
The following table presents gross margin for each of our reportable operating
segments for the 16 weeks ended June 16, 2007 and the 16 weeks ended June 17,
2006:
16 Weeks Ended 16 Weeks Ended
June 16, 2007 June 17, 2006
----------------------------- -----------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
------------ -------------- ------------ --------------
Northeast $523.0 31.15% $508.5 30.76%
Midwest 77.3 25.13 94.5 27.69
------ ----- ------ -----
Total $600.3 30.21% $603.0 30.23%
====== ===== ====== =====
The following table details the dollar impact of items affecting the gross
margin dollar increase (decrease) from the first quarter of fiscal 2006 to the
first quarter of fiscal 2007:
Sales Volume Gross Margin Rate Total
------------ ----------------- ------
Northeast $ 8.0 $ 6.5 $ 14.5
Midwest (9.3) (7.9) (17.2)
----- ----- ------
Total $(1.3) $(1.4) $ (2.7)
===== ===== ======
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
Store operating, general and administrative expense ("SG&A") was $714.5 million
or 35.96% for the first quarter of fiscal 2007 as compared to $613.9 million or
30.78% for the first quarter of fiscal 2006.
The following table presents SG&A for each of our reportable operating segments
for the 16 weeks ended June 16, 2007 and the 16 weeks ended June 17, 2006:
16 Weeks Ended 16 Weeks Ended
June 16, 2007 June 17, 2006
----------------------- -----------------------
SG&A Rate to Sales% SG&A Rate to Sales%
------ -------------- ------ --------------
Northeast $529.4 31.52% $516.5 31.24%
Midwest 185.1 60.16 97.4 28.54
------ ----- ------ -----
Total $714.5 35.96% $613.9 30.78%
====== ===== ====== =====
Included in SG&A in the Northeast for the first quarter of fiscal 2007 were
certain charges as follows:
- costs relating to the closing of our owned warehouses in Edison, New Jersey
and Bronx, New York of $0.8 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 as discussed in Note
9 - Asset Disposition Initiatives;
- net losses on real estate activity of $2.2 million (14 basis points); and
- Pathmark acquisition related costs of $0.4 million (3 basis points).
46
Included in SG&A in the Northeast for the first quarter of fiscal 2006 were
certain charges as follows:
- costs relating to the closing of our owned warehouses in Edison, New Jersey
and Bronx, New York of $4.2 million (25 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
9 - Asset Disposition Initiatives;
- costs relating to the consolidation of our operating offices in line with
our smaller operations in the U.S. of $3.3 million (20 basis points); and
- costs relating to a voluntary labor buyout program of $3.7 million (22
basis points).
Partially offset by:
- net gains on real estate activity of $8.8 million (54 basis points) during
the first quarter of fiscal 2006.
Excluding the items listed above, SG&A within our core Northeast operations as a
percentage of sales increased by 49 basis points during the first quarter of
fiscal 2007 as compared to the first quarter of fiscal 2006 primarily due to an
increase in utility costs of $6.8 million (38 basis points), an increase in
depreciation expense of $3.3 million (16 basis points), an increase in
advertising costs of $2.6 million (14 basis points), partially offset by lower
store operating costs and overhead.
The increase in SG&A for the Midwest of $87.7 million for the first quarter
ended June 16, 2007 as compared to June 17, 2006 primarily relates to the net
costs recorded in connection with the sale of groups of non-core stores within
our Midwest operations of $99.3 million as discussed in Note 9 - Asset
Disposition Initiatives.
