UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 20, 2009
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-4141
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
--------------------------------------------------
(Exact name of registrant as specified in charter)
Maryland 13-1890974
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Paragon Drive
Montvale, New Jersey 07645
---------------------------------------
(Address of principal executive offices)
(201) 573-9700
---------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate website, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ____ Accelerated filer X Non-accelerated
filer ____ Smaller reporting company____
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
As of July 17, 2009, the Registrant had a total of 57,899,318 shares of common
stock - $1 par value outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except share and per share amounts)
(Unaudited)
16 Weeks Ended
-------------------------------------
June 20, 2009 June 14, 2008
--------------- ----------------
Sales $ 2,790,243 $ 2,922,665
Cost of merchandise sold (1,945,374) (2,039,079)
--------------- ----------------
Gross margin 844,869 883,586
Store operating, general and administrative expense (846,705) (881,495)
--------------- ----------------
(Loss) income from operations (1,836) 2,091
Nonoperating (loss) income (1,875) 48,597
Interest expense (54,248) (46,926)
Interest and dividend income 41 410
--------------- ----------------
(Loss) income from continuing operations before income taxes (57,918) 4,172
Provision for income taxes (386) (1,384)
--------------- -----------------
(Loss) income from continuing operations (58,304) 2,788
Discontinued operations:
Loss from operations of discontinued businesses, net of tax benefit of $0
for both the 16 weeks ended June 20, 2009 and June 14, 2008,
respectively (6,856) (4,163)
Gain on disposal of discontinued operations, net of tax benefit of $0
for both the 16 weeks ended June 20, 2009 and June 14, 2008,
respectively - 2,639
--------------- ----------------
Loss from discontinued operations (6,856) (1,524)
--------------- ---------------
Net (loss) income $ (65,160) $ 1,264
================ ================
Net (loss) income per share - basic:
Continuing operations $ (1.10) $ 0.06
Discontinued operations (0.13) (0.03)
---------------- ----------------
Net (loss) income per share - basic $ (1.23) $ 0.03
================ ================
Net loss per share - diluted:
Continuing operations $ (3.36) $ (0.51)
Discontinued operations (0.28) (0.03)
--------------- ----------------
Net loss per share - diluted $ (3.64) $ (0.54)
=============== ================
Weighted average number of common shares outstanding
Basic 52,886,956 49,786,027
=============== ================
Diluted 24,782,040 48,156,654
=============== ================
See Notes to Consolidated Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Stockholders' Equity and Comprehensive (Loss) Income
(Dollars in thousands)
(Unaudited)
(Accumulated
Common Stock Additional Deficit)/ Accumulated Other Total
----------------------------- Paid-in Retained Comprehensive Stockholders'
Shares Amount Capital Earnings (Loss) Income Equity
-------------- ------------- ------------- -------------- ----------------- ---------------
16 Weeks Ended June 20, 2009
----------------------------
Balance as of 2/28/2009, as
previously reported 57,674,799 $ 57,675 $ 438,300 $ (123,458) $ (105,147) $ 267,370
Impact of the adoption of
FSP APB 14-1 26,379 (3,856) 22,523
------------ ----------- ------------ ---------- ----------- -----------
Balance as of 2/28/2009, as
adjusted 57,674,799 57,675 464,679 (127,314) (105,147) $ 289,893
Net loss (65,160) (65,160)
Other comprehensive income 1,378 1,378
Stock options exercised 397 1 1
Other share based awards 224,122 224 2,629 2,853
------------ ----------- ------------ ---------- ----------- -----------
Balance at end of period 57,899,318 $ 57,899 $ 467,309 $ (192,474) $ (103,769) $ 228,965
============ =========== ============ ========== =========== ===========
16 Weeks Ended June 14, 2008
----------------------------
