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 SEPTEMBER 8, 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 OCTOBER 15, 2007 THE REGISTRANT HAD A TOTAL OF 41,960,917 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)
12 Weeks Ended 28 Weeks Ended
----------------------------- -----------------------------
Sept. 8, 2007 Sept. 9, 2006 Sept. 8, 2007 Sept. 9, 2006
------------- ------------- ------------- -------------
Sales $ 1,274,338 $ 1,236,859 $ 2,953,507 $ 2,889,954
Cost of merchandise sold (875,701) (846,216) (2,031,888) (1,990,835)
----------- ----------- ----------- -----------
Gross margin 398,637 390,643 921,619 899,119
Store operating, general and administrative
expense (391,247) (396,620) (920,603) (913,072)
----------- ----------- ----------- -----------
Income (loss) from operations 7,390 (5,977) 1,016 (13,953)
(Loss) gain on sale of Canadian operations (5) 35 (286) (291)
Gain on sale of shares of Metro, Inc. -- -- 78,388 --
Interest expense (14,594) (15,124) (34,307) (34,825)
Interest and dividend income 3,655 1,976 8,321 6,279
Equity in earnings of Metro, Inc. -- 11,870 7,869 19,817
----------- ----------- ----------- -----------
(Loss) income from continuing operations
before income taxes (3,554) (7,220) 61,001 (22,973)
Benefit from (provision for) income taxes 615 5,050 (2,534) 14,455
----------- ----------- ----------- -----------
(Loss) income from continuing operations (2,939) (2,170) 58,467 (8,518)
Discontinued operations:
(Loss) income from operations of discontinued
businesses, net of tax benefit of $0 and
$475 for the 12 weeks ended 9/8/07 and
9/9/06, respectively, and $0 and $773
for the 28 weeks ended 9/8/07 and
9/9/06, respectively (86,347) 1,714 (166,127) 2,107
Loss on disposal of discontinued
businesses, net of tax provision of $0 and
$15 for the 12 weeks ended 9/8/07 and
9/9/06, respectively, and $0 and $58
for the 28 weeks ended 9/8/07 and
9/9/06, respectively (2,036) (55) (48,804) (209)
----------- ----------- ----------- -----------
(Loss) income from discontinued operations (88,383) 1,659 (214,931) 1,898
----------- ----------- ----------- -----------
Net loss $ (91,322) $ (511) $ (156,464) $ (6,620)
=========== =========== =========== ===========
Net (loss) income per share - basic:
Continuing operations $ (0.07) $ (0.05) $ 1.39 $ (0.21)
Discontinued operations (2.11) 0.04 (5.13) 0.05
----------- ----------- ----------- -----------
Net loss per share - basic $ (2.18) $ (0.01) $ (3.74) $ (0.16)
=========== =========== =========== ===========
Net (loss) income per share - diluted:
Continuing operations $ (0.07) $ (0.05) $ 1.38 $ (0.21)
Discontinued operations (2.11) 0.04 (5.08) 0.05
----------- ----------- ----------- -----------
Net loss per share - diluted $ (2.18) $ (0.01) $ (3.70) $ (0.16)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding 41,933,470 41,470,799 41,857,990 41,362,113
Common stock equivalents 425,245 476,923 426,498 510,198
----------- ----------- ----------- -----------
Weighted average number of common and
common equivalent shares outstanding 42,358,715 41,947,722 42,284,488 41,872,311
=========== =========== =========== ===========
See Notes to Quarterly Report
2
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Dollars in thousands, except share amounts)
(Unaudited)
Retained Accumulated
Common Stock Additional Earnings Other Total
-------------------- Paid-in (Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit) Income Equity
---------- ------- ---------- ------------ ------------- -------------
28 WEEK PERIOD ENDED SEPTEMBER 8, 2007
Balance at beginning of period,
as previously reported 41,589,195 $41,589 $212,868 $ 153,325 $ 22,888 $430,670
Cumulative impact of
the adoption of FIN48 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 (156,464) (156,464)
Other comprehensive income 139,185 139,185
Stock options exercised 363,023 363 5,734 6,097
Tax benefit on stock options 1,776 1,776
Other share based awards 6,597 7 5,297 5,304
---------- ------- -------- --------- -------- --------
Balance at end of period 41,958,815 $41,959 $225,675 $ 21,282 $162,073 $450,989
========== ======= ======== ========= ======== ========
28 WEEK PERIOD ENDED SEPTEMBER 9, 2006
Balance at beginning of period 41,148,987 $41,149 $497,193 $ 126,432 $ 6,953 $671,727
Net loss (6,620) (6,620)
Other comprehensive income 12,687 12,687
Cash dividends on common stock -
$7.25 per share (299,089) (299,089)
Stock options exercised 314,131 314 4,487 4,801
Other share based awards 26,104 26 5,818 5,844
---------- ------- -------- --------- -------- --------
Balance at end of period 41,489,222 $41,489 $208,409 $ 119,812 $ 19,640 $389,350
========== ======= ======== ========= ======== ========
COMPREHENSIVE INCOME (LOSS)
12 Weeks Ended 28 Weeks Ended
----------------------------- -----------------------------
Sept. 8, 2007 Sept. 9, 2006 Sept. 8, 2007 Sept. 9, 2006
------------- ------------- ------------- -------------
Net loss $(91,322) $ (511) $(156,464) $(6,620)
-------- ------ --------- -------
Foreign currency translation adjustment, net of tax 8,513 773 24,558 12,302
Net unrealized (loss) gain on investment
securities, net of tax (6,355) -- 115,385 --
Net unrealized gain on marketable securities, net of tax -- 499 22 385
Pension and other post-retirement benefits, net of tax (381) -- (780) --
-------- ------ --------- -------
Other comprehensive income, net of tax 1,777 1,272 139,185 12,687
-------- ------ --------- -------
Total comprehensive (loss) income $(89,545) $ 761 $ (17,279) $ 6,067
======== ====== ========= =======
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BALANCES
Net Unrealized Net Unrealized Pension Accumulated
Foreign Gain on (Loss) Gain & Other Other
Currency Investment on Marketable Post-retirement Comprehensive
Translation Securities Securities Benefits Income
----------- -------------- -------------- --------------- -------------
Balance at February 24, 2007 $ 9,710 $ -- $ (22) $13,200 $ 22,888
Current period change 24,558 115,385 22 (780) 139,185
------- -------- ------- ------- --------
Balance at September 8, 2007 $34,268 $115,385 $ -- $12,420 $162,073
======= ======== ======= ======= ========
Balance at February 25, 2006 $12,874 $ -- $(1,015) $(4,906) $ 6,953
Current period change 12,302 -- 385 -- 12,687
------- -------- ------- ------- --------
Balance at September 9, 2006 $25,176 $ -- $ (630) $(4,906) $ 19,640
======= ======== ======= ======= ========
See Notes to Quarterly Report
3
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share amounts)
September 8, 2007 February 24, 2007
----------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 76,208 $ 86,194
Restricted cash 193,899 51,176
Restricted marketable securities -- 20,335
Accounts receivable, net of allowance for doubtful accounts of
$5,263 and $4,514 at September 8, 2007 and February 24, 2007,
respectively 84,138 117,082
Inventories 314,162 411,370
Prepaid expenses and other current assets 85,547 62,751
Assets held for sale 73,147 --
---------- ----------
Total current assets 827,101 748,908
---------- ----------
Non-current assets:
Property:
Property owned 764,312 919,322
Property leased under capital leases 12,708 20,676
---------- ----------
Property - net 777,020 939,998
Investment in Metro, Inc. 391,371 --
Equity investment in Metro, Inc. -- 368,871
Other assets 171,171 53,846
---------- ----------
Total assets $2,166,663 $2,111,623
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 90 $ 32,069
Current portion of obligations under capital leases 1,354 1,554
Accounts payable 164,517 197,500
Book overdrafts 28,691 31,833
Accrued salaries, wages and benefits 100,753 115,719
Accrued taxes 34,778 34,452
Other accruals 154,231 145,264
---------- ----------
Total current liabilities 484,414 558,391
---------- ----------
Non-current liabilities:
Long-term debt 220,960 284,214
Long-term obligations under capital leases 28,731 29,938
Long-term real estate liabilities 304,502 300,832
Other non-current liabilities 677,067 507,578
---------- ----------
Total liabilities 1,715,674 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 - 41,958,815 and 41,589,195
shares at September 8, 2007 and February 24, 2007, respectively 41,959 41,589
Additional paid-in capital 225,675 212,868
Accumulated other comprehensive income 162,073 22,888
Retained earnings 21,282 153,325
---------- ----------
Total stockholders' equity 450,989 430,670
---------- ----------
Total liabilities and stockholders' equity $2,166,663 $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)
28 Weeks Ended
-----------------------------
Sept. 8, 2007 Sept. 9, 2006
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(156,464) $ (6,620)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Asset disposition initiatives (20,985) 5,135
Depreciation and amortization 89,960 95,219
Income tax benefit -- (17,269)
Loss (gain) on disposal of owned property and write-down
of property, net 1,221 (10,941)
Loss on disposal of discontinued operations 48,804 151
Other property impairments 1,114 2,565
Loss on sale of Canadian operations 286 291
Other share based awards 5,304 5,844
Equity in earnings of Metro, Inc. (7,869) (19,817)
Proceeds from dividends from Metro, Inc. -- 3,408
Gain on sale of shares of Metro, Inc. (78,388) --
Other changes in assets and liabilities:
Decrease in receivables 33,004 69,415
Decrease in inventories 71,560 5,195
Increase in prepaid expenses and other current assets (10,795) (11,791)
Increase in other assets (9,024) (2,811)
Decrease in accounts payable (29,589) (18,534)
Decrease in accrued salaries, wages, benefits and taxes (16,151) (15,362)
Increase (decrease) in other accruals 8,962 (49,763)
Increase (decrease) in other non-current liabilities 70,009 (19,596)
Other operating activities, net 2,704 2,147
--------- ---------
Net cash provided by operating activities 3,663 16,866
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (79,760) (120,346)
Proceeds from disposal of property 74,355 19,768
Disposal related expenditures for sale of Canadian operations (286) (291)
(Increase) decrease in restricted cash (142,723) 68,963
Proceeds from the sale of shares of Metro, Inc. 203,492 --
Purchases of marketable securities -- (148,700)
Proceeds from maturities of marketable securities 20,446 230,904
--------- ---------
Net cash provided by investing activities 75,524 50,298
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds under revolving lines of credit 388,700 624,900
Principal payments on revolving lines of credit (451,900) (540,900)
Principal payments on long-term borrowings (31,955) (46)
Long term real estate liabilities 3,670 (861)
Principal payments on capital leases (2,284) (2,891)
(Decrease) increase in book overdrafts (3,142) 543
Deferred financing fees (142) (105)
Dividends paid -- (299,089)
Tax benefit on stock options 1,776 --
Proceeds from exercises of stock options 6,097 4,801
--------- ---------
Net cash used in financing activities (89,180) (213,648)
Effect of exchange rate changes on cash and cash equivalents 7 145
--------- ---------
Net decrease in cash and cash equivalents (9,986) (146,339)
Cash and cash equivalents at beginning of period 86,194 229,589
--------- ---------
Cash and cash equivalents at end of period $ 76,208 $ 83,250
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 9,375 $ 12,953
Cash paid during the year for income taxes $ 1,658 $ 4,726
See Notes to Quarterly Report
5
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
1. BASIS OF PRESENTATION
The accompanying Consolidated Statements of Operations for the 12 and 28 weeks
ended September 8, 2007 and September 9, 2006, Consolidated Statements of
Stockholders' Equity and Comprehensive Income and Consolidated Statements of
Cash Flows for the 28 weeks ended September 8, 2007 and September 9, 2006, and
the Consolidated Balance Sheets at September 8, 2007 and February 24, 2007 of
The Great Atlantic & Pacific Tea Company, Inc. ("We," "Our," "Us" or "Our
Company"), are unaudited and, in the opinion of management, contain all
adjustments that are of a normal and recurring nature necessary for a fair
statement of financial position and results of operations for such periods. The
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes contained in our revised
Fiscal 2006 Annual Report on Form 8-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. 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 September 8, 2007 on the basis that we no longer exert significant
influence over substantive operating decisions made by Metro, Inc.
As discussed in Note 7 - Discontinued Operations, the criteria necessary to
classify the operations for the Midwest and the Greater New Orleans area as
discontinued have been satisfied and as such, have been reclassified in our
Consolidated Statements of Operations for the 12 and 28 weeks ended September 8,
2007 and September 9, 2006.
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
6
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 $24.4 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 (provision for) 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 11 - 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
ending 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 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 ending 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 10 - 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 159"). SFAS 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
7
beginning after November 15, 2007 (our year ending February 28, 2009). Our
Company is currently evaluating the impact, if any, of the provisions of SFAS
159.
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 regarding 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 fiscal 2007 and is subject to the completion of shareholder and
regulatory approvals, as well as other customary closing conditions.
4. 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 10.17% of the outstanding shares of
Metro, Inc. as of its third quarter ended July 7, 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 September 8, 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.
The following table summarizes the status and results of our Company's
investment in Metro, Inc. from February 24, 2007 through September 8, 2007:
8
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 115,385
Foreign currency translation 27,544
---------
Investment at September 8, 2007 $ 391,371
=========
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, we recorded nil and $7.9 million during the 12 and 28 weeks ended
September 8, 2007, respectively, and $11.9 million and $19.8 million during the
12 and 28 weeks ended September 9, 2006, respectively, in equity earnings
relating to our equity investment in Metro, Inc. and included these amounts in
"Equity in earnings of Metro, Inc." on our Consolidated Statements of
Operations. In accordance with SFAS 115, for the 12 and 28 weeks ended September
8, 2007, we recorded dividend income of $1.2 million and $2.5 million,
respectively, based on Metro, Inc.'s dividend declaration on April 17, 2007 and
August 8, 2007. These amounts are included in "Interest and dividend income" on
our Consolidated Statements of Operations. There was no such income for the 12
and 28 weeks ended September 9, 2006, as dividends received were recorded as a
reduction of the investment balance under the equity method of accounting.
Metro, Inc.'s summarized financial information, derived from its unaudited
second quarter ended March 17, 2007 and unaudited third quarter ended July 1,
2006 financial statements, is as follows (in millions):
12 Weeks Ended 16 Weeks Ended 40 Weeks Ended
March 17, 2007 July 1, 2006 July 1, 2006
-------------- -------------- --------------
Income statement:
Net sales $2,096.5 $2,976.3 $7,334.3
======== ======== ========
Cost of sales and operating expenses $1,967.1 $2,801.3 $6,921.7
======== ======== ========
Net income $ 55.0 $ 75.9 $ 154.4
======== ======== ========
5. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND AVAILABLE-FOR-SALE SECURITIES
At September 8, 2007 and February 24, 2007, we had $193.9 million and $51.2
million, respectively, in restricted cash, of which $190.2 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 amounts of $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 our investment in Metro, Inc. as unrealized gains or losses, net
of tax, and 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.