During the 16 weeks ended June 16, 2007 and June 17, 2006, we recorded
impairment losses on long-lived assets of $38.0 million ($0.5 million in the
Northeast and $37.5 million in the Midwest) and $2.3 million ($2.3 million in
the Northeast), respectively, as follows:
16 weeks ended 16 weeks ended
June 17, 2006 June 18, 2005
-------------- --------------
Impairments due to closure or conversion in the normal
course of business $ 0.5 $1.2
Impairments related to our asset disposition initiatives (1) 37.5 1.1
----- ----
Total impairments $38.0 $2.3
===== ====
(1) Refer to Note 9 - Asset Disposition Initiatives
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
If current operating levels do not continue to improve, there may be additional
future impairments on long-lived assets, including the potential for impairment
of assets that are held and used.
INTEREST EXPENSE
Interest expense of $21.4 million ($19.7 million for the Northeast and $1.7
million for the Midwest) for the first quarter of fiscal 2007 remained flat from
the prior year of $21.4 million ($19.7 million for the Northeast and $1.7
million for the Midwest).
47
EQUITY IN EARNINGS OF METRO, INC.
We used the equity method of accounting to account for our investment in Metro,
Inc., through March 13, 2007, on the basis that we exerted significant influence
over substantive operating decisions made by Metro, Inc. through our membership
on Metro, Inc.'s Board of Directors and its committees and through an
information technology services agreement with Metro, Inc. During the 16 weeks
ended June 16, 2007 and June 17, 2006, we recorded $7.9 million and $7.9
million, respectively, in equity earnings relating to our equity investment in
Metro, Inc.
Beginning March 13, 2007, as a result of the sale of 6,350,000 shares of Metro,
Inc., our Company records our investment in Metro, Inc. under SFAS 115 and
classifies the investment as an available-for-sale security in non-current
assets on our Consolidated Balance Sheet at June 16, 2007 on the basis that we
no longer exert significant influence over substantive operating decisions made
by Metro, Inc. In accordance with SFAS 115, we recorded dividend income of $1.3
million based on Metro, Inc.'s dividend declaration on April 17, 2007 and
included this amount in "Interest and dividend income" on our Consolidated
Statements of Operations for the first quarter ended June 16, 2007.
INCOME TAXES
The benefit from income taxes from continuing operations for the first quarter
of fiscal 2007 was $18.8 million compared to $11.5 million for the first quarter
of fiscal 2006. Consistent with prior year, we continue to record a valuation
allowance against our net deferred tax assets.
For the first quarter of fiscal 2007, our effective income tax rate provision of
41.9% changed from the effective income tax rate benefit of 57.1% in the first
quarter of fiscal 2006 as follows:
16 Weeks Ended
-----------------------------------------
June 16, 2007 June 17, 2006
------------------- -------------------
Tax Effective Tax Effective
Benefit Tax Rate Benefit Tax Rate
------- --------- ------- ---------
Northeast $18.8 (41.9%) $11.5 (57.1%)
Midwest -- -- -- --
----- ----- ----- -----
Total $18.8 (41.9%) $11.5 (57.1%)
===== ===== ===== =====
The effective tax rate on continuing operations for the 16 weeks ended June 16,
2007 varied from the statutory rate of 35% primarily due to state and local
income taxes and a reduction of our valuation allowance as a result of taxes
provided on other comprehensive income and cumulative translation adjustments.
The effective tax rate for the 16 weeks ended June 17, 2006 varied from the
statutory rate of 35% primarily due to a reduction in our valuation allowance
and taxes not being provided on undistributed earnings of 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. These asset sales are now complete. However,
our Company continues to pay occupancy costs for operating leases on closed
locations.
48
On May 30, 2007, our Company announced that we are in advanced negotiations for
the sale of our non-core stores located within the Greater New Orleans area.
There is no guarantee that these stores will be sold and we do not intend to
dispose of these assets unless the terms and conditions are reasonable to our
Company, shareholders and our employees. In connection with this potential sale,
it is possible that liabilities may be recorded in the near term.
The loss from operations of discontinued businesses, net of tax, for the first
quarter of fiscal 2007 of $1.8 million decreased from income from operations of
discontinued businesses, net of tax, of $2.5 million for the first quarter of
fiscal 2006 primarily due to (i.) a decrease in income from operations for the
Greater New Orleans area for the first quarter of fiscal 2006 to the first
quarter fiscal 2007, and (ii.) additional vacancy costs that were recorded in
the first quarter of fiscal 2007 due to changes in our estimation of such future
costs. The loss on disposal of discontinued operations of $15.2 million
increased from the prior year amount of $0.01 million primarily due to
impairment losses recorded on the property, plant and equipment in the Greater
New Orleans area as we estimated the assets' fair market value based upon
expected proceeds less costs to sell in connection with its potential sale.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The following table presents excerpts from our Consolidated Statement of Cash
Flows:
16 weeks ended
-----------------------------
June 16, 2007 June 17, 2006
------------- -------------
Net cash provided by (used in) operating activities $ 27,631 $ (2,768)
-------- ---------
Net cash provided by investing activities $ 32,900 $ 89,460
-------- ---------
Net cash used in by financing activities $(52,530) $(219,370)
-------- ---------
Net cash provided by operating activities of $27.6 million for the 16 weeks
ended June 16, 2007 primarily reflected our net loss of $43.1 million, adjusted
for non-cash charges for (i.) depreciation and amortization of $56.3 million,
and (ii.) charges for our asset disposition initiatives, primarily related to
our Midwest operations, of $105.6 million, (iii.) losses on the disposal of
owned property of $1.2 million, (iv.) loss on disposal of discontinued
operations of $15.2 million, partially offset by (v.) income tax benefit of
$22.0 million, (vi.) our equity in earnings of Metro, Inc. of $7.9 million, and
(vii.) the gain on sale of shares of Metro, Inc. of $78.4 million. Further, cash
was provided by a decrease in accounts receivable of $27.9 million, a decrease
in inventories of $24.1 million partially offset by an increase in prepaid
expenses and other current assets of $7.2 million, an increase in other assets
of $11.4 million, a decrease in accounts payable of $11.9 million, a decrease in
accrued salaries, wages and benefits, and taxes of $16.2 million mainly due
to the timing of payments. Refer to Working Capital below for discussion of
changes in working capital items. Net cash used in operating activities of $2.8
million for the 16 weeks ended June 17, 2006 primarily reflected our net loss of
$6.1 million, adjusted for non-cash charges for (i.) depreciation and
amortization of $54.9 million, and (ii.) our asset disposition initiatives of
$7.3 million, partially offset by (iii.) gains on the disposal of owned property
of $9.7 million, (iv.) income tax benefit relating to the sale of our Canadian
operations of $11.3 million, and (v.) our equity in earnings of Metro, Inc. of
$7.9 million. Further, cash was used by a decrease in accounts receivable of
$44.0 million partially offset by a decrease in accrued
49
salaries, wages and benefits, and taxes of $19.4 million, a decrease in other
accruals of $47.3 million and a decrease in non-current liabilities of $14.2
million due mainly to a decrease in closed store accruals.
Net cash provided by investing activities of $32.9 million for the 16 weeks
ended June 16, 2007 primarily reflected cash received from the sale of shares of
Metro, Inc. of $203.5 million, and net sales of marketable securities of $20.4
million partially offset by an increase in restricted cash of $142.9 million and
property expenditures totaling $50.9 million, which included 2 new supermarkets,
4 major remodels and 3 minor remodels. For the remainder of fiscal 2007, we have
planned capital expenditures of approximately $100 million, which relate
primarily to opening up 2 new supermarkets under the Fresh format, 1 new
liquor store, enlarging or remodeling up to 7 supermarkets to the new Fresh
format, remodeling 1 Gourmet store, and converting 3 supermarkets to the Gourmet
format. Net cash provided by investing activities of $89.5 million for the 16
weeks ended June 17, 2006 primarily reflected cash received from the sale of
certain of our assets of $10.4 million, a decrease in restricted cash of $76.8
million, and net sales of marketable securities of $70.7 million partially
offset by property expenditures totaling $68.1 million, which included 1 new
supermarket, 6 major remodels and 27 minor remodels.