The following is a summary of cash, cash equivalents, restricted cash and
available-for-sale securities at September 8, 2007 and February 24, 2007:
9
At September 8, 2007
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Costs Gains Losses Value
--------- ---------- ---------- ---------
CLASSIFIED AS:
Cash $ 73,919 $ -- $-- $ 73,919
Cash equivalents:
Money market funds 2,289 -- -- 2,289
-------- -------- --- --------
Total cash and cash equivalents 76,208 -- -- 76,208
-------- -------- --- --------
Restricted cash 193,899 -- -- 193,899
Available-for-sale securities:
Investment in Metro, Inc. 275,986 115,385 -- 391,371
-------- -------- --- --------
Total cash, cash equivalents, restricted cash
and available-for-sale securities $546,093 $115,385 $-- $661,478
======== ======== === ========
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)
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.
10
Gross realized gains or losses on sales of investments were nil and $78.5
million for the 12 and 28 weeks ended September 8, 2007, respectively, and nil
and $0.05 million for the 28 weeks ended September 9, 2006, respectively.
6. 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 12 and 28 weeks ended September 8, 2007 we recorded impairment losses
on long-lived assets of $2.9 million and $53.1 million, respectively. During the
12 and 28 weeks ended September 9, 2006, we recorded impairment losses on
long-lived assets of $1.3 million and $3.6 million, respectively.
Impairments due to closure or conversion in the normal course of business
We review assets in stores planned for closure or conversion for impairment upon
determination that such assets will not be used for their intended useful life.
During the 12 and 28 weeks ended September 8, 2007, we recorded impairment
losses on property of $0.6 million and $1.1 million, respectively, related to
stores that were or will be closed or converted in the normal course of
business, as compared to $1.3 million and $2.5 million in impairment losses on
property related to stores that were closed or converted in the normal course of
business during the 12 and 28 weeks ended September 9, 2006, respectively. These
amounts were included in "Store operating, general and administrative expense"
in our Consolidated Statements of Operations.
Impairments related to our Asset Disposition Initiatives
During the 12 and 28 weeks ended September 9, 2006, we recorded impairment
losses on property of nil and $1.1 million, respectively, related to property
write-downs as a result of our asset disposition initiatives as discussed in
Note 8 - Asset Disposition Initiatives. These amounts were included in "Store
operating, general and administrative expense" in our Consolidated Statements of
Operations for the 12 and 28 weeks ended September 9, 2006. There were no such
amounts recorded for the 12 and 28 weeks ended September 8, 2007.
Impairments related to our discontinued operations
During the 12 and 28 weeks ended September 8, 2007, we recorded impairment
losses of $2.3 million and $52.0 million, respectively, related to our
discontinued operations as a result of our exit of the Greater New Orleans and
Midwest markets as discussed in Note 7 - Discontinued Operations. These amounts
were included in our Consolidated Statements of Operations under the caption
"Loss on disposal of discontinued operations, net of tax" for the 12 and 28
weeks ended September 8, 2007. There were no such charges for the 12 and 28
weeks ended September 9, 2006.
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
7. DISCONTINUED OPERATIONS
11
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 one location. Further, our Company has ceased sales
operations in all stores as of July 7, 2007. In connection with the shutdown of
these operations, we recorded net occupancy costs of $58.9 million during the 12
weeks ended September 8, 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, these estimates may
require adjustment in future periods. We also recorded a curtailment gain of
approximately $3.0 million reflecting a reduction in the estimated future costs
of previously recorded postretirement benefits. This reduction is a result of
the termination of certain employees in the Midwest who did not meet the
eligibility requirements for these benefits before their termination.
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. Subsequent to our second quarter
end, on September 15, 2007, our Company announced that we have definitive
agreements for the sale of the majority of stores in this area to Rouse's
Supermarket. The remaining stores are being sold to independent buyers. These
transactions are expected to be completed during the second half of fiscal 2007
and are subject to customary closing conditions.
Upon the decision to pursue the sale of 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
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 all stores in the Midwest and 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 September 8, 2007. In addition, in accordance with SFAS 144, the
criteria necessary to classify these operations as discontinued have been
satisfied for the Midwest and the Greater New Orleans area and as such, have
been reclassified in our Consolidated Statements of Operations for the 12 and 28
weeks ended September 8, 2007 and September 9, 2006.
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 for the 12 and 28 weeks ended
September 8, 2007 of $2.3 million and $52.0 million, respectively, and is
included in "Loss on disposal of discontinued businesses, net of tax" on our
Consolidated Statements of Operations.
12
An analysis of "Assets held for sale" on our Consolidated Balance Sheet at
September 8, 2007 is as follows:
Inventories $24,258
Property owned, net 48,889
-------
$73,147
=======
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.
Summarized below are the operating results for these discontinued businesses,
which are included in our Consolidated Statements of Operations, under the
caption "Loss from operations of discontinued businesses, net of tax" for the 12
and 28 weeks ending September 8, 2007 and September 9, 2006.
12 weeks ended September 8, 2007
---------------------------------------------------------------------------
Greater
New Midwest Midwest Midwest Northern
Orleans 2007 2005 2004 New England Kohl's Total
-------- --------- ------- ------- ----------- ------ ---------
INCOME (LOSS) FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ 80,450 $ 24,742 $ -- $ -- $-- $ -- $ 105,192
Operating expenses (77,110) (118,378) 4,271 (161) -- (161) (191,539)
-------- --------- ------ ----- --- ----- ---------
Income (loss) from operations of
discontinued businesses, before tax 3,340 (93,636) 4,271 (161) -- (161) (86,347)
-------- --------- ------ ----- --- ----- ---------
Tax benefit -- -- -- -- -- -- --
-------- --------- ------ ----- --- ----- ---------
Income (loss) from operations of
discontinued businesses, net of tax $ 3,340 $ (93,636) $4,271 $(161) $-- $(161) $ (86,347)
======== ========= ====== ===== === ===== =========
DISPOSAL RELATED COSTS INCLUDED
IN OPERATING EXPENSES ABOVE:
Non-accruable closing costs $ (13) $ (3,465) $ -- $ -- $-- $ -- $ (3,478)
Occupancy related costs -- (58,913) 5,084 -- -- -- (53,829)
Inventory related costs -- (3,086) -- -- -- -- (3,086)
Lease termination costs (822) 214 -- -- -- -- (608)
Pension withdrawal costs -- (14,000) -- -- -- -- (14,000)
Curtailment gain -- 3,000 -- -- -- -- 3,000
Interest accretion on present value
of future occupancy costs (197) (1,604) (813) (161) -- (161) (2,936)
-------- --------- ------ ----- --- ----- ---------
Total disposal related costs $ (1,032) $ (77,854) $4,271 $(161) $-- $(161) $ (74,937)
======== ========= ====== ===== === ===== =========
(LOSS) GAIN ON DISPOSAL OF
DISCONTINUED OPERATIONS
Property impairments $ -- $ (2,311) $ -- $ -- $-- $ -- $ (2,311)
Gain on sale of fixed assets -- 275 -- -- -- -- 275
-------- --------- ------ ----- --- ----- ---------
Loss on disposal of discontinued
business, before tax -- (2,036) -- -- -- -- (2,036)
-------- --------- ------ ----- --- ----- ---------
Tax benefit -- -- -- -- -- -- --
-------- --------- ------ ----- --- ----- ---------
Loss on disposal of discontinued
operations, net of tax $ -- $ (2,036) $ -- $ -- $-- $ -- $ (2,036)
======== ========= ====== ===== === ===== =========
13
12 weeks ended September 9, 2006
---------------------------------------------------------------------------
Greater
New Midwest Midwest Midwest Northern
Orleans 2007 2005 2004 New England Kohl's Total
-------- --------- ------- ------- ----------- ------ ---------
INCOME (LOSS) FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ 94,760 $ 240,631 $ -- $ -- $ -- $ -- $ 335,391
Operating expenses (90,570) (244,726) 1,318 (171) (11) 8 (334,152)
-------- --------- ------ ----- ---- ---- ---------
Income (loss) from operations of
discontinued businesses, before tax 4,190 (4,095) 1,318 (171) (11) 8 1,239
-------- --------- ------ ----- ---- ---- ---------
Tax benefit (provision) 1,605 (1,569) 505 (65) (4) 3 475
-------- --------- ------ ----- ---- ---- ---------
Income (loss) from operations of
discontinued businesses, net of tax $ 5,795 $ (5,664) $1,823 $(236) $(15) $ 11 $ 1,714
======== ========= ====== ===== ==== ==== =========
DISPOSAL RELATED COSTS INCLUDED
IN OPERATING EXPENSES ABOVE:
Severance and benefits $ -- $ -- $ -- $ -- $ -- $146 $ 146
Non-accruable closing costs -- -- (24) -- (11) (46) (81)
Occupancy related costs 1,972 (481) 2,183 -- -- -- 3,674
Interest accretion on present value
of future occupancy costs (269) (118) (841) (171) -- (92) (1,491)
-------- --------- ------ ----- ---- ---- ---------
Total disposal related costs $ 1,703 $ (599) $1,318 $(171) $(11) $ 8 $ 2,248
======== ========= ====== ===== ==== ==== =========
LOSS ON DISPOSAL OF
DISCONTINUED OPERATIONS
Property impairments $ -- $ -- $ -- $ -- $ -- $ -- $ --
(Loss) gain on sale of fixed assets (3) (83) 46 -- -- -- (40)
-------- --------- ------ ----- ---- ---- ---------
Loss on disposal of discontinued
business, before tax (3) (83) 46 -- -- -- (40)
-------- --------- ------ ----- ---- ---- ---------
Tax benefit (provision) (1) (31) 17 -- -- -- (15)
-------- --------- ------ ----- ---- ---- ---------
(Loss) income on disposal of
discontinued operations, net of tax $ (4) $ (114) $ 63 $ -- $ -- $ -- $ (55)
======== ========= ====== ===== ==== ==== =========
14
28 weeks ended September 8, 2007
-----------------------------------------------------------------------------
Greater
New Midwest Midwest Midwest Northern
Orleans 2007 2005 2004 New England Kohl's Total
--------- --------- ------- ------- ----------- ------- ---------
INCOME (LOSS) FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ 195,021 $ 332,498 $ -- $ -- $-- $ -- $ 527,519
Operating expenses (192,557) (503,865) 4,566 (301) -- (1,489) (693,646)
--------- --------- ------- ----- --- ------- ---------
Income (loss) from operations of
discontinued businesses, before tax 2,464 (171,367) 4,566 (301) -- (1,489) (166,127)
--------- --------- ------- ----- --- ------- ---------
Tax benefit -- -- -- -- -- -- --
--------- --------- ------- ----- --- ------- ---------
Income (loss) from operations of
discontinued businesses,
net of tax $ 2,464 $(171,367) $ 4,566 $(301) $-- $(1,489) $(166,127)
========= ========= ======= ===== === ======= =========
DISPOSAL RELATED COSTS INCLUDED
IN OPERATING EXPENSES ABOVE:
Severance and benefits $ (403) $ (23,501) $ -- $ -- $-- $ -- $ (23,904)
Non-accruable closing costs (20) (3,499) -- -- -- -- (3,519)
Occupancy related costs (738) (58,913) 6,467 80 -- (1,232) (54,336)
Inventory related costs -- (3,086) -- -- -- -- (3,086)
Lease termination costs (822) (630) -- -- -- -- (1,452)
Pension withdrawal costs -- (57,007) -- -- -- -- (57,007)
Curtailment gain -- 3,000 -- -- -- -- 3,000
Interest accretion on present value
of future occupancy costs (476) (1,741) (1,901) (381) -- (257) (4,756)
--------- --------- ------- ----- --- ------- ---------
Total disposal related costs $ (2,459) $(145,377) $ 4,566 $(301) $-- $(1,489) $(145,060)
========= ========= ======= ===== === ======= =========
(LOSS) GAIN ON DISPOSAL OF
DISCONTINUED OPERATIONS
Property impairments $ (14,896) $ (37,118) $ -- $ -- $-- $ -- $ (52,014)
Gain on sale of fixed assets 79 3,131 -- -- -- -- 3,210
--------- --------- ------- ----- --- ------- ---------
Loss on disposal of discontinued
business, before tax (14,817) (33,987) -- -- -- -- (48,804)
--------- --------- ------- ----- --- ------- ---------
Tax benefit -- -- -- -- -- -- --
--------- --------- ------- ----- --- ------- ---------
Loss on disposal of discontinued
operations, net of tax $ (14,817) $ (33,987) $ -- $ -- $-- $ -- $ (48,804)
========= ========= ======= ===== === ======= =========
15
28 weeks ended September 9, 2006
-----------------------------------------------------------------------------
Greater
New Midwest Midwest Midwest Northern
Orleans 2007 2005 2004 New England Kohl's Total
--------- --------- ------- ------- ----------- ------- ---------
INCOME (LOSS) FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ 227,227 $ 581,964 $ -- $ -- $ -- $ -- $ 809,191
Operating expenses (217,975) (586,900) (4,912) 2,616 (25) (661) (807,857)
--------- --------- ------- ------ ---- ------- ---------
Income (loss) from operations of
discontinued businesses, before tax 9,252 (4,936) (4,912) 2,616 (25) (661) 1,334
--------- --------- ------- ------ ---- ------- ---------
Tax (provision) benefit 5,357 (2,858) (2,844) 1,515 (14) (383) 773
--------- --------- ------- ------ ---- ------- ---------
Income (loss) from operations of
discontinued businesses, net of tax $ 14,609 $ (7,794) $(7,756) $4,131 $(39) $(1,044) $ 2,107
========= ========= ======= ====== ==== ======= =========
DISPOSAL RELATED COSTS INCLUDED
IN OPERATING EXPENSES ABOVE:
Severance and benefits $ -- $ -- $ 20 $ -- $ -- $ 146 $ 166
Non-accruable closing costs (158) -- (93) -- (25) (42) (318)
Occupancy related costs 1,886 (235) (2,857) 3,021 -- (541) 1,274
Interest accretion on present value
of future occupancy costs (663) (284) (1,982) (405) -- (224) (3,558)
--------- --------- ------- ------ ---- ------- ---------
Total disposal related costs $ 1,065 $ (519) $(4,912) $2,616 $(25) $ (661) $ (2,436)
========= ========= ======= ====== ==== ======= =========
LOSS ON DISPOSAL OF
DISCONTINUED OPERATIONS
Property impairments $ -- $ -- $ -- $ -- $ -- $ -- $ --
Loss on sale of fixed assets (19) (86) (46) -- -- -- (151)
--------- --------- ------- ------ ---- ------- ---------
Loss on disposal of discontinued
business, before tax (19) (86) (46) -- -- -- (151)
--------- --------- ------- ------ ---- ------- ---------
Tax benefit (7) (33) (18) -- -- -- (58)
--------- --------- ------- ------ ---- ------- ---------
Loss on disposal of discontinued
operations, net of tax $ (26) $ (119) $ (64) $ -- $ -- $ -- $ (209)
========= ========= ======= ====== ==== ======= =========
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, including inventory related to these stores.
Subsequent to our second quarter end, on September 15, 2007, our Company
announced that we have definitive agreements for the sale of the majority of
stores in this area to Rouse's Supermarket. The remaining stores are being sold
to independent buyers.