Net cash used in financing activities of $52.5 million for the 16 weeks ended
June 16, 2007 primarily reflected principal payments on long term borrowings of
$31.9 million and net principal payments on revolving lines of credit of $30.0
million, partially offset by proceeds from the exercise of stock options of $5.6
million. Net cash used in financing activities of $219.4 million for the 16
weeks ended June 17, 2006 primarily reflected dividends paid of $299.1 million
partially offset by net proceeds under revolving lines of credit of $70.5
million, an increase in book overdrafts of $7.6 million and proceeds from the
exercise of stock options of $4.6 million.
We operate under an annual operating plan which is reviewed and approved by our
Board of Directors and incorporates the specific operating initiatives we expect
to pursue and the anticipated financial results of our Company. Our plan for
fiscal 2007 at this time has been approved and we believe that our present cash
resources, including invested cash on hand as well as our available-for-sale
security, 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.
On March 5, 2007, our Company announced that we have reached a definitive merger
agreement with Pathmark Stores, Inc. in which we will acquire Pathmark Stores,
Inc., ("Pathmark") for $1.5 billion in cash, stock, and debt assumption or
retirement. This transaction is expected to be completed during the second half
of our fiscal year 2007 and is subject to the completion of shareholder and
regulatory approvals, as well as other customary closing conditions. For further
details surrounding the Pathmark transaction, refer to our Company's Form 8-K
and the accompanying exhibits filed with the U.S. Securities and Exchange
Commission on March 6, 2007.
Our planned acquisition of Pathmark requires approximately $1.5 billion of cash
proceeds to finance the equity purchase and pay down debt obligations. Our
Company has adequate funding to meet these needs including fully committed
financing from Bank of America and Lehman Brothers.
50
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 Sheet at February 24, 2007. The transaction
was funded primarily by cash available on the balance sheet resulting from the
strategic restructuring of the Company during fiscal 2005.
WORKING CAPITAL
We had working capital of $430.6 million at June 16, 2007 compared to working
capital of $190.5 million at February 24, 2007. We had cash and cash equivalents
aggregating $94.2 million at June 16, 2007 compared to $86.2 million at February
24, 2007. The increase in working capital was attributable primarily to the
following:
- An increase in cash and cash equivalents as detailed in the Consolidated
Statements of Cash Flows;
- An increase in restricted cash as a result of the partial sale of our
holdings in Metro, Inc. as discussed in Note 5 - Investment in Metro, Inc.;
- An increase in assets held for sale as a result of our decision to sell our
non-core stores in the Midwest and Greater New Orleans area, as discussed
in Note 4 - Assets Held for Sale;
- A decrease in the current portion of our long-term debt primarily due to
our 7.75% Notes due April 15, 2007 maturing during the first quarter and
paid in full; and
- A decrease in accounts payable (inclusive of book overdrafts) due to the
timing of payments.
Partially offset by the following:
- A decrease in accounts receivable mainly due to timing of receipts and
special initiatives to reduce receivables; and
- A decrease in inventory due to the liquidation of inventory for our
Midwestern operations due to its potential sale in addition to the
reclassification of inventory related to the Midwest and Greater New
Orleans areas to held for sale.
LETTER OF CREDIT AGREEMENT
Our Company has a $250 million Revolving Credit Agreement ("Revolver") with
four lenders enabling us to borrow funds on a revolving basis for working
capital loans and letters of credit.
On March 13, 2007, in connection with our agreement to acquire Pathmark,
our Company sold 6,350,000 shares of our holdings in Metro, Inc. for
proceeds of approximately $203.5 million resulting in a net gain of $78.4
million. Of the total proceeds received, $190.4 million are being held as
restricted cash to collateralize our outstanding letters of credit.
51
In March 2007, our Letter of Credit Agreement and Revolver were amended to allow
for the sale of such shares provided that the net proceeds from such sales are
deposited in a restricted cash account.
At June 16, 2007 and February 24, 2007, there were $137.5 million and $138.3
million, respectively, in letters of credit outstanding under this agreement.
REVOLVING CREDIT AGREEMENT
During fiscal 2005, 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 June
16, 2007 and February 24, 2007, there were no letters of credit outstanding
under this agreement and there were $40.0 million and $70.0 million,
respectively, in outstanding borrowings under the Revolver. As of June 16, 2007,
after reducing availability for borrowing base requirements, we had $173.6
million available under the Revolver. Combined with cash we held in short-term
investments and our available-for-sale security in Metro, Inc. of $421.8
million, we had total cash availability of $595.4 million at June 16, 2007.
Under the Revolver, we are permitted to pay cumulative cash dividends on common
shares as well as make bond repurchases.
PUBLIC DEBT OBLIGATIONS
Outstanding notes totaling $212.8 million at June 16, 2007 consisted of $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% Notes. The 9.375% Notes are now callable at par ($25
per bond) and the 9.125% Notes are now callable at a premium to par (104.563%).
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 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.
During the first quarter of fiscal 2007, the outstanding principal amount of our
7.75% Notes of $31.9 million due April 15, 2007 matured and was paid in full.
52
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 2007. 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 $1.5 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 June 16, 2007, 103 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 $311.8 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 developing outlook with Standard &
Poor's Ratings Group ("S&P") as of June 16, 2007. Our liquidity rating was SGL3
with Moody's as of June 16, 2007. Our recovery rating was 1 with S&P as of June
16, 2007 indicating a high expectation of 100% recovery of our senior debt to
our lenders.
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
53
historical loss experience, projected loss development factors, actual payroll,
legal costs 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 7 year U.S.
Treasury 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 16 weeks ended June 16, 2007, we recorded U.S. impairment
losses on long-lived assets as follows:
Impairments due to closure or conversion in the
normal course of business $ 0.5
Impairments related to our asset disposition initiatives (1) 37.5
-----
Total impairments $38.0
=====
(1) Refer to Note 9 - Asset Disposition Initiatives
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
If current operating levels do not continue to improve, 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 June 16, 2007, we had recorded liabilities for
estimated probable obligations of $151 million. Of this amount, $15 million
relates to stores closed in the normal course of business, $127 million relates
to stores and warehouses closed as part of the asset disposition initiatives
(see Note 9 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 8 of our Consolidated Financial Statements).
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
54
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 13 of the Consolidated Financial Statements, our Company
recorded a valuation allowance for the entire 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 operations.
We adopted the provisions of FIN 48 as of February 25, 2007. The cumulative
effect of the adoption of the recognition and measurement provisions of FIN 48
resulted in a $24 million increase to the February 25, 2007 balance of retained
earnings. Results of prior periods have not been restated. Our policy for
interest and penalties under FIN 48 related to income tax exposures was not
impacted as a result of the adoption of the recognition and measurement
provisions of FIN 48. Therefore, we continue to recognize interest and penalties
as incurred within "Benefit from income taxes" in our Consolidated Statements of
Operations. We do not expect a material impact on our effective tax rate as a
result of the adoption of FIN 48. Refer to Note 13 - Income Taxes for further
discussion.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board ("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. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 requires
that we determine whether the benefits of our tax positions are more likely than
not of being sustained upon audit based on the technical merits of the tax
position. For tax positions that are more likely than not of being sustained
upon audit, we recognize the largest amount of the benefit that is more likely
than not of being sustained in our consolidated financial statements. For tax
positions that are not more likely than not of being sustained upon audit, we do
not recognize any portion of the benefit in our consolidated financial
statements. The provisions of FIN 48 also provide guidance on derecognition,
classification, interest and penalties, accounting in interim periods, and
disclosure. We adopted these requirements as of February 25, 2007.