During the 12 and 28 weeks ended September 8, 2007, we incurred pre-tax disposal
related costs for our operations in this region of $1.0 million and $2.5
million, respectively, related to severance and benefits, occupancy related
costs and lease termination costs. During the 12 and 28 weeks ended September 9,
2006, we recorded pre-tax reversals of occupancy related costs for our
operations in this region of $1.7 million and $1.1 million, respectively. 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 nil and
$14.9 million offset by a pre-tax gain on the sale of fixed assets of nil and
$0.1 million for the 12 and 28 weeks ended September 8, 2007, respectively. We
also recorded a pre-tax loss on the sale of fixed assets of $0.003 million and
$0.02 million, respectively, for the 12 and 28 weeks ended September 9, 2006,
which were included in "Loss on disposal of discontinued operations, net of tax"
on our Consolidated Statements of Operations.
We paid $0.3 million of the total net severance and benefits charges from the
time of the original charges through September 8, 2007. The remaining severance
liability of $0.1 million at September 8, 2007 relates
16
to expected future payments for severance and benefits payments to individual
employees which will be fully paid out by 2008. This liability was included in
"Accrued salaries, wages and benefits" on our Consolidated Balance Sheets.
We have evaluated the reserve balances as of September 8, 2007 of $0.1 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 severance
and benefits and adjustments to the reserve balances may be recorded in the
future, if necessary.
MIDWEST 2007
As previously stated, 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.
During the 12 and 28 weeks ended September 8, 2007, we incurred pre-tax disposal
related costs for our operations in this region of $77.9 million and $145.4
million, respectively, primarily related to pension withdrawal costs, severance,
inventory costs and occupancy related costs. During the 12 and 28 weeks ended
September 9, 2006, we incurred pre-tax disposal related costs for our operations
in this region of $0.6 million and $0.5 million, respectively, related to
occupancy 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
$2.3 million and $37.1 million offset by a pre-tax gain on the sale of fixed
assets of $0.3 million and $3.1 million for the 12 and 28 weeks ended September
8, 2007, respectively. For the 12 and 28 weeks ended September 9, 2006, we
recorded a pre-tax loss on the sale of fixed assets of $0.1 million and $0.1
million, respectively, which were included in "Loss on disposal of discontinued
operations, net of tax" on our Consolidated Statements of Operations.
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) $ 68,440 $ 66,508 $ 134,948
Additions (2) 1,514 14,000 15,514
Utilization (3) (7,158) (15,378) (22,536)
--------- --------- ---------
Balance at September 8, 2007 $ 62,796 $ 65,130 $ 127,926
========= ========= =========
(1) The original charge to occupancy of $68.4 million during the 28 weeks ended
September 8, 2007 represents charges related to closures of 33 stores in
conjunction with our decision to close stores in the Midwest. The original
charge to severance and benefits during the 28 weeks ended September 8,
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) The additions to occupancy during the 28 weeks ended September 8, 2007
represents 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 during the 28 weeks ended September 8, 2007 relates
to additional costs for future obligations for early withdrawal from
multi-employer union pension plans.
(3) Occupancy utilization represents payments made during those periods for
costs such as rent, common area maintenance and real estate taxes.
Severance and benefits utilization represents payments made to terminated
employees during the period.
17
We paid $7.2 million of the total occupancy charges from the time of the
original charge through September 8, 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 $62.8 million relates to
expected future payments under long term leases and is expected to be paid out
in full by 2024. We paid $15.4 million of the total net severance and benefits
charges from the time of the original charges through September 8, 2007. The
remaining severance and benefits liability of $65.1 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 2026.
As of September 8, 2007 approximately $8.1 million of the liability was included
in "Accrued salaries, wages and benefits," $21.9 million was included in "Other
accruals" and $97.9 million was included in "Other non-current liabilities" on
our Consolidated Balance Sheets.
We have evaluated the reserve balances as of September 8, 2007 of $127.9 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.
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 September 8 2007.
During the 12 and 28 weeks ended September 8, 2007, we recorded pre-tax
reversals of occupancy related costs for our operations in this region of $4.3
million and $4.6 million, respectively. During the 12 weeks ended September 9,
2006, we recorded pre-tax reversals of occupancy related costs for our
operations in this region of $1.3 million and during the 28 weeks ended
September 9, 2006, we incurred pre-tax disposal related costs for our operations
in this region of $4.9 million primarily related to occupancy costs. These
amounts were included in "(Loss) income from operations of discontinued
businesses, net of tax" on our Consolidated Statements of Operations.
Additionally, we recorded a pre-tax gain on the sale of fixed assets of $0.1
million and a pre-tax loss on the sale of fixed assets of $0.1 million,
respectively, for the 12 and 28 weeks ended September 9, 2006, which were
included in "Loss on disposal of discontinued operations, net of tax" on our
Consolidated Statements of Operations. There were no such similar costs recorded
for the 12 and 28 weeks ended September 8, 2007
18
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) 1,901 -- 1,901
Utilization (3) (7,394) -- (7,394)
Adjustment (4) (6,467) -- (6,467)
-------- ------- --------
Balance at September 8, 2007 $ 71,151 $ -- $ 71,151
======== ======= ========
(1) The original charge to occupancy during fiscal 2005 represents charges
related to closures of the first 8 stores in conjunction with our decision
to close stores in the Midwest of $14.8 million. The original charge to
severance during fiscal 2005 of $1.3 million related to individual
severings as a result of these store closures.
(2) The additions to occupancy during fiscal 2005 represent charges related to
the closures of an additional 27 stores in the amount of $73.7 million and
interest accretion on future occupancy costs which were recorded at present
value at the time of the original charge in the amount of $1.6 million. The
additions to store occupancy during fiscal 2006 and the 28 weeks ended
September 8, 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
28 weeks ended September 8, 2007, we recorded adjustments for a reduction
in vacancy related costs for our properties of $6.5 million due to changes
in our estimation of such future costs.
We paid $31.0 million of the total occupancy charges from the time of the
original charge through September 8, 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 $71.2 million relates to
expected future payments under long term leases and is expected to be paid out
in full by 2022. We paid $2.6 million of the total net severance charges from
the time of the original charges through September 8, 2007, which resulted from
the termination of approximately 125 employees. The severance liability has been
fully utilized as of September 8, 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 28 weeks ended September 8, 2007 and
September 9, 2006.
At September 8, 2007 and February 24, 2007, approximately $20.0 million and
$22.4 million, respectively, of the liability was included in "Other accruals"
and $51.2 million and $60.7 million, respectively, was included in "Other
non-current liabilities" on our Consolidated Balance Sheets.
19
We have evaluated the reserve balances as of September 8, 2007 of $71.2 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 2004
During the 12 and 28 weeks ended September 8, 2007, we incurred pre-tax disposal
related costs for our operations in this region of $0.2 million and $0.3
million, respectively, related to occupancy costs. During the 12 weeks ended
September 9, 2006, we incurred pre-tax disposal related costs for our operations
in this region of $0.2 million and we recorded pre-tax reversals of occupancy
related costs of $2.6 million during the 28 weeks ended September 9, 2006. These
amounts were included in "(Loss) income from operations of discontinued
businesses, net of tax" on our Consolidated Statements of Operations.
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) 381 -- 381
Utilization (2) (527) -- (527)
Adjustment (3) (80) -- (80)
------- ------- -------
Balance at September 8, 2007 $14,088 $ -- $14,088
======= ======= =======
(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 28 weeks ended September 8, 2007, we recorded adjustments
for 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 $10.8 million of the total occupancy charges from the time of the
original charge through September 8, 2007 which was primarily for occupancy
related costs such as rent, common area
20
maintenance, real estate taxes and lease termination costs. The remaining
occupancy liability of $14.1 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 September 8, 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 12 and 28 weeks ended
September 8, 2007 or September 9, 2006.
At September 8, 2007 and February 24, 2007, approximately $1.3 million and $1.3
million, respectively, of the liability was included in "Other accruals" and
$12.8 million and $13.0 million, respectively, was included in "Other
non-current liabilities" on our Consolidated Balance Sheets.
We have evaluated the reserve balances as of September 8, 2007 of $14.1 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.
NORTHERN NEW ENGLAND
During the 12 and 28 weeks ended September 9, 2006, we incurred additional costs
in this region subsequent to the sale of these stores of $0.01 million and $0.02
million, respectively, primarily related to adjustments as a result of changes
in estimates. These amounts were included in "Loss from operations of
discontinued businesses, net of tax" on our Consolidated Statements of
Operations for the 12 and 28 weeks ended September 9, 2006. There were no such
similar costs recorded for the 12 and 28 weeks ended September 8, 2007
KOHL'S MARKET
During the 12 and 28 weeks ended September 8, 2007, we recorded costs of $0.2
million and $1.5 million, respectively, due to interest accretion on future
occupancy payments that were recorded at present value at the time of the
original charge and adjustments to occupancy related costs as a result of
changes in estimates. During the 12 and 28 weeks ended September 9, 2006, we
recorded costs of nil and $0.7 million, respectively, primarily due to interest
accretion on future occupancy payments that were recorded at present value at
the time of the original charge and adjustments as a result of changes in
estimates. These amounts were included in "Loss from operations of discontinued
businesses, net of tax" on our Consolidated Statements of Operations for the 12
and 28 weeks ended September 8, 2007 and September 9, 2006.
21
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) 257 -- -- 257
Utilization (2) (1,005) -- -- (1,005)
Adjustments (3) 1,232 -- -- 1,232
------- ------- ----- -------
Balance at September 8, 2007 $ 8,432 $ -- $ -- $ 8,432
======= ======= ===== =======
(1) The fiscal 2004, fiscal 2005, fiscal 2006 and the 28 weeks ended September
8, 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 28 weeks ended September 8, 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 $14.0 million of the total occupancy charges from the time of the
original charge through September 8, 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 $8.4 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 September 8, 2007, which resulted from
the termination of approximately 2,000 employees. At September 8, 2007, there
are no future obligations for severance and benefits.
At September 8, 2007 and February 24, 2007, $1.9 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.
22
We have evaluated the liability balance of $8.4 million as of September 8, 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.
8. ASSET DISPOSITION INITIATIVES
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 12 and 28 weeks ended September 8, 2007 and
September 9, 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".
12 weeks ended September 8, 2007
------------------------------------------------------------------------------------------------------------------
Project 2001
Great Renewal Asset Disposition Distribution 2005 Totals
---------------------- ------------------- --------------------------------- ----------------------------------
NE* MW* Total NE GNO* Total NE MW GNO Total NE MW GNO Total
------- ---- ------- ----- ----- ----- -------- ------- --- -------- -------- ------- ----- --------
BALANCE SHEET
ACCRUALS
Vacancy $ -- $ -- $ -- $ 242 $ -- $ 242 $ (109) $(2,631) $-- $ (2,740) $ 133 $(2,631) $ -- $ (2,498)
PV Interest 100 19 119 93 171 264 12 28 5 45 205 47 176 428
Severance -- -- -- -- -- -- 26 -- -- 26 26 -- -- 26
Pension
withdrawal
costs -- -- -- -- -- -- 726 -- -- 726 726 -- -- 726
------- ---- ------- ----- ----- ----- -------- ------- --- -------- -------- ------- ----- --------
Total accrued
to balance
sheet 100 19 119 335 171 506 655 (2,603) 5 (1,943) 1,090 (2,584) 176 (1,318)
------- ---- ------- ----- ----- ----- -------- ------- --- -------- -------- ------- ----- --------
NON-ACCRUABLE
ITEMS
RECORDED ON
STATEMENTS
OF
OPERATIONS
Proceeds from
lease
termination (1,100) -- (1,100) -- -- -- -- -- -- -- (1,100) -- -- (1,100)
Gain on sale of
property -- -- -- -- -- -- (20,922) -- -- (20,922) (20,922) -- -- (20,922)
Closing costs -- -- -- -- -- -- 1,415 -- -- 1,415 1,415 -- -- 1,415
------- ---- ------- ----- ----- ----- -------- ------- --- -------- -------- ------- ----- --------
Total
non-
accruable
items (1,100) -- (1,100) -- -- -- (19,507) -- -- (19,507) (20,607) -- -- (20,607)
------- ---- ------- ----- ----- ----- -------- ------- --- -------- -------- ------- ----- --------
Less PV
interest (100) (19) (119) (93) (171) (264) (12) (28) (5) (45) (205) (47) (176) (428)
------- ---- ------- ----- ----- ----- -------- ------- --- -------- -------- ------- ----- --------
TOTAL AMOUNT
RECORDED
ON
STATEMENTS
OF
OPERATIONS
EXCLUDING
PV INTEREST $(1,100) $ -- $(1,100) $ 242 $ -- $ 242 (18,864) (2,631) $-- (21,495) (19,722) $(2,631) $ -- $(22,353)
======= ==== ======= ===== ===== ===== ======= ====== === ======= ======= ======= ===== ========
* The headings in the tables included in Note 8 - Asset Disposition
Initiatives have been indexed with the following abbreviations: Northeast
(NE), Midwest (MW) and Greater New Orleans (GNO).
23
12 weeks ended September 9, 2006
--------------------------------------------------------------------------------------------
Project 2001
Great Renewal Asset Disposition Distribution 2005 Totals
------------------ ------------------- ------------------------ -------------------------
NE MW Total NE GNO Total NE MW GNO Total NE MW GNO Total
----- ---- ----- ----- ----- ----- ----- ---- ---- ----- ----- ---- ----- -----
BALANCE SHEET
ACCRUALS
Vacancy $(468) $ -- $(468) $ -- $ -- $ -- $ 871 $ -- $ -- $ 871 $ 403 $ -- $ -- $ 403
PV Interest 190 25 215 141 183 324 -- 32 20 52 331 57 203 591
Severance (95) -- (95) -- -- -- (406) -- -- (406) (501) -- -- (501)
----- ---- ----- ----- ----- ----- ----- ---- ---- ----- ----- ---- ----- -----
Total accrued
to balance
sheet (373) 25 (348) 141 183 324 465 32 20 517 233 57 203 493
----- ---- ----- ----- ----- ----- ----- ---- ---- ----- ----- ---- ----- -----
NON-ACCRUABLE
ITEMS
RECORDED ON
STATEMENTS
OF
OPERATIONS
Loss (gain) on
sale of
property -- -- -- -- -- -- 7 -- (11) (4) 7 -- (11) (4)
Closing costs -- -- -- -- -- -- 156 -- -- 156 156 -- -- 156
----- ---- ----- ----- ----- ----- ----- ---- ---- ----- ----- ---- ----- -----
Total
non-
accruable
items -- -- -- -- -- -- 163 -- (11) 152 163 -- (11) 152
----- ---- ----- ----- ----- ----- ----- ---- ---- ----- ----- ---- ----- -----
Less PV
interest (190) (25) (215) (141) (183) (324) -- (32) (20) (52) (331) (57) (203) (591)
----- ---- ----- ----- ----- ----- ----- ---- ---- ----- ----- ---- ----- -----
TOTAL AMOUNT
RECORDED
ON
STATEMENTS
OF
OPERATIONS
EXCLUDING PV
INTEREST $(563) $ -- $(563) $ -- $ -- $ -- $ 628 $ -- $(11) $ 617 $ 65 $ -- $ (11) $ 54
===== ==== ===== ===== ===== ===== ===== ==== ==== ===== ===== ==== ===== =====
24
28 weeks ended September 8, 2007
------------------------------------------------------------------------------------------------------------------
2001
Project Great Renewal Asset Disposition Distribution 2005 Totals
---------------------- ------------------- --------------------------------- ----------------------------------
NE MW Total NE GNO Total NE MW GNO Total NE MW GNO Total
------- ---- ------- ----- ----- ----- -------- ------- ---- -------- -------- ------- ----- --------
BALANCE SHEET
ACCRUALS
Vacancy $ (351) $ -- $ (351) $ 10 $ -- $ 10 $ (957) $(2,631) $ -- $ (3,588) $ (1,298) $(2,631) $ -- $ (3,929)
PV Interest 247 46 293 219 411 630 28 69 19 116 494 115 430 1,039
Severance -- -- -- -- -- -- 1,511 -- -- 1,511 1,511 -- -- 1,511
Pension
withdrawal
costs -- -- -- -- -- -- 726 -- -- 726 726 -- -- 726
------- ---- ------- ----- ----- ----- -------- ------- ---- -------- -------- ------- ----- --------
Total accrued
to balance
sheet (104) 46 (58) 229 411 640 1,308 (2,562) 19 (1,235) 1,433 (2,516) 430 (653)
------- ---- ------- ----- ----- ----- -------- ------- ---- -------- -------- ------- ----- --------
NON-ACCRUABLE
ITEMS
RECORDED ON
STATEMENTS
OF
OPERATIONS
Proceeds from
lease
termination (1,100) -- (1,100) -- -- -- -- -- -- -- (1,100) -- -- (1,100)
Gain on sale of
property -- -- -- -- -- -- (20,824) -- -- (20,824) (20,824) -- -- (20,824)
Closing costs -- -- -- -- -- -- 1,464 -- -- 1,464 1,464 -- -- 1,464
------- ---- ------- ----- ----- ----- -------- ------- ---- -------- -------- ------- ----- --------
Total non-
accruable
items (1,100) -- (1,100) -- -- -- (19,360) -- -- (19,360) (20,460) -- -- (20,460)
------- ---- ------- ----- ----- ----- -------- ------- ---- -------- -------- ------- ----- --------
Less PV
interest (247) (46) (293) (219) (411) (630) (28) (69) (19) (116) (494) (115) (430) (1,039)
------- ---- ------- ----- ----- ----- -------- ------- ---- -------- -------- ------- ----- --------
TOTAL AMOUNT
RECORDED ON
STATEMENTS
OF
OPERATIONS
EXCLUDING PV
INTEREST (1,451) -- (1,451) 10 -- 10 (18,080) (2,631) -- (20,711) (19,521) (2,631) -- (22,152)
======= ==== ======= ===== ===== ===== ======= ======= ==== ======== ======== ======= ===== ========
Less closing
costs -- -- -- -- -- -- (1,464) -- -- (1,464) (1,464) -- -- (1,464)
Less vacancy
costs
included
in
discont-
inued
operations -- -- -- -- -- -- -- 2,631 -- 2,631 -- 2,631 -- 2,631
------- ---- ------- ----- ----- ----- -------- ------- ---- -------- -------- ------- ----- --------
TOTAL AMOUNT
RECORDED ON
STATEMENTS
OF CASH
FLOWS $(1,451) $ -- $(1,451) $ 10 $ -- $ 10 (19,544) $ -- $ -- (19,544) (20,985) $ -- $ -- $(20,985)
======= ==== ======= ===== ===== ===== ======== ======= ==== ======== ======== ======= ===== ========
25
28 weeks ended September 9, 2006
---------------------------------------------------------------------------------------------------------------
Project Great Renewal 2001 Asset Disposition Distribution 2005 Totals
---------------------- ----------------------- ----------------------------- ------------------------------
NE MW Total NE GNO Total NE MW GNO Total NE MW GNO Total
------- ---- ------- ------- ----- ------- ------- ---- ----- ------- ------- ----- ----- --------
BALANCE SHEET
ACCRUALS
Vacancy $(1,633) $ -- $(1,633) $ 4,433 $ -- $ 4,433 $ 1,744 $ -- $ -- $ 1,744 $ 4,544 $ -- $ -- $ 4,544
PV Interest 493 66 559 402 448 850 7 78 46 131 902 144 494 1,540
Severance (95) -- (95) -- -- -- 135 -- -- 135 40 -- -- 40
------- ---- ------- ------- ----- ------- ------- ---- ----- ------- ------- ----- ----- -------
Total accrued
to balance
sheet (1,235) 66 (1,169) 4,835 448 5,283 1,886 78 46 2,010 5,486 144 494 6,124
------- ---- ------- ------- ----- ------- ------- ---- ----- ------- ------- ----- ----- -------
NON-ACCRUABLE
ITEMS
RECORDED ON
STATEMENTS OF
OPERATIONS
Property
writeoffs -- -- -- -- -- -- 1,049 -- -- 1,049 1,049 -- -- 1,049
Inventory
related costs -- -- -- -- -- -- (505) -- (66) (571) (505) -- (66) (571)
Loss (gain) on
sale of
property -- -- -- -- -- -- 7 -- (11) (4) 7 -- (11) (4)
Closing costs -- -- -- -- -- -- 1,853 -- 222 2,075 1,853 -- 222 2,075
------- ---- ------- ------- ----- ------- ------- ---- ----- ------- ------- ----- ----- -------
Total non-
accruable
items -- -- -- -- -- -- 2,404 -- 145 2,549 2,404 -- 145 2,549
------- ---- ------- ------- ----- ------- ------- ---- ----- ------- ------- ----- ----- -------
Less PV
interest (493) (66) (559) (402) (448) (850) (7) (78) (46) (131) (902) (144) (494) (1,540)
------- ---- ------- ------- ----- ------- ------- ---- ----- ------- ------- ----- ----- -------
TOTAL AMOUNT
RECORDED ON
STATEMENTS OF
OPERATIONS
EXCLUDING
PV INTEREST (1,728) -- (1,728) 4,433 -- 4,433 4,283 -- 145 4,428 6,988 -- 145 7,133
======= ==== ======= ======= ===== ======= ======= ==== ===== ======= ======= ===== ===== =======
Less
closing
costs -- -- -- -- -- -- (1,853) -- (222) (2,075) (1,853) -- (222) (2,075)
Less costs
included
in
discont-
inued
operations -- -- -- -- -- -- -- -- 77 77 -- -- 77 77
------- ---- ------- ------- ----- ------- ------- ---- ----- ------- ------- ----- ----- -------
TOTAL AMOUNT
RECORDED ON
STATEMENTS OF
CASH FLOWS $(1,728) $ -- $(1,728) $ 4,433 $ -- $ 4,433 $ 2,430 $ -- $ -- $ 2,430 $ 5,135 $ -- $ -- $ 5,135
======= ==== ======= ======= ===== ======= ======= ==== ===== ======= ======= ===== ===== =======
26
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) 293 -- 293 -- -- -- 293 -- 293
Utilization (2) (1,554) -- (1,554) (108) -- (108) (1,662) -- (1,662)
Adjustments (3) (351) -- (351) -- -- -- (351) -- (351)
------- ----- ------- -------- --- ------ ------- ----- -------
Balance at
September 8, 2007 $ 9,424 $ -- $ 9,424 $ 1,102 $-- $1,102 $10,526 $ -- $10,526
======= ===== ======= ======== === ====== ======= ===== =======
(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. During the 28 weeks ended September 8, 2007, $0.05 million
was recorded to Midwest 2007 in discontinued operations.
(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 28 weeks ended September
8, 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 $110.4 million of the total occupancy charges from the time of the
original charges through September 8, 2007 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $30.4 million of the total net severance charges from
the time of the original charges through September 8, 2007, which resulted from
the termination of approximately 3,400 employees. The remaining occupancy
liability of $9.4 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 $1.1 million primarily relates to expected future payments for
early withdrawals from multi-employer union pension plans and will be fully paid
out in 2020. None of these stores were open during either of the 12 and 28 weeks
ended September 8, 2007 or September 9, 2006.
27
At September 8, 2007 and February 24, 2007, approximately $2.9 million and $3.0
million, respectively, of the reserve was included in "Other accruals" and $7.6
million and $9.2 million, respectively, was included in "Other non-current
liabilities" on the Company's Consolidated Balance Sheets.
We have evaluated the reserve balances as of September 8, 2007 of $10.5 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) 630 -- 630 -- -- -- 630 -- 630
Utilization (2) (1,141) -- (1,141) -- -- -- (1,141) -- (1,141)
Adjustments (3) 10 -- 10 -- -- -- 10 -- 10
-------- ----- -------- ------- ---- ------- -------- ----- --------
Balance at
September 8, 2007 $ 20,085 $ -- $ 20,085 $ -- $ -- $ -- $ 20,085 $ -- $ 20,085
======== ===== ======== ======= ==== ======= ======== ===== ========
(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. During the 28 weeks ended September 8, 2007, $0.4 million
was recorded to Greater New Orleans in discontinued operations.
(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 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 28 weeks ended
September 8, 2007, we recorded adjustments for additional vacancy related
costs of $0.01 million due to changes in our estimation of such future
costs.
28
We paid $57.4 million ($54.4 million in the U.S. and $3.0 million in Canada) of
the total occupancy charges from the time of the original charges through
September 8, 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
September 8, 2007, which resulted from the termination of approximately 1,100
employees. The remaining occupancy liability of $20.1 million primarily relates
to expected future payments under long term leases through 2022. The severance
liability has been fully utilized as of September 8, 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 12 and 28 weeks ended
September 8, 2007 or September 9, 2006.
At September 8, 2007 and February 24, 2007, approximately $2.9 million and $3.0
million of the reserve, respectively, was included in "Other accruals" and $17.2
million and $17.6 million, respectively, was included in "Other non-current
liabilities" on the Company's Consolidated Balance Sheets.
We have evaluated the reserve balances as of September 8, 2007 of $20.1 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.
DISTRIBUTION 2005
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.
29
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) 116 2,237 2,353
Utilization (3) (429) (1,245) (1,674)
Adjustment (4) (3,588) -- (3,588)
-------- -------- --------
Balance at
September 8, 2007 $ 1,549 $ 1,868 $ 3,417
======== ======== ========
(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 28 weeks ended
September 8, 2007 represent interest accretion on future occupancy costs
which were recorded at present value at the time of the original charge.
During the 28 weeks ended September 8, 2007, $0.02 million was recorded to
Greater New Orleans and $0.07 million was recorded to Midwest 2007 in
discontinued operations. 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 28 weeks ended
September 8, 2007, we recorded adjustments for a reduction in vacancy
related costs for our properties of $3.6 million due to (i.) changes in our
estimation of such future costs of $1.0 million and (ii.) $2.6 million for
one property that was reclassified to Midwest 2007 in discontinued
operations. We also recorded additions to severance and benefits of $2.2
million for health and welfare benefits for warehouse retirees of $1.5
million and pension withdrawal costs of $0.7 million.
We paid $12.8 million of the total occupancy charges from the time of the
original charge through September 8, 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 $1.5 million relates to
expected future payments under long term leases and is expected to be paid out
in full by 2021. We paid $47.6 million of the total net severance and benefits
charges from the time of the original charges through September 8, 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.
30
As of September 8, 2007 and February 24, 2007, approximately $0.8 million and
$1.7 million, respectively, was included in "Other Accruals" and $2.6 million
and $4.6 million, respectively, was included in "Other non-current liabilities"
on our Consolidated Balance Sheets.
We have evaluated the reserve balances as of September 8, 2007 of $3.4 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 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.
9. 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 12 Weeks Ended
---------------------------
September 8, September 9,
2007 2006
------------ ------------
Service cost $ 1,137 $ 1,220
Interest cost 2,800 2,611
Expected return on plan assets (3,031) (2,850)
Amortization of unrecognized net prior service cost (gain) 59 (41)
Amortization of unrecognized net loss 23 37
Administrative expenses and other -- 117
------- -------
Net pension cost $ 988 $ 1,094
======= =======
For the 28 Weeks Ended
---------------------------
September 8, September 9,
2007 2006
------------ ------------
Service cost $ 2,652 $ 2,845
Interest cost 6,534 6,093
Expected return on plan assets (7,072) (6,650)
Amortization of unrecognized net prior service cost (gain) 138 (96)
Amortization of unrecognized net loss 53 87
Administrative expenses and other -- 195
------- -------
Net pension cost $ 2,305 $ 2,474
======= =======
31
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 September 8, 2007, we
contributed approximately $2.4 million to our defined benefit plans. We plan to
contribute approximately $3.2 million to our plans during the remainder of
fiscal 2007.
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 12 Weeks Ended
---------------------------
September 8, September 9,
2007 2006
------------ ------------
Service cost $ 76 $ 87
Interest cost 242 270
Amortization of gain (105) (51)
Prior service gain (310) (311)
Curtailment gain (3,000) --
------- -----
Net postretirement benefits income $(3,097) $ (5)
======= =====
For the 28 Weeks Ended
---------------------------
September 8, September 9,
2007 2006
------------ ------------
Service cost $ 176 $ 201
Interest cost 566 632
Amortization of gain (245) (120)
Prior service gain (725) (725)
Curtailment gain (3,000) --
------- -----
Net postretirement benefits income $(3,228) $ (12)
======= =====
As discussed in Note 7 - Discontinued Operations, we recorded a curtailment gain
of approximately $3.0 million reflecting a reduction in the estimated future
costs of previously recorded postretirement benefits. This reduction is a result
of the termination of certain employees in the Midwest who did not meet the
eligibility requirements for these benefits before their termination.
10. STOCK BASED COMPENSATION
During the 12 and 28 weeks ended September 8, 2007, compensation expense related
to share-based incentive plans was $2.4 million and $5.3 million, after tax,
respectively, compared to $2.5 million and $5.8 million, after tax, during the
12 and 28 weeks ended September 9, 2006, respectively. Included in share-based
compensation expense recorded during the 12 and 28 weeks ended September 8, 2007
was $0.1 million and $0.3 million, respectively, related to expensing of stock
options, $2.2 million and $4.7 million, respectively, relating to expensing of
restricted stock, and $0.1 million and $0.3 million, respectively, relating to
expensing of common stock to be granted to our Board of Directors at the Annual
Meeting of Stockholders. Included in share-based compensation expense recorded
during the 12 and 28 weeks ended
32
September 9, 2006 was $0.2 million and $0.7 million, respectively, related to
expensing of stock options, $2.1 million and $4.3 million, respectively,
relating to expensing of restricted stock, and $0.2 million and $0.8 million,
respectively, relating to expensing of common stock to be granted to our Board
of Directors at the Annual Meeting of Stockholders.
At September 8, 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
2007 and 2005 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 12 and 28 weeks ended
September 8, 2007.
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
12 or 28 weeks ended September 8, 2007.
Performance restricted stock units issued under this plan during fiscal
2007, 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 approved an executive Acquisition Closing
and Integration Incentive Compensation Program (the "Integration Program").
The executive 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
33
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.
Also on June 15, 2007, the Committees approved a non-executive Integration
Program. The non-executive 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 24 month period 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 non-executive
officer can earn up to a maximum of 125% 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 executive and non-executive Integration Programs are
contingent upon the closing of the Pathmark transaction, the restricted
share units awarded to each executive officer are considered granted on
June 15, 2007 and each non-executive officer are considered granted on
August 7, 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. During the 12 weeks ended September 8, 2007
and September 9, 2006, our Company did not grant any stock options under
this plan. The following assumptions were in place during the 28 weeks
ended September 8, 2007 and September 9, 2006:
28 weeks ended 28 weeks ended
Sept. 8, 2007 Sept. 9, 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, adjusted by an estimated
forfeiture rate.