The cumulative effect of the adoption of the recognition and measurement
provisions of FIN 48 resulted in a $24 million increase to the February 25, 2007
balance of retained earnings. Results of prior periods have not been restated.
Our policy for interest and penalties under FIN 48 related to income tax
exposures was
55
not impacted as a result of the adoption of the recognition and measurement
provisions of FIN 48. Therefore, we continue to recognize interest and penalties
as incurred within "Benefit from income taxes" in our Consolidated Statements of
Operations. We do not expect a material impact on our effective tax rate as a
result of the adoption of FIN 48. Refer to Note 13 - Income Taxes for further
discussion.
In October 2004, the government passed the Homeland Investment Act which allows
companies to repatriate cash balances from their controlled foreign subsidiaries
at a reduced rate. This was achieved by permitting a one time 85% dividends
received deduction. Our Company completed the sale of our Canadian subsidiary to
Metro, Inc. during fiscal 2005. As a result of this transaction, our Company
repatriated $949.0 million from our foreign subsidiaries, of which $500.0
million is intended to qualify for the 85% dividends received deduction. Until
such time as the taxing authorities have affirmed the adequacy of our Company's
Domestic Reinvestment Plan, the balance sheet is and will be grossed-up to
reflect liabilities for uncertain tax positions and deferred tax assets for net
operating losses in accordance with FIN 48.
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 No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). 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. We adopted these requirements of SFAS 158 as of
February 24, 2007. 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. We are
currently evaluating which of the two transition methods to use and when we will
adopt the change in measurement date. Refer to Note 11 - Retirement Plans and
Benefits for further discussion.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities-including an amendment of FASB
Statement No. 115." SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected will be
recognized in earnings at each subsequent reporting date. The provisions of SFAS
159 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 159.
56
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.
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 $214.3 million in total indebtedness as of June 16, 2007 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 first quarters of fiscal 2007 and fiscal 2006, a presumed 1% change
in the variable floating rate would have impacted interest expense by $0.1
million and $0.1 million, respectively.
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 $41.1 million and
$30.2 million at June 16, 2007 and February 24, 2007, respectively. We do not
believe that a change in the Canadian currency of 10% will have a material
effect on our Consolidated Statements of Operations or Cash Flows.
ITEM 4 - CONTROLS AND PROCEDURES
We have established and maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our Company's
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to our Company's management, including our
President and Chief Executive Officer and Senior Vice President, Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
We carried out an evaluation, under the supervision and with the participation
of our Company's management, including our Company's President and Chief
Executive Officer along with our Company's Senior Vice President, Chief
Financial Officer, of the effectiveness of the design and operation of our
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15(b). Based upon the foregoing, our Company's President and Chief Executive
Officer along with our Company's Senior Vice President, Chief Financial Officer,
concluded that our Company's disclosure controls and procedures were effective
as of the period covered by this report.
There have been no changes during our Company's fiscal quarter ended June 16,
2007 in our Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially
57
affect, our Company's internal control over financial reporting.
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.
58
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
LaMarca et al v. The Great Atlantic & Pacific Tea Company, Inc. ("Defendants")
On June 24, 2004, a class action complaint was filed in the Supreme Court of the
State of New York against The Great Atlantic & Pacific Tea Company, Inc., d/b/a
A&P, The Food Emporium, and Waldbaum's alleging violations of the overtime
provisions of the New York Labor Law. Three named plaintiffs, Benedetto Lamarca,
Dolores Guiddy, and Stephen Tedesco, alleged on behalf of a class that our
Company failed to pay overtime wages to full-time hourly employees who were
either required or permitted to work more than 40 hours per week.