34
Stock options
The following is a summary of the stock option activity during the 28 weeks
ended September 8, 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 (21,432) 17.16
Exercised (363,023) 16.79
--------- ------
Outstanding at September 8, 2007 1,025,486 $16.39 4.1 $13,430
========= ====== === =======
Exercisable at:
September 8, 2007 877,873 $14.32 3.3 $13,313
=== =======
Nonvested at:
September 8, 2007 147,613 $28.70 9.0 $ 116
=== =======
The total intrinsic value of options exercised during the 28 weeks ended
September 8, 2007 was $5.7 million.
The weighted average grant date fair value of stock options granted during
the 28 weeks ended September 8, 2007 was $19.47.
As of September 8, 2007, approximately $1.4 million, after tax, of total
unrecognized compensation expense related to unvested stock option awards
will be recognized over a weighted average period of 3.0 years.
The amount of cash received from the exercise of stock options was
approximately $6.1 million.
Performance Restricted Stock Units
During the 12 and 28 weeks ended September 8, 2007, our Company granted
219,950 and 708,696 shares of performance restricted stock units to
selected employees, respectively, for a total grant date fair value of
$23.2 million. Approximately $14.8 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 $10.1 million of additional unrecognized fair value
compensation expense relating to the performance restricted stock units
granted on June 15, 2007 and August 7, 2007 is expected to be recognized
through 2010.
The following is a summary of the performance restricted stock units
activity during the 28 weeks ended September 8, 2007:
Weighted
Average
Exercise
Shares Price
--------- --------
Nonvested at February 24, 2007 1,767,451 $14.73
Granted 708,696 32.77
Canceled or expired (179,289) 12.51
Exercised -- --
--------- ------
Nonvested at September 9, 2006 2,296,858 $20.47
========= ======
35
II. 2004 Non-Employee Director Compensation Plan: This plan provides for the
annual grant of Company common stock equivalent of $90 to members of our
Board of Directors. The $90 grant of common stock shall be made on the
first business day following the Annual Meeting of Stockholders. The number
of shares of our Company's $1.00 common stock granted annually to each
non-employee Director will be based on the closing price of the common
stock on the New York Stock Exchange, as reported in the Wall Street
Journal on the date of grant. Only whole shares will be granted; any
remaining amounts will be paid in cash as promptly as practicable following
the date of grant.
11. INCOME TAXES
The income tax provision recorded for the 28 weeks ended September 8, 2007 and
September 9, 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, we recorded a valuation allowance
in an amount that would appropriately reduce our net deferred tax asset to
reflect our assessment of its realizability. For the 12 and 28 weeks ended
September 8, 2007, the valuation allowance was increased by $48.1 million and
$41.1 million, respectively, as compared to decreased by $1.7 million and $7.1
million during the 12 and 28 weeks ended September 9, 2006. 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 12 and 28 weeks ended September 8, 2007 and September 9, 2006, no
amounts were recorded for interest and penalties within "Benefit from income
taxes" in our Consolidated Statements of Operations.
36
Our Company is subject to U.S. federal income tax, as well as income tax in
multiple state and foreign jurisdictions. As of September 8, 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.
The effective tax rate on continuing operations of 17.3% for the 12 weeks ended
September 8, 2007 varied from the statutory rate of 35% primarily due to state
and local income taxes and an increase to our valuation allowance as a result of
losses not benefited because of a lack of history of earnings.
The effective tax rate on continuing operations of 4.2% for the 28 weeks ended
September 8, 2007 varied from the statutory rate of 35% primarily due to state
and local income taxes and a decrease to our valuation allowance as a result of
the utilization of loss carryforwards that were not previously tax benefited.
At September 8, 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 $51.3 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 $113.7 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.
12. OPERATING SEGMENTS
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Our chief operating decision maker is our President and
Chief Executive Officer.
During fiscal 2006, 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 operations in the Greater New Orleans area and
in the Midwest, resulting in a change in management's review of these
operations. Prior year information has been restated to conform to current year
presentation.
For the 12 and 28 weeks ended September 8, 2007, we operated in two reportable
segments: Northeast and our investment in Metro, Inc. Our Northeast segment is
comprised of retail supermarkets and all corporate related charges. 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 28
weeks ended September 8, 2007. The criteria necessary to classify the Midwest
and 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 12 and 28 weeks ended September 8, 2007 and September 9,
2006. Refer to Note 7 - Discontinued Operations for further discussion.
37
The accounting policies for these segments are the same as those described in
the summary of significant accounting policies included in our revised Fiscal
2006 Annual Report on Form 8-K. We measure segment performance based upon
segment (loss) income.
Interim information on segments is as follows:
For the 12 weeks ended September 8, 2007
-------------------------------------------------------------
Grocery (1) Meat (2) Produce (3) Other (4) Total
----------- -------- ----------- --------- ----------
Sales by Category $843,279 $256,348 $173,690 $1,021 $1,274,338
======== ======== ======== ====== ==========
(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 12 weeks ended September 8, 2007
----------------------------------------
Northeast Metro, Inc. Total
----------- ----------- ----------
Sales $1,274,338 $ -- $1,274,338
========== ====== ==========
Segment loss $ (5,335) $ -- $ (5,335)
Reconciliation:
Net restructuring (2,715) -- (2,715)
Pathmark acquisition (1,942) -- (1,942)
Real estate related activity 17,382 -- 17,382
---------- ------ ----------
Income from operations $ 7,390 $ -- $ 7,390
========== ====== ==========
Loss on sale of Canadian operations $ (5) $ -- $ (5)
Interest expense (14,594) -- (14,594)
Interest and dividend income 2,379 1,276 3,655
---------- ------ ----------
(Loss) income from continuing
operations before income taxes $ (4,830) $1,276 $ (3,554)
========== ====== ==========
Depreciation and amortization by segment $ 33,611 $ -- $ 33,611
========== ====== ----------
Depreciation and amortization for
discontinued operations --
----------
Total Company $ 33,611
==========
Capital expenditures by segment $ 28,844 $ -- $ 28,844
========== ====== ----------
Capital expenditures for discontinued operations --
----------
Total Company $ 28,844
==========
38
For the 12 weeks ended September 9, 2006
-------------------------------------------------------------
Grocery (1) Meat (2) Produce (3) Other (4) Total
----------- -------- ----------- --------- ----------
Sales by Category $819,563 $244,083 $169,092 $4,121 $1,236,859
======== ======== ======== ====== ==========
For the 12 weeks ended September 9, 2006
----------------------------------------
Northeast Metro, Inc. Total
----------- ----------- ----------
Sales $1,236,859 $ -- $1,236,859
========== ======= ==========
Segment loss $ (4,935) $ -- $ (4,935)
Reconciliation:
Net restructuring (233) -- (233)
Real estate related activity (809) -- (809)
---------- ------- ----------
Loss from operations $ (5,977) $ -- $ (5,977)
========== ======= ==========
Loss on sale of Canadian operations $ 35 $ -- $ 35
Interest expense (15,124) -- (15,124)
Interest and dividend income 1,976 -- 1,976
Equity in earnings of Metro, Inc. -- 11,870 11,870
---------- ------- ----------
(Loss) income from continuing
operations before income taxes $ (19,090) $11,870 $ (7,220)
========== ======= ==========
Depreciation and amortization by segment $ 33,780 $ -- $ 33,780
========== ======= ----------
Depreciation and amortization for
discontinued operations 6,492
----------
Total Company $ 40,272
==========
Capital expenditures by segment $ 49.676 $ -- $ 49,676
========== ======= ----------
Capital expenditures for discontinued operations 2,541
----------
Total Company $ 52,217
==========
39
For the 28 weeks ended September 8, 2007
-------------------------------------------------------------
Grocery (1) Meat (2) Produce (3) Other (4) Total
----------- -------- ----------- --------- ----------
Sales by Category $1,959,614 $584,581 $403,536 $5,776 $2,953,507
========== ======== ======== ====== ==========
For the 28 weeks ended September 8, 2007
----------------------------------------
Northeast Metro, Inc. Total
----------- ----------- ----------
Sales $2,953,507 $ -- $2,953,507
========== ======= ==========
Segment loss $ (8,849) $ -- $ (8,849)
Reconciliation:
Net restructuring (4,252) -- (4,252)
Pathmark acquisition (2,369) -- (2,369)
Real estate related activity 16,486 -- 16,486
---------- ------- ----------
Income from operations $ 1,016 $ -- $ 1,016
========== ======= ==========
Loss on sale of Canadian operations $ (286) $ -- $ (286)
Gain on sale of shares of Metro, Inc. -- 78,388 78,388
Interest expense (34,307) -- (34,307)
Interest and dividend income 5,788 2,533 8,321
Equity in earnings of Metro, Inc. -- 7,869 7,869
---------- ------- ----------
(Loss) income from continuing
operations before income taxes $ (27,789) $88,790 $ 61,001
========== ======= ==========
Depreciation and amortization by segment $ 81,323 $ -- $ 81,323
========== ======= ----------
Depreciation and amortization for
discontinued operations 8,637
----------
Total Company $ 89,960
==========
Capital expenditures by segment $ 78,191 $ -- $ 78,191
========== ======= ----------
Capital expenditures for discontinued operations 1,569
----------
Total Company $ 79,760
==========
At September 8, 2007
-------------------------------------
Northeast Metro, Inc. Total
---------- ----------- ----------
Total assets by segment $1,693,046 $391,371 $2,084,417
========== ======== ----------
Total assets for discontinued operations 82,246
----------
Total Company $2,166,663
==========
40
For the 28 weeks ended September 9, 2006
-------------------------------------------------------------
Grocery (1) Meat (2) Produce (3) Other (4) Total
----------- -------- ----------- --------- ----------
Sales by Category $1,933,845 $559,812 $386,753 $9,544 $2,889,954
========== ======== ======== ====== ==========
For the 28 weeks ended September 9, 2006
----------------------------------------
Northeast Metro, Inc. Total
----------- ----------- ----------
Sales $2,889,954 $ -- $2,889,954
========== ======= ==========
Segment loss $ (7,385) $ -- $ (7,385)
Reconciliation:
Net restructuring (7,159) -- (7,159)
Real estate related activity 591 -- 591
---------- ------- ----------
Loss from operations $ (13,953) $ -- $ (13,953)
========== ======= ==========
Loss on sale of Canadian operations (291) $ -- $ (291)
Interest expense (34,825) -- (34,825)
Interest and dividend income 6,279 -- 6,279
Equity in earnings of Metro, Inc. -- 19,817 19,817
---------- ------- ----------
(Loss) income from continuing
operations before income taxes $ (42,790) $19,817 $ (22,973)
========== ======= ==========
Depreciation and amortization by segment $ 79,384 $ -- $ 79,384
========== ======= ----------
Depreciation and amortization for
discontinued operations 15,835
----------
Total Company $ 95,219
==========
Capital expenditures by segment $ 109,255 $ -- $ 109,255
========== ======= ----------
Capital expenditures for discontinued operations 11,091
----------
Total Company $ 120,346
==========
At February 24, 2007
-------------------------------------
Northeast Metro, Inc. Total
---------- ----------- ----------
Total assets by segment $1,464,989 $368,871 $1,833,860
========== ======== ==========
Total assets for discontinued operations 277,763
----------
Total Company $2,111,623
==========
13. INDEBTEDNESS
At September 8, 2007 and February 24, 2007, there were $137.3 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 September 8, 2007 and February 24, 2007,
there were no letters of credit outstanding under this agreement; however, there
were $6.8 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 4 - Investment
in Metro, Inc. for further discussion regarding the sale of these Metro, Inc.
shares.
During the 28 weeks ended September 8, 2007, the outstanding principal amount of
our 7.75% Notes of $31.9 million due April 15, 2007 matured and was paid in
full.
Subsequent to the end of our second quarter of fiscal 2007, on October 14, 2007,
our Letter of Credit Agreement was amended to extend the expiration date of the
facility from October 14, 2007 to April 14, 2008.
41
14. 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.
15. SUBSEQUENT EVENTS
On September 15, 2007, our Company announced that we have definitive agreements
for the sale of the majority of stores in the Greater New Orleans area to
Rouse's Supermarket. The remaining stores are being sold to independent buyers.
These transactions are expected to be completed during the second half of fiscal
2007 and are subject to customary closing conditions.
On October 14, 2007, our Letter of Credit Agreement was amended to extend the
expiration date of the facility from October 14, 2007 to April 14, 2008.
42
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 12
and 28 weeks ended September 8, 2007 and September 9, 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 12 weeks ended September 8, 2007 compared to
the 12 weeks ended September 9, 2006; results for the 28 weeks ended
September 8, 2007 compared to the 28 weeks ended September 9, 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 12 and 28 weeks ended September 8, 2007 and
September 9, 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 revised
Fiscal 2006 Annual Report on Form 8-K. Interim results are not necessarily
indicative of results for a full year.
The consolidated financial statements include the accounts of our Company and
all subsidiaries.
OVERVIEW
The Great Atlantic & Pacific Tea Company, Inc., based in Montvale, New Jersey,
operates conventional supermarkets, combination food and drug stores and
discount food stores in 8 U.S. states and the District of Columbia. Our
Company's business consists strictly of our retail operations, which totaled 337
stores as of September 8, 2007.
For the 12 and 28 weeks ended September 8, 2007, we operated in two reportable
segments: Northeast, and our investment in Metro, Inc. Our Northeast segment is
comprised of retail supermarkets and all corporate related charges. Our
investment in Metro, Inc. represents our economic interest in Metro, Inc. The
criteria necessary to classify the Midwest and Greater New Orleans area as
discontinued have been satisfied and as such, these operations have been
reclassified in our Consolidated Statements of Operations for the 12 and 28
weeks ended September 8, 2007 and September 9, 2006.
43
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 regarding 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 fiscal 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 one location. Further, our Company has ceased sales
operations in all stores as of July 7, 2007. In connection with the shutdown of
these operations, we recorded net occupancy costs of $58.9 million during the 12
weeks ended September 8, 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, these estimates may
require adjustments in future periods. We also recorded a curtailment gain of
approximately $3.0 million reflecting a reduction in the estimated future costs
of previously recorded postretirement benefits. This reduction is a result of
the termination of certain employees in the Midwest who did not meet the
eligibility requirements for these benefits before their termination.
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. Subsequent to our second quarter
end, on September 15, 2007, our Company announced that we have definitive
agreements for the sale of the majority of stores in this area to Rouse's
Supermarket. The remaining stores are being sold to independent buyers. These
transactions are expected to be completed during the second half of fiscal 2007
and are subject to customary closing conditions.
OPERATING RESULTS
A&P's transformation and operating improvement moved forward in the second
quarter of fiscal 2007, behind ongoing strategic, operating, merchandising,
store development and cost control initiatives.
Our Company proceeded with the strategic divestiture of non-core operations, and
resulting concentration of operations and future development plans in core
Northeast markets. During the quarter, we divested all
44
operations in the Michigan market, through the sale and/or closure of all Farmer
Jack stores. We also initiated the sale of the Sav-A-Center operations in
Louisiana and Mississippi, and went on to complete that process early in the
third quarter.
The successful completion of those initiatives, and the anticipated completion
of the Pathmark Stores Inc. acquisition later in fiscal 2007, will position A&P
as a stronger entity in our key Northeastern markets, poised to achieve
sustainable profitability after completing the integration of Pathmark's
operations.
The ongoing improvement of operating and merchandising execution, combined with
the growing impact of our new store formats, drove continued, strong
year-over-year sales improvement in most of our Company's Northeast operations
in the second quarter, although overall sales results were impacted by
activities related to the Midwest and Southern divestitures.
Accordingly, ongoing improvement from core operations was driven by the
continued sales improvement in those markets, more consistent operating
discipline and cost controls; margin improvement associated with our ongoing
fresh store development and positive results in our discount Food Basics
operations.
We continued the conversion of suitable conventional locations to the successful
fresh format, completing 8 conversions during the second quarter. In addition to
increased volume and customer traffic, the emphasis on fresh category
distribution in those stores continues to improve margins, underlining its top
and bottom line growth potential.
The discount Food Basics operations again returned sound results, as they
provided customers in certain markets with an excellent value alternative. In
combination with the mainstream Fresh stores and gourmet Fine Food concept that
continued to evolve in New York, this development stream continues to advance
the multi-tier marketing strategy initiated in 2005.
In summary, strategic accomplishments for the quarter included the following:
- Acceleration of strong sales trends in Northeast operating markets.
- Positive earnings momentum in Northeast operations.
- 8 conversions to the Fresh store concept, generating volume and margin
improvement.
- Good contribution from discount Food Basics and Food Emporium operations.
- Ongoing cash and earnings flow from corporate real estate and tax
management strategies.
- Continued financial benefits from previous cost reduction measures and
ongoing controls and discipline.
- Development of comprehensive integration strategy in preparation of the
acquisition of Pathmark Stores Inc. in the second half of fiscal 2007.
OUTLOOK
Management's objectives for the third quarter and balance of fiscal 2007 are to
progress further toward operating profitability in the Northeast business, by:
continuing operating and merchandising
45
improvements behind established strategies; maintaining cost control and
reduction disciplines throughout the business; completing the acquisition of the
Pathmark operations in New York, New Jersey, Pennsylvania and Delaware, and
commencing their efficient integration into our Company.
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, A&P management 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 management focuses 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:
- Our retail food business and the grocery retailing industry continues to
experience fierce competition from mass merchandisers, warehouse clubs,
drug stores, convenience stores, discount merchandisers, dollar stores,
restaurants, other retail chains, nontraditional competitors and emerging
alternative formats in the markets where we have retail operations.
Competition with these outlets is based on price, store location,
advertising and promotion, product mix, quality and service. Some of these
competitors may have greater financial resources, lower merchandise
46
acquisition costs and lower operating expenses than we do, and we may be
unable to compete successfully in the future. An overall lack of inflation
in food prices and increasingly competitive markets have made it difficult
generally for grocery store operators to achieve comparable store sales
gains. Because sales growth has been difficult to attain, our competitors
have attempted to maintain market share through increased levels of
promotional activities and discount pricing, creating a more difficult
environment in which to consistently increase year-over-year sales.
Price-based competition has also, from time to time, adversely affected our
operating margins. Our continued success is dependent upon our ability to
effectively compete in this industry and to reduce operating expenses,
including managing health care and pension costs contained in our
collective bargaining agreements. The competitive practices and pricing in
the food industry generally and particularly in our principal markets may
cause us to reduce our prices in order to gain or maintain our market share
of sales, thus reducing margins.
- Our in-store pharmacy business is also subject to intense competition. In
particular, an adverse trend for drug retailing has been significant growth
in mail-order and internet-based prescription processors. Pharmacies are
exposed to risks inherent in the packaging and distribution of
pharmaceuticals and other healthcare products. In addition, the conversion
of various prescription drugs to over-the-counter medications, the
withdrawal of certain drugs from the market and changes in third party
reimbursement levels for prescription drugs, including changes in Medicare
Part D or state Medicaid programs, may have a material adverse effect on
our business. Failure to properly adhere to certain government regulations,
local registrations, applicable Medicare and Medicaid regulations and
prohibitions against paid referrals of patients could result in the
imposition of civil as well as criminal penalties.
- The retail food and food distribution industries, and the operation of our
businesses, specifically in the New York -- New Jersey and Philadelphia
regions, are sensitive to a number of economic conditions and other factors
such as (i) food price deflation or inflation, (ii) softness in local and
national economies, (iii) increases in commodity prices, (iv) the
availability of favorable credit and trade terms, (v) changes in business
plans, operations, results and prospects, (vi) potential delays in the
development, construction or start-up of planned projects, and (vii) other
economic conditions that may affect consumer buying habits. Any one or more
of these economic conditions can affect our retail sales, the demand for
products we distribute to our retail customers, our operating costs and
other aspects of our business.
- Acts of war, threats of terror, acts of terror or other criminal activity
directed at the grocery or drug store industry, the transportation
industry, or computer or communications systems, could increase security
costs, adversely affect our operations, or impact consumer behavior and
spending as well as customer orders. Other events that give rise to actual
or potential food contamination, drug contamination, or food-borne illness
could have an adverse effect on our operating results.
- We could be adversely affected if consumers lose confidence in the safety
and quality of the food supply chain. Adverse publicity about these types
of concerns, whether or not valid, could discourage consumers from buying
products in our stores. The real or perceived sale of contaminated food
products by us could result in a loss of consumer confidence and product
liability claims, which could have a material adverse effect on our sales
and operations.
- 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.
47
- 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.
- 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.
- Fluctuating fuel costs may adversely affect our operating costs since we
incur the cost of fuel in connection with the transportation of goods from
our warehouse and distribution facilities to our stores. In addition,
operations at our stores are sensitive to rising utility fuel costs due to
the amount of electricity and gas required to operate our stores. We may
not be able to recover these rising utility and fuel costs through
increased prices charged to our customers. Our profitability is
particularly sensitive to the cost of oil. Oil prices directly affect our
product transportation costs and
48
fuel costs due to the amount of electricity and gas required to operate our
stores as well as our utility and petroleum-based supply costs; including
plastic bags for example.
- We are subject to federal, state and local laws and regulations relating to
zoning, land use, environmental protection, work place safety, public
health, community right-to-know, beer and wine sales, pharmaceutical sales
and gasoline station operations. A number of states and local jurisdictions
regulate the licensing of supermarkets, including beer and wine license
grants. In addition, under certain local regulations, we are prohibited
from selling beer and wine in certain of our stores. Employers are also
subject to laws governing their relationship with employees, including
minimum wage requirements, overtime, working conditions, disabled access
and work permit requirements. Compliance with these laws could reduce the
revenue and profitability of our supermarkets and could otherwise adversely
affect our business, financial condition or results of operations. In
addition, any changes in these law or regulations could significantly
increase our compliance costs and adversely affect our results of
operations, financial condition and liquidity.
- We have large, complex information technology systems that are important to
business operations. We could encounter difficulties developing new systems
and encounter difficulties maintaining, upgrading or securing our existing
systems. Such difficulties could lead to significant expenses or losses due
to disruption in our business operations.
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.
12 WEEKS ENDED SEPTEMBER 8, 2007 COMPARED TO THE 12 WEEKS ENDED SEPTEMBER 9,
2006
OVERALL
Sales for the second quarter of fiscal 2007 were $1,274.3 million compared to
$1,236.9 million for the second quarter of fiscal 2006; comparable store sales,
which include stores that have been in operation for two full fiscal years and
replacement stores, increased 3.2%. Loss from continuing operations increased
from $2.2 million for the second quarter of fiscal 2006 to $2.9 million for the
second quarter of fiscal 2007. Income from discontinued operations of $1.7
million for the second quarter of fiscal 2006 decreased to loss from
discontinued operations of $88.4 million for the second quarter of fiscal 2007
due to the sale and closure of stores in the Midwest and the sale of our stores
in the Greater New Orleans area. Net loss per
49
share - basic and diluted for the second quarter of fiscal 2007 was $2.18
compared to net loss per share of $0.01 for the second quarter of fiscal 2006.
12 Weeks 12 Weeks
Ended Ended Favorable /
Sept. 8, 2007 Sept. 9, 2006 (Unfavorable) % Change
------------- ------------- ------------- --------
Sales $1,274.3 $1,236.9 $ 37.4 3.0%
Increase in comparable store sales 3.2% 0.4% NA NA
Loss from continuing operations (2.9) (2.2) (0.7) (31.8%)
(Loss) income from discontinued operations (88.4) 1.7 (90.1) >100.0%
Net loss (91.3) (0.5) (90.8) >100.0%
Net loss per share - basic and diluted (2.18) (0.01) (2.17) >100.0%
SALES
Sales in the Northeast for the second quarter of fiscal 2007 of $1,274.3 million
increased $37.4 million or 3.0% from sales of $1,236.9 million for second
quarter of fiscal 2006.
The following details the dollar impact of several items affecting the increase
in sales by reportable operating segment from the second quarter of fiscal 2006
to the second quarter of fiscal 2007:
Impact of Impact of Comparable
New Closed Store
Stores Stores Sales Other Total
--------- --------- ---------- ----- -----
Northeast $19.3 $(14.8) $36.0 $(3.1) $37.4
The increase in the Northeast sales was primarily attributable to the opening or
re-opening of 12 new stores since the beginning of the second quarter of fiscal
2006, of which 3 were opened or re-opened in fiscal 2007, increasing sales by
$19.3 million and the increase in comparable store sales for the second quarter
of fiscal 2007 of $36.0 million or 3.2% as compared with the second quarter of
fiscal 2006. This increase was partially offset by the closing of 11 stores
since the beginning of the second quarter of fiscal 2006, of which 4 were closed
in fiscal 2007, decreasing sales by $14.8 million along with the decrease in
sales relating to the expiration of an information technology services agreement
with Metro, Inc. of $3.1 million.
Average weekly sales per supermarket in the Northeast were approximately
$353,700 for the second quarter of fiscal 2007 versus $344,100 for the
corresponding period of the prior year, an increase of 2.8% primarily due to
positive comparable store sales.
GROSS MARGIN
Gross margin in the Northeast of $398.6 million decreased 30 basis points as a
percentage of sales to 31.28% for the second quarter of fiscal 2007 from gross
margin of $390.6 million or 31.58% for the second quarter of fiscal 2006
primarily due to the decrease in sales relating to the expiration of an
information technology services agreement with Metro, Inc. of $3.1 million. We
believe the impact on margin for changes in costs and special reductions was not
significant.
The following table details the dollar impact of several items affecting the
gross margin dollar increase (decrease) from the second quarter of fiscal 2006
to the second quarter of fiscal 2007:
50
Sales Volume Gross Margin Rate Total
------------ ----------------- -----
Northeast $11.8 $(3.8) $8.0
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
Store operating, general and administrative expense ("SG&A") in the Northeast
was $391.2 million or 30.70% as a percentage of sales for the second quarter of
fiscal 2007 compared to $396.6 million or 32.07% as a percentage of sales for
the second quarter of fiscal 2006.
Included in SG&A for the second quarter of fiscal 2007 were certain charges as
follows:
- costs relating to a voluntary retirement buyout program of $0.6 million (4
basis points);
- net real estate activity of $0.7 million (5 basis points); and
- Pathmark acquisition related costs of $1.9 million (15 basis points).
Partially offset by:
- reversal of costs relating to the consolidation of our operating offices in
line with our smaller operations of $0.9 million (7 basis points);
- gain on the sale of our owned warehouse in Edison, New Jersey of $14.2
million (112 basis points) that was closed and not sold as part of the sale
of our U.S. distribution operations and some warehouse facilities and
related assets to C&S Wholesale Grocers, Inc. as discussed in Note 8 -
Asset Disposition Initiatives; and
- reversal of occupancy related costs of $0.8 million (7 basis points) due to
changes in our estimates of future costs for stores closed as part of our
asset disposition initiatives as discussed in Note 8 - Asset Disposition
Initiatives.
SG&A for the second quarter of fiscal 2006 included certain charges as follows:
- costs relating to the closing of our owned warehouses in Edison, New Jersey
and Bronx, New York of $0.6 million (5 basis points) that were not sold as
part of the sale of our U.S. distribution operations and some warehouse
facilities and related assets to C&S Wholesale Grocers, Inc. as discussed
in Note 8 - Asset Disposition Initiatives;
- costs relating to the consolidation of our operating offices in line with
our smaller operations in the Northeast of $0.3 million (2 basis points);
- costs relating to a voluntary labor buyout program in the South Region of
$0.6 million (4 basis points); and
- net real estate activity of $0.2 million (2 basis points) during the second
quarter of fiscal 2006.
Partially offset by:
- reversal of occupancy related costs of $0.6 million (5 basis points) due to
changes in our estimates of future costs for stores closed as part of our
asset disposition initiatives as discussed in Note 8 - Asset Disposition
Initiatives.
51
Excluding the items listed above, SG&A for our Northeast increased $8.3 million
or decreased 29 basis points as a percentage of sales during the second quarter
of fiscal 2007 as compared to the second quarter of fiscal 2006 primarily due to
a decrease in productive labor costs as a percentage of sales of 20 basis points
and a decrease in store operating costs of 19 basis points offset by an increase
in advertising costs of 10 basis points.
During the 12 weeks ended September 8, 2007 and September 9, 2006, we recorded
impairment losses on long-lived assets due to closure or conversion in the
normal course of business of $0.6 million and $1.3 million, respectively.
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
If current operating levels do not continue to improve, there may be additional
future impairments on long-lived assets, including the potential for impairment
of assets that are held and used.
INTEREST EXPENSE
Interest expense of $14.6 million for the second quarter of 2007 decreased from
the prior year amount of $15.1 million primarily due to (i.) additional landlord
allowances received that are considered debt financing resulting in an increase
in interest expense of $0.7 million and (ii.) an increase in bank commitment
fees of $0.1 million, partially offset by (iii.) a decrease in interest expense
of $0.6 million as our 7.75% Notes due April 15, 2007 matured and were paid in
full during the first quarter of fiscal 2007 and (iv.) a decrease in interest
expense of $0.8 million due to decreased borrowings on our revolving lines of
credit.
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 12 weeks
ended September 8, 2007 and September 9, 2006, we recorded nil and $11.9
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 September 8, 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 August 8, 2007 and
included this amount in "Interest and dividend income" on our Consolidated
Statements of Operations for the second quarter ended September 8, 2007.
INCOME TAXES
The benefit from income taxes from continuing operations for the second quarter
of fiscal 2007 was $0.6 million compared the second quarter of fiscal 2006 of
$5.1 million. Consistent with the prior year, we continue to record a valuation
allowance in an amount that appropriately reduces our net deferred tax asset to
reflect our assessment of its realizability.
52
The effective tax rate on continuing operations of 17.3% for the 12 weeks ended
September 8, 2007 varied from the statutory rate of 35% primarily due to state
and local income taxes and an increase to our valuation allowance as a result of
losses not benefited because of a lack of history of earnings.
The effective tax rate on continuing operations of 70.0% for the 12 weeks ended
September 9, 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.
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 one location. Further, our Company has ceased sales
operations in all stores as of July 7, 2007. In connection with the shutdown of
these operations, we recorded net occupancy costs of $58.9 million during the 12
weeks ended September 8, 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, these estimates may
require adjustments in future periods. We also recorded a curtailment gain of
approximately $3.0 million reflecting a reduction in the estimated future costs
of previously recorded postretirement benefits. This reduction is a result of
the termination of certain employees in the Midwest who did not meet the
eligibility requirements for these benefits before their termination.