In April 2006, the plaintiffs filed a motion for class certification. In July
2007, the Court granted the plaintiffs' motion and certified the class as
follows: All full-time hourly employees of Defendants who were employed in
Defendants' supermarket stores located in the State of New York, for any of the
period from June 24, 1998 through the date of the commencement of the action,
whom Defendants required or permitted to perform work in excess of 40 hours per
week without being paid overtime wages. The Court also ruled that the issue of
whether to include an "opt-in" or "opt-out" provision is premature and can be
decided after discovery has been had.
As class certification was granted only recently, and as discovery on the
prospective plaintiffs comprising the class has yet to be conducted, neither the
number of class participants nor the sufficiency of their respective claims can
be determined at this time.
ITEM 1A - RISK FACTORS
Set forth below is a summary of the material risks to an investment in our
securities.
- 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 our market share of sales, thus reducing margins.
- 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 2007
and fiscal 2008. 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.
- Our capital expenditures could differ from our estimate if development and
remodel costs vary from those budgeted, or if performance varies
significantly from expectations or if we are unsuccessful in acquiring
suitable sites for new stores.
- 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.
- 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
59
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.
- 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.
- 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.
- 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.
- Completion of the acquisition of Pathmark is conditioned upon the receipt
of certain governmental authorizations, consents, orders and approvals,
including the expiration or termination of the applicable waiting period
(and any extension of the waiting period) under the Hart-Scott-Rodino Act.
The success of the acquisition will depend, in part, on our Company's
ability to realize the anticipated benefits from combining the business of
A&P and Pathmark. If our Company is not able to achieve these objectives,
the anticipated benefits of the acquisition may not be realized fully or at
all or may take longer to realize than expected. Our Company will take on
substantial additional indebtedness to finance this acquisition, which will
decrease our business flexibility and increase our borrowing costs.
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
60
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS
(a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT NO. DESCRIPTION
----------- -----------
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)
61
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)
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 ("Credit Agreement")
(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)
4.8 First amendment to Credit Agreement dated March 13, 2006
(incorporated herein by reference to Exhibit 4.8 to Form 10-K
filed on April 25, 2007)
4.9 Second amendment to Credit Agreement dated November 10, 2006
(incorporated herein by reference to Exhibit 4.9 to Form 10-K
filed on April 25, 2007)
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 ("Costantini Agreement") (incorporated herein by
reference to Exhibit 10 to Form 10-Q filed on January 16, 2001)
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)
62
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
("Jueptner Agreement") (incorporated herein by reference to
Exhibit 10.26 to Form 10-Q filed on October 22, 2002)
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)
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 ("Metzger Agreement") (incorporated
herein by reference to Exhibit 10.13 to Form 10-K filed on July 5,
2002)
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 11th day of
December, 2006, by and between our Company and Rebecca Philbert,
and Offer Letter dated the 11th day of December, 2006
(incorporated herein by reference to Exhibit 10.15 to Form 10-K
filed on April 25, 2007)
10.16 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 ("Piwek
Agreement") (incorporated herein by reference to Exhibit 10.14 to
Form 10-Q filed on January 10, 2003)
63
10.17 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)
10.18 Employment Agreement, made and entered into as of the 4th day 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)
10.19 Employment Agreement, made and entered into as of the 12th day 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)
10.20 Employment Agreement, made and entered into as of the 2nd day 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)
10.21 Employment Agreement, made and entered into as of the 2nd day 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)
10.22 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)
10.23 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)
10.24 1994 Stock Option Plan (incorporated herein by reference to