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. Subsequent to our second quarter
end, on September 15, 2007, our Company announced that we have definitive
agreements for the sale of the majority of stores in this area to Rouse's
Supermarket. The remaining stores are being sold to independent buyers. These
transactions are expected to be completed during the second half of fiscal 2007
and are subject to customary closing conditions.
The loss from operations of discontinued businesses, net of tax, for the second
quarter of fiscal 2007 of $86.3 million decreased from income from operations of
discontinued businesses, net of tax, of $1.7 million for the second quarter of
fiscal 2006 primarily due to (i.) a decrease in income from operations for the
Midwest for the second quarter of fiscal 2006 to the second quarter fiscal 2007,
and (ii.) additional vacancy costs that were recorded in the second quarter of
fiscal 2007 due to the closure of stores in the Midwest. The loss on disposal of
discontinued operations of $2.0 million increased from the prior year amount of
$0.1 million primarily due to impairment losses recorded on the property, plant
and equipment in the Midwest as we recorded the assets' fair market value based
upon proceeds received and expected proceeds less costs to sell in connection
with their sales.
53
28 WEEKS ENDED SEPTEMBER 8, 2007 COMPARED TO THE 28 WEEKS ENDED SEPTEMBER 9,
2006
OVERALL
Sales for the 28 weeks ended September 8, 2007 were $2,953.5 million compared to
$2,890.0 million for the 28 weeks ended September 9, 2006; comparable store
sales, which includes stores that have been in operation for two full fiscal
years and replacement stores, increased 1.9%. Income from continuing operations
of $58.5 million for the 28 weeks ended September 8, 2007 increased from loss
from continuing operations of $8.5 million for the 28 weeks ended September 9,
2006 primarily due to the gain on sale of shares of Metro, Inc. Income from
discontinued operations of $1.9 million for the 28 weeks ended September 9, 2006
decreased to loss from discontinued operations of $214.9 million for the 28
weeks ended September 8, 2007 due to the sale and closure of stores in the
Midwest and the sale of our stores in the Greater New Orleans area. Net loss per
share - basic for the 28 weeks ended September 8, 2007 was $3.74 compared to a
net loss per share - basic of $0.16 for the 28 weeks ended September 9, 2006.
Net loss per share - diluted for the 28 weeks ended September 8, 2007 was $3.70
compared to a net loss per share - diluted of $0.16 for the 28 weeks ended
September 9, 2006.
28 Weeks 28 Weeks
Ended Ended Favorable /
Sept. 8, 2007 Sept. 9, 2006 (Unfavorable) % Change
------------- ------------- ------------- --------
Sales $2,953.5 $2,890.0 $ 63.5 2.2%
Increase in comparable store sales 1.9% 0.8% NA NA
Income (loss) from continuing operations 58.5 (8.5) 67.0 >100.0%
(Loss) income from discontinued operations (214.9) 1.9 (216.8) >100.0%
Net loss (156.4) (6.6) (149.8) >100.0%
Net loss per share - basic (3.74) (0.16) (3.58) >100.0%
Net loss per share - diluted (3.70) (0.16) (3.54) >100.0%
SALES
Sales in the Northeast for the 28 weeks ended September 8, 2007 of $2,953.5
million increased $63.5 million or 2.2% from sales of $2,890.0 million for 28
weeks ended September 9, 2006.
The following details the dollar impact of several items affecting the increase
in sales by reportable operating segment from the 28 weeks ended September 9,
2006 to the 28 weeks ended September 8, 2007:
Impact of Impact of Comparable
New Closed Store
Stores Stores Sales Other Total
--------- --------- ---------- ----- -----
Northeast $44.9 $(36.5) $58.9 $(3.8) $63.5
The increase in Northeast sales was primarily attributable the opening or
re-opening of 13 new stores since the beginning of fiscal 2006, of which 3 were
opened or re-opened in fiscal 2007, increasing sales by $44.9 million and the
increase in comparable store sales for the 28 weeks ended September 8, 2007 of
$58.9 million or 1.9% as compared with the 28 weeks ended September 9, 2006.
This increase was partially offset by to the closing of 12 stores since the
beginning of fiscal 2006, of which 4 were closed in fiscal 2007, decreasing
sales by $36.5 million and the decrease in sales relating to the expiration of
an information technology services agreement with Metro, Inc. of $3.8 million.
Average weekly sales per supermarket for the Northeast were approximately
$350,800 for the 28 weeks ended September 8, 2007 versus $344,400 for the
corresponding period of the prior year, an increase of 1.9% primarily due to the
impact of closing smaller stores and positive comparable store sales.
54
GROSS MARGIN
Gross margin in the Northeast of $921.6 million increased 9 basis points to
31.20% as a percentage of sales for the 28 weeks ended September 8, 2007 from
$899.1 million or 31.11% as a percentage of sales for the 28 weeks ended
September 9, 2006. We believe the impact on margin for changes in costs and
special reductions was not significant.
The following table details the dollar impact of several items affecting the
gross margin dollar increase from the 28 weeks ended September 9, 2006 to the 28
weeks ended September 8, 2007:
Sales Volume Gross Margin Rate Total
------------ ----------------- -----
Northeast $19.8 $2.7 $22.5
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
SG&A expense in the Northeast was $920.6 million or 31.17% as a percentage of
sales for the 28 weeks ended September 8, 2007 as compared to $913.1 million or
31.59% as a percentage of sales for the 28 weeks ended September 9, 2006.
Included in SG&A for the 28 weeks ended September 8, 2007 were certain charges
as follows:
- costs relating to a voluntary retirement buyout program of $0.5 million (2
basis points);
- net real estate activity of $3.0 million (10 basis points); and
- Pathmark acquisition related costs of $2.4 million (8 basis points).
Partially offset by:
- reversal of costs relating to the consolidation of our operating offices in
line with our smaller operations of $0.9 million (3 basis points);
- gain on the sale of our owned warehouse in Edison, New Jersey of $13.4
million (45 basis points) that was closed and not sold as part of the sale
of our U.S. distribution operations and some warehouse facilities and
related assets to C&S Wholesale Grocers, Inc. as discussed in Note 8 -
Asset Disposition Initiatives; and
- reversal of occupancy related costs of $1.4 million (5 basis points) due to
changes in our estimates of future costs for stores closed as part of our
asset disposition initiatives as discussed in Note 8 - Asset Disposition
Initiatives.
Included in SG&A for the 28 weeks ended September 9, 2006 were certain charges
as follows:
- costs relating to the closing of our owned warehouses in Edison, New Jersey
and Bronx, New York of $4.8 million (17 basis points) that were not sold as
part of the sale of our U.S. distribution operations and some warehouse
facilities and related assets to C&S Wholesale Grocers, Inc. as discussed
in Note 8 - Asset Disposition Initiatives;
- costs relating to the consolidation of our operating offices in line with
our smaller operations of $3.5 million (12 basis points);
55
- costs relating to a voluntary labor buyout program in the South Region of
$4.2 million (15 basis points); and
- occupancy related costs of $2.7 million (9 basis points) due to changes in
our estimates of future costs for stores closed as part of our asset
disposition initiatives as discussed in Note 8 - Asset Disposition
Initiatives.
Partially offset by:
- net real estate activity of $8.6 million (30 basis points) during the 28
weeks ended September 9, 2006.
Excluding the items listed above, SG&A for our Northeast operations as a
percentage of sales increased 16 basis points during the 28 weeks ended
September 8, 2007 as compared to the 28 weeks ended September 9, 2006 primarily
due to an increase in advertising costs of 13 basis points.
During the 28 weeks ended September 8, 2007 and September 9, 2006, we recorded
impairment losses on long-lived assets of $1.1 million and $3.6 million,
respectively, as follows:
28 weeks ended 28 weeks ended
September 8, 2007 September 9, 2006
----------------- -----------------
Impairments due to closure or conversion in the
normal course of business $1.1 $2.5
Impairments related to our asset disposition initiatives (1) -- 1.1
---- ----
Total impairments $1.1 $3.6
==== ====
(1) Refer to Note 8 - Asset Disposition Initiatives
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
If current operating levels 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 $34.3 million for the 28 weeks ended September 8, 2007
decreased from the prior year amount of $34.8 million primarily due to (i.) a
decrease in interest expense of $1.0 million as our 7.75% Notes due April 15,
2007 matured and were paid in full during the first quarter of fiscal 2007 and
(ii.) a decrease in interest expense of $0.7 million due to our decreased
borrowings on our revolving lines of credit partially offset by (iii.)
additional landlord allowances received that are considered debt financing
resulting in an increase in interest expense of $1.1 million and (iv.) an
increase in bank commitment fees of $0.1 million.
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 28 weeks
ended September 8, 2007
56
and September 9, 2006, we recorded $7.9 million and $19.8 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 September 8, 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
$2.5 million based on Metro, Inc.'s dividend declaration on April 17, 2007 and
August 8, 2007 and included this amount in "Interest and dividend income" on our
Consolidated Statements of Operations for the 28 weeks ended September 8, 2007.
INCOME TAXES
The provision for income taxes from continuing operations for the 28 weeks ended
September 8, 2007 was $2.5 million compared to the benefit from income taxes
from continuing operations for the 28 weeks ended September 9, 2006 of $14.5
million. Consistent with prior year, we continue to record a valuation allowance
against our net deferred tax assets.
The effective tax rate on continuing operations of 4.2% for the 28 weeks ended
September 8, 2007 varied from the statutory rate of 35% primarily due to state
and local income taxes and a decrease to our valuation allowance as a result of
the utilization of loss carryforwards that were not previously tax benefited.
The effective tax rate on continuing operations of 62.9% for the 28 weeks ended
September 9, 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.
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 one location. Further, our Company has ceased sales
operations in all stores as of July 7, 2007. In connection with the shutdown of
these operations, we recorded net occupancy costs of $58.9 million during the 12
and 28 weeks ended September 8, 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, these estimates may
require adjustment in future periods. We also recorded a curtailment gain of
approximately $3.0 million reflecting a reduction in the estimated future costs
of previously recorded postretirement benefits. This reduction is a result of
the termination of certain employees in the Midwest who did not meet the
eligibility requirements for these benefits before their termination.
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.
57
Subsequent to our second quarter end, on September 15, 2007, our Company
announced that we have definitive agreements for the sale of the majority of
stores in this area to Rouse's Supermarket. The remaining stores are being sold
to independent buyers. These transactions are expected to be completed during
the second half of fiscal 2007 and are subject to customary closing conditions.
The loss from operations of discontinued businesses, net of tax, for the 28
weeks ended September 8, 2007 of $166.1 million decreased from income from
operations of discontinued businesses, net of tax, of $2.1 million for the 28
weeks ended September 9, 2006 primarily due to (i.) a decrease in income from
operations for the Greater New Orleans area and (ii.) additional vacancy costs
that were recorded during the 28 weeks ended September 8, 2007 due to the
closure of stores in the Midwest. The loss on disposal of discontinued
operations of $48.8 million increased from the prior year amount of $0.2 million
primarily due to impairment losses recorded on the property, plant and equipment
in the Greater New Orleans area and Midwest as we recorded the assets' fair
market value based upon proceeds received and expected proceeds less costs to
sell in connection with their sales.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The following table presents excerpts from our Consolidated Statements of Cash
Flows:
28 Weeks Ended
-----------------------------
Sept. 8, 2007 Sept. 9, 2006
------------- -------------
Net cash provided by operating activities $ 3,663 $ 16,866
-------- ---------
Net cash provided by investing activities $ 75,524 $ 50,298
-------- ---------
Net cash used in financing activities $(89,180) $(213,648)
-------- ---------
Net cash provided by operating activities of $3.7 million for the 28 weeks ended
September 8, 2007 primarily reflected our net loss of $156.5 million, adjusted
for non-cash charges for (i.) depreciation and amortization of $90.0 million,
(ii.) losses on the disposal of owned property of $1.2 million, (iii.) loss on
disposal of discontinued operations of $48.8 million, (iv) other property
impairments of $1.1 million partially offset by (v.) income from our asset
disposition initiatives, primarily related to real estate gains, of $21.0
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 $33.0 million, a decrease
58
in inventories of $71.6 million, an increase in other non-current liabilities of
$70.0 million due to an increase in our store closing reserves, partially offset
by an increase in prepaid expenses and other current assets of $10.8 million, an
increase in other assets of $9.0 million and a decrease in accounts payable of
$29.6 million mainly due to the timing of payments. Refer to Working Capital
below for discussion of changes in working capital items. Net cash flow provided
by operating activities of $16.9 million for the 28 weeks ended September 9,
2006 primarily reflected our net loss of $6.6 million, adjusted for non-cash
charges for (i.) depreciation and amortization of $95.2 million, (ii.) our asset
disposition initiatives of $5.1 million partially offset by (iii.) gains on the
disposal of owned property of $10.9 million, (iv.) income tax benefit relating
to the sale of our Canadian operations of $17.3 million, and (v.) our equity in
earnings of Metro, Inc. of $19.8 million. Further, cash was provided by a
decrease in accounts receivables of $69.4 million partially offset by a decrease
in accounts payable of $18.5 million, a decrease in accrued salaries, wages and
benefits of $15.4 million, a decrease in other accruals of $49.8 million
primarily due to timing and a decrease in non-current liabilities of $19.6
million due mainly to closed store accruals.
Net cash provided by investing activities of $75.5 million for the 28 weeks
ended September 8, 2007 primarily reflected proceeds from the sale of assets of
$74.4 million ($22.9 million in the Northeast, $51.1 million in the Midwest and
$0.4 million in the Greater New Orleans area), 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 $142.7
million and property expenditures totaling $79.8 million, which included 3 new
supermarkets, 6 major remodels and 2 minor remodels. For the remainder of fiscal
2007, we have planned capital expenditures of approximately $70 million, which
relate primarily to opening up 1 new supermarket under the Fresh format,
enlarging or remodeling up to 6 supermarkets to the new Fresh format, opening 1
new liquor store, and converting 2 supermarkets to the new Gourmet format. We
currently expect to close up to 5 stores during the remainder of fiscal 2007.
Net cash provided by investing activities of $50.3 million for the 28 weeks
ended September 9, 2006 primarily reflected proceeds received from the sale of
assets of $19.8 million, a decrease in restricted cash of $69.0 million, net
proceeds from marketable securities of $82.2 million partially offset by
property expenditures totaling $120.3 million, which included 1 new supermarket,
12 major remodels and 31 minor remodels.
Net cash used in financing activities of $89.2 million for the 28 weeks ended
September 8, 2007 primarily reflected principal payments on long-term borrowings
of $32.0 million and net principal payments on revolving lines of credit of
$63.2 million partially offset by proceeds from the exercise of stock options of
$6.1 million. Net cash used in financing activities of $213.6 million for the 28
weeks ended September 9, 2006 primarily reflected principal payments on
long-term borrowings of $540.9 million, principal payments on capital leases of
$2.9 million, and dividends paid of $299.1 million partially offset by proceeds
from long-term borrowings of $624.9 million and proceeds from the exercise of
stock options of $4.8 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 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 for the next twelve months.
Profitability, cash flow, asset sale proceeds and timing can be impacted by
certain external factors such as unfavorable economic conditions, competition,
labor relations and fuel and utility costs which could have a significant impact
on cash generation. If our profitability and cash flow do not improve in line
with our plans or if the taxing authorities do not affirm the adequacy of our
Company's Domestic Reinvestment
59
Plan, we anticipate that we would be able to 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 fiscal 2007 and is subject to the completion of shareholder and regulatory
approvals, as well as other customary closing conditions. For further details
regarding 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 $1.1 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.