Exhibit 10(e) to Form 10-K filed on May 24, 1995)
10.25 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)
10.26 Form of Stock Option Grant (incorporated herein by reference to
Exhibit 10.20 to Form 10-K filed on May 10, 2005)
10.27 Description of 2005 Turnaround Incentive Compensation Program
(incorporated herein by reference to Exhibit 10.21 to Form 10-K
filed on May 10, 2005)
10.28 Form of Restricted Share Unit Award Agreement (incorporated herein
by reference to Exhibit 10.22 to Form 10-K filed on May 10, 2005)
10.29 Description of 2006 Long Term Incentive Plan (incorporated herein
by reference to Exhibit 10.28 to Form 10-Q filed on July 21, 2006)
64
10.30 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)
10.31 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)
10.32 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)
10.33 Description of Management Incentive Plan (incorporated herein by
reference to Exhibit 10.30 to Form 10-K filed on May 9, 2006)
10.34 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/A filed on June 25, 2007)
10.35 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/A filed on June 25, 2007)
10.36 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)
10.37 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)
10.38 Letter of Credit Agreement, dated as of October 14, 2005 between
the Company and Bank of America, N.A., as Issuing Bank, ("Letter
of Credit Agreement") (incorporated herein by reference to Exhibit
10.42 to Form 10-Q filed on October 18, 2005)
10.39 First amendment to Letter of Credit Agreement, dated October 13,
2006 (incorporated herein by reference to Exhibit 10.39 to Form
10-K filed on April 25, 2007)
10.40 Second amendment to Letter of Credit Agreement, dated November 10,
2006 (incorporated herein by reference to Exhibit 10.40 to Form
10-K filed on April 25, 2007)
10.41 Entry into a Material Definitive Agreement dated as of March 4,
2007, by and between the Company and Pathmark Stores, Inc.
(incorporated herein by reference to Form 8-K and the accompanying
exhibits filed on March 6, 2007)
65
10.42 Employment Agreement, made and entered into as of the 1st day of
May 2007, by and between our Company and Andreas Guldin
(incorporated herein by reference to Exhibit 10.1 to Form 8-K
filed on May 7, 2007)
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 23.1 to Form 10-K
filed on April 25, 2007)
23.2 Consent of Independent Auditors from Ernst & Young LLP
(incorporated herein by reference to Exhibit 23.2 to Form 10-K
filed on April 25, 2007)
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
99.2 Metro, Inc. September 30, 2006 Consolidated Financial Statements
(incorporated herein by reference to Exhibit 99.2 to Form 10-K
filed on April 25, 2007)
* Filed with this 10-Q
66
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: July 25, 2007 By: /s/ Melissa E. Sungela
------------------------------------
Melissa E. Sungela, Vice President,
Corporate Controller
(Chief Accounting Officer)
67
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
SECTION 302 CERTIFICATION
I, Eric Claus, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Great Atlantic &
Pacific Tea Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusion
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this quarterly report based on
such evaluation; and
d) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is likely to materially affect, the registrant's internal
control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Eric Claus Date: July 25, 2007
-------------------------------------
Eric Claus
President and
Chief Executive Officer
68
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
SECTION 302 CERTIFICATION
I, Brenda M. Galgano, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Great Atlantic &
Pacific Tea Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusion
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this quarterly report based on
such evaluation; and
d) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is likely to materially affect, the registrant's internal
control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Brenda M. Galgano Date: July 25, 2007
-------------------------------------
Brenda M. Galgano
Senior Vice President,
Chief Financial Officer
69
Exhibit 32
CERTIFICATION ACCOMPANYING PERIODIC REPORT
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SS. 1350)
The undersigned, Eric Claus, President and Chief Executive Officer of The Great
Atlantic & Pacific Tea Company, Inc. ("Company"), and Brenda M. Galgano, Senior
Vice President, Chief Financial Officer of the Company, each hereby certifies
that (1) the Quarterly Report of the Company on Form 10-Q for the period ended
June 16, 2007 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and (2) the information contained in the
Report fairly presents, in all material respects, the financial condition and
the results of operations of the Company.
Dated: July 25, 2007 /s/ Eric Claus
----------------------------------------
Eric Claus
President and Chief Executive Officer
Dated: July 25, 2007 /s/ Brenda M. Galgano
----------------------------------------
Brenda M. Galgano
Senior Vice President,
Chief Financial Officer
70