WORKING CAPITAL
We had working capital of $342.7 million at September 8, 2007 compared to
working capital of $190.5 million at February 24, 2007. We had cash and cash
equivalents aggregating $76.2 million at September 8, 2007 compared to $86.2
million at February 24, 2007. The increase in working capital was attributable
primarily to the following:
- An increase in restricted cash as a result of the partial sale of our
holdings in Metro, Inc. as discussed in Note 4 - Investment in Metro, Inc.;
- An increase in prepaid expenses and other current assets mainly due to the
timing of payments;
- 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 7 - Discontinued Operations;
- 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 and the reduction of purchases in the Midwest.
Partially offset by the following:
- A decrease in cash and cash equivalents as detailed in the Consolidated
Statements of Cash Flows;
- A decrease in marketable securities due to their maturity;
- A decrease in accounts receivable mainly due to the timing of receipts and
initiatives to accelerate the collection of receivables; and
- A decrease in inventory due to the liquidation of inventory for our Midwest
operations due to its 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
60
$78.4 million. Of the total proceeds received, $190.4 million are being held as
restricted cash to collateralize our outstanding letters of credit.
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 September 8, 2007 and February 24, 2007, there were $137.3 million and $138.3
million, respectively, in letters of credit outstanding under this agreement.
Subsequent to the end of our second quarter of fiscal 2007, on October 14, 2007,
our Letter of Credit Agreement was amended to extend the expiration date of the
facility from October 14, 2007 to April 14, 2008.
REVOLVING CREDIT AGREEMENT
During fiscal 2005, we 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
September 8, 2007 and February 24, 2007, there were no letters of credit
outstanding under this agreement; however, there were $6.8 million and $70.0
million, respectively, in outstanding borrowings under the Revolver. As of
September 8, 2007, after reducing availability for borrowing base requirements,
we had $219.0 million available under the Revolver. Combined with cash we held
in short-term investments of $2.3 million we had total cash availability of
$221.3 million at September 8, 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 September 8, 2007 consisted of
$12.8 million of 9.125% Senior Notes due December 15, 2011 and $200.0 million of
9.375% Notes due August 1, 2039. Interest is payable quarterly on the 9.375%
Notes and semi-annually on the 9.125% 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.
61
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.
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.
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 unable to
continue making payments under the Assigned Leases, we could be required to
assume the lease obligation. As of September 8, 2007, 129 Assigned Leases remain
in place. Assuming that each respective assignee was unable to make payments
under an Assigned Lease, an event we believe to be remote, we estimate our
maximum potential obligation with respect to the Assigned Leases to be
approximately $497.9 million, which could be partially or totally offset by
reassigning or subletting these 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 September 8, 2007. On September 17, 2007,
subsequent to our quarter end, S&P changed our rating to B- with positive
outlook. Our liquidity rating was SGL3 with Moody's as of September 8, 2007. Our
recovery rating was 1 with S&P as of September 8, 2007 indicating a high
expectation of 100% recovery of our senior debt to our lenders. Future rating
changes could affect the availability and cost of financing to our Company.
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 for self-insured workers'
compensation and general liability claims. We estimate the required liability of
these claims on a discounted basis, utilizing an actuarial method, which is
based upon various assumptions, which include, but are not limited to, our
historical loss experience, projected loss development factors, actual payroll,
legal costs and other data.
62
Legal expenses incurred in connection with workers' compensation and general
liability claims are charged to the specific claim to which costs pertain. The
required liability is also subject to adjustment in the future based upon the
changes in claims experience, including changes in the number of incidents
(frequency) and changes in the ultimate cost per incident (severity).
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. This review is based upon groups of assets and
the undiscounted estimated future cash flows from these assets to determine if
the carrying value of these assets is recoverable from their respective cash
flows. If this review indicates an impairment exists, we measure this 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 these assets will not be used for their intended useful
life. During the 12 and 28 weeks ended September 8, 2007, we recorded impairment
losses on long-lived assets due to the closure or conversion in the normal
course of business of $0.6 million and $1.1 million, respectively.
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense. If current operating levels do not 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. Variation in these factors could
cause changes to our estimates. As of September 8, 2007, we had recorded
liabilities for estimated probable obligations of $200 million. Of this amount,
$13 million relates to stores closed in the normal course of business, $31
million relates to stores and warehouses closed as part of the asset disposition
initiatives (see Note 8 of our Consolidated Financial Statements), and $156
million relates to stores closed as part of our discontinued operations (see
Note 7 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
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.
63
Inventories
We evaluate inventory shrinkage throughout the year based on actual physical
counts and record reserves based on the results of these counts to provide for
estimated shrinkage between the store's last inventory and the balance sheet
date.
Income Taxes
As discussed in Note 11 of the Consolidated Financial Statements, our Company
recorded a valuation allowance for the entire 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 we
experience improvement in our operations.
We adopted the provisions of Financial Accounting Standards Board ("FASB")
Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an
Interpretation of FASB Statement 109 ("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 $24.4 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 (provision for) 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 11 -
Income Taxes for further discussion.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued 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 $24.4 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 (provision for) 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 11 - 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
64
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 U.S. GAAP, and expands disclosures about fair
value measurements. The provisions of SFAS 157 are effective for fiscal years
beginning after November 15, 2007 (our year ending 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 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 ending 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 10 - 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 159"). SFAS 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 ending February 28, 2009). Our Company is currently evaluating the impact,
if any, of the provisions of SFAS 159.
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.
65
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 September 8, 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 12 and 28 weeks ended September 8, 2007, a presumed 1%
change in the variable floating rate would have impacted interest expense by
$0.04 million and $0.14 million, respectively. During the 12 and 28 weeks ended
September 9, 2006, a presumed 1% change in the variable floating rate would have
impacted interest expense by $0.2 million and $0.3 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 $39.1 million and
$30.2 million at September 8, 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 September
8, 2007 in our Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, our Company's
internal control over financial reporting.
66
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.
67
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.
- Our retail food business and the grocery retailing industry continues to
experience fierce competition from mass merchandisers, warehouse clubs,
drug stores, convenience stores, discount merchandisers, dollar stores,
restaurants, other retail chains, nontraditional competitors and emerging
alternative formats in the markets where we have retail operations.
Competition with these outlets is based on price, store location,
advertising and promotion, product mix, quality and service. Some of these
competitors may have greater financial resources, lower merchandise
acquisition costs and lower operating expenses than we do, and we may be
unable to compete successfully in the future. An overall lack of inflation
in food prices and increasingly competitive markets have made it difficult
generally for grocery store operators to achieve comparable store sales
gains. Because sales growth has been difficult to attain, our competitors
have attempted to maintain market share through increased levels of
promotional activities and discount pricing, creating a more difficult
environment in which to consistently increase year-over-year sales.
Price-based competition has also, from time to time, adversely affected our
operating margins. 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.
68
- Our in-store pharmacy business is also subject to intense competition. In
particular, an adverse trend for drug retailing has been significant growth
in mail-order and internet-based prescription processors. Pharmacies are
exposed to risks inherent in the packaging and distribution of
pharmaceuticals and other healthcare products. In addition, the conversion
of various prescription drugs to over-the-counter medications, the
withdrawal of certain drugs from the market and changes in third party
reimbursement levels for prescription drugs, including changes in Medicare
Part D or state Medicaid programs, may have a material adverse effect on
our business. Failure to properly adhere to certain government regulations,
local registrations, applicable Medicare and Medicaid regulations and
prohibitions against paid referrals of patients could result in the
imposition of civil as well as criminal penalties.
- The retail food and food distribution industries, and the operation of our
businesses, specifically in the New York -- New Jersey and Philadelphia
regions, are sensitive to a number of economic conditions and other factors
such as (i) food price deflation or inflation, (ii) softness in local and
national economies, (iii) increases in commodity prices, (iv) the
availability of favorable credit and trade terms, (v) changes in business
plans, operations, results and prospects, (vi) potential delays in the
development, construction or start-up of planned projects, and (vii) other
economic conditions that may affect consumer buying habits. Any one or more
of these economic conditions can affect our retail sales, the demand for
products we distribute to our retail customers, our operating costs and
other aspects of our business.
- Acts of war, threats of terror, acts of terror or other criminal activity
directed at the grocery or drug store industry, the transportation
industry, or computer or communications systems, could increase security
costs, adversely affect our operations, or impact consumer behavior and
spending as well as customer orders. Other events that give rise to actual
or potential food contamination, drug contamination, or food-borne illness
could have an adverse effect on our operating results.
- We could be adversely affected if consumers lose confidence in the safety
and quality of the food supply chain. Adverse publicity about these types
of concerns, whether or not valid, could discourage consumers from buying
products in our stores. The real or perceived sale of contaminated food
products by us could result in a loss of consumer confidence and product
liability claims, which could have a material adverse effect on our sales
and operations.
- 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
69
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.
- 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.
- Fluctuating fuel costs may adversely affect our operating costs since we
incur the cost of fuel in connection with the transportation of goods from
our warehouse and distribution facilities to our stores. In addition,
operations at our stores are sensitive to rising utility fuel costs due to
the amount of electricity and gas required to operate our stores. We may
not be able to recover these rising utility and fuel costs through
increased prices charged to our customers.Our profitability is particularly
sensitive to the cost of oil. Oil prices directly affect our product
transportation costs and fuel costs due to the amount of electricity and
gas required to operate our stores as well as our utility and
petroleum-based supply costs; including plastic bags for example.
- We are subject to federal, state and local laws and regulations relating to
zoning, land use, environmental protection, work place safety, public
health, community right-to-know, beer and wine sales, pharmaceutical sales
and gasoline station operations. A number of states and local jurisdictions
regulate the licensing of supermarkets, including beer and wine license
grants. In addition, under certain local regulations, we are prohibited
from selling beer and wine in certain of our stores. Employers are also
subject to laws governing their relationship with employees, including
minimum wage requirements, overtime, working conditions, disabled access
and work permit requirements. Compliance with these laws could reduce the
revenue and profitability of our
70
supermarkets and could otherwise adversely affect our business, financial
condition or results of operations. In addition, any changes in these law
or regulations could significantly increase our compliance costs and
adversely affect our results of operations, financial condition and
liquidity.
- We have large, complex information technology systems that are important to
business operations. We could encounter difficulties developing new systems
and encounter difficulties maintaining, upgrading or securing our existing
systems. Such difficulties could lead to significant expenses or losses due
to disruption in our business operations.
Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. Accordingly, actual events and results may vary significantly from
those included in or contemplated or implied by forward-looking statements made
by us or our representatives.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our annual meeting of shareholders, held July 19, 2007, there were 39,434,931
shares or 94.20% of the 41,861,697 shares outstanding and entitled to vote
represented either in person or by proxy.
The eight (8) directors nominated to serve on the Board for a one-year term were
all elected, with each receiving an affirmative vote of at least 83.03% of the
shares present.
Of the total shares cast, 85.06% voted to approve an amendment of the Charter to
eliminate preemptive rights, 93.5% voted to approve an amendment of Charter to
require the Company to indemnify the Company's officers to the fullest extent
permitted under the Maryland General Corporation Law and expressly require the
Company to advance reasonable expenses incurred by a director or officer who is
a party to a proceeding upon meeting certain requirements of the Maryland
General Corporation Law, and 93.92% voted to approve an amendment of the Charter
to eliminate the liability of the Company's officers and directors for money
damages to the Company or its stockholders except under certain circumstances.
ITEM 5 - OTHER INFORMATION
None
71
ITEM 6 - EXHIBITS
(a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Stock Purchase Agreement, dated as of July 19, 2005, by and among
the Company, A&P Luxembourg S.a.r.l., Metro Inc. and 4296711
Canada Inc. (incorporated herein by reference to Exhibit 2.1 to
Form 8-K filed on July 22, 2005)
3.1 Articles of Incorporation of The Great Atlantic & Pacific Tea
Company, Inc., as amended through July 1987 (incorporated herein
by reference to Exhibit 3(a) to Form 10-K filed on May 27, 1988)
3.2 By-Laws of The Great Atlantic & Pacific Tea Company, Inc., as
amended and restated through October 6, 2005 (incorporated herein
by reference to Exhibit 3.1 to Form 8-K filed on October 11, 2005)
4.1 Indenture, dated as of January 1, 1991 between the Company and
JPMorgan Chase Bank (formerly The Chase Manhattan Bank as
successor by merger to Manufacturers Hanover Trust Company), as
trustee (the "Indenture") (incorporated herein by reference to
Exhibit 4.1 to Form 8-K)
4.2 First Supplemental Indenture, dated as of December 4, 2001, to the
Indenture, dated as of January 1, 1991 between our Company and
JPMorgan Chase Bank, relating to the 7.70% Senior Notes due 2004
(incorporated herein by reference to Exhibit 4.1 to Form 8-K filed
on December 4, 2001)
4.3 Second Supplemental Indenture, dated as of December 20, 2001, to
the Indenture between our Company and JPMorgan Chase Bank,
relating to the 9 1/8% Senior Notes due 2011 (incorporated
herein by reference to Exhibit 4.1 to Form 8-K filed on December
20, 2001)
4.4 Successor Bond Trustee (incorporated herein by reference to
Exhibit 4.4 to Form 10-K filed on May 9, 2003)
4.5 Third Supplemental Indenture, dated as of August 23, 2005, to the
Indenture between the Company and Wilmington Trust Company (as
successor to JPMorgan Chase Bank) (incorporated herein by
reference to Exhibit 4.1 to Form 8-K filed on August 23, 2005)
4.6 Fourth Supplemental Indenture, dated as of August 23, 2005, to the
Indenture between the Company and Wilmington Trust Company (as
successor to
72
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)
4.10* Third amendment to Credit Agreement dated March 9, 2007, as filed
herein
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)
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)
73
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)
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)
74
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)
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)
75
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* Third amendment to Letter of Credit Agreement, dated October 14,
2007, as filed herein
10.42 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)
10.43 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)
76
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)
23.1 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)
23.2 Consent of Independent Registered Public Accounting Firm
(incorporated herein by reference to Exhibit 23.1 to Form 10-K
filed on August 24, 2007)
23.3 Consent of Independent Auditors from Ernst & Young LLP
(incorporated herein by reference to Exhibit 23.2 to Form 10-K
filed on August 24, 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
99.1 Revised February 24, 2007 Consolidated Financial Statements
(incorporated herein by reference to Exhibit 99.1 to Form 8-K
filed on August 24, 2007)
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
77
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: October 17, 2007 By: /s/ Melissa E. Sungela
------------------------------------
Melissa E. Sungela, Vice President,
Corporate Controller
(Chief Accounting Officer)
78
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: October 17, 2007
-------------------------------------
Eric Claus
President and
Chief Executive Officer
79
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: October 17, 2007
-------------------------------------
Brenda M. Galgano
Senior Vice President,
Chief Financial Officer
80
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
September 8, 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: October 17, 2007 /s/ Eric Claus
----------------------------------------
Eric Claus
President and Chief Executive Officer
Dated: October 17, 2007 /s/ Brenda M. Galgano
----------------------------------------
Brenda M. Galgano
Senior Vice President,
Chief Financial Officer
81