Balance as of 2/23/2008, as
previously reported 57,100,955 $ 57,101 $ 373,594 16,423 (28,975) 418,143
Impact of the adoption of
FSP APB 14-1 26,379 (402) 25,977
------------ ----------- ------------ ---------- ----------- -----------
Balance as of 2/23/2008, as
adjusted 57,100,955 57,101 399,973 16,021 (28,975) 444,120
Net income 1,264 1,264
Other comprehensive loss (340) (340)
Conversion features related to
convertible debt 18,241 18,241
Stock options exercised 104,536 104 2,071 2,175
Other share based awards 435,600 436 4,410 4,846
------------ ----------- ------------ ---------- ----------- -----------
Balance at end of period 57,641,091 $ 57,641 $ 424,695 $ 17,285 $ (29,315) $ 470,306
============ =========== ============ ========== =========== ===========
See Notes to Consolidated Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Stockholders' Equity and Comprehensive (Loss) Income - (Continued)
(Dollars in thousands)
(Unaudited)
Comprehensive (Loss) Income
---------------------------
16 Weeks Ended
-----------------------------
June 20, 2009 June 14, 2008
------------- -------------
Net (loss) income $ (65,160) $ 1,264
---------- ----------
Net unrealized gain on marketable securities, net of tax 519 -
Pension and other post-retirement benefits, net of tax 859 (340)
---------- ----------
Other comprehensive income (loss), net of tax 1,378 (340)
---------- ----------
Total comprehensive (loss) income $ (63,782) $ 924
========== ==========
Accumulated Other Comprehensive (Loss) Income Balances
------------------------------------------------------
Net Pension
Unrealized & Other Accumulated
Gain on Post- Other
Marketable retirement Comprehensive
Securities Benefits (Loss) Income
------------ ------------ -------------
Balance at February 28, 2009 $ - $ (105,147) $ (105,147)
Current period change 519 859 1,378
----------- ----------- ------------
Balance at June 20, 2009 $ 519 $ (104,288) $ (103,769)
=========== =========== =============
Balance at February 23, 2008 $ - $ (28,975) $ (28,975)
Current period change - (340) (340)
----------- ------------ -------------
Balance at June 14, 2008 $ - $ (29,315) $ (29,315)
=========== ============ =============
See Notes to Consolidated Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands except share amounts)
(Unaudited)
June 20, 2009 February 28, 2009
--------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 119,497 $ 175,375
Restricted cash 2,136 2,214
Restricted marketable securities 2,312 2,929
Accounts receivable, net of allowance for doubtful accounts of
$9,398 and $8,463 at June 20, 2009 and February 28, 2009,
respectively 176,589 196,537
Inventories 468,701 474,002
Prepaid expenses and other current assets 71,275 67,465
------------- --------------
Total current assets 840,510 918,522
------------- --------------
Non-current assets:
Property:
Property owned, net 1,545,069 1,591,250
Property leased under capital leases, net 130,354 132,960
------------- --------------
Property, net 1,675,423 1,724,210
Goodwill 483,560 483,560
Intangible assets, net 221,538 224,838
Other assets 191,217 193,954
------------- --------------
Total assets $ 3,412,248 $ 3,545,084
============= ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,187 $ 5,283
Current portion of obligations under capital leases 14,092 12,290
Accounts payable 225,387 221,073
Book overdrafts 57,116 60,835
Accrued salaries, wages and benefits 142,892 161,054
Accrued taxes 45,240 39,404
Other accruals 225,794 246,596
------------- --------------
Total current liabilities 714,708 746,535
------------- --------------
Non-current liabilities:
Long-term debt 894,224 919,364
Long-term obligations under capital leases 145,547 147,921
Long-term real estate liabilities 333,153 330,196
Deferred real estate income 90,999 95,000
Other financial liabilities 6,641 4,766
Other non-current liabilities 998,011 1,011,409
------------- --------------
Total liabilities 3,183,283 3,255,191
------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock--no par value; authorized - 3,000,000 shares; issued - none - -
Common stock--$1 par value; authorized - 160,000,000 shares;
issued and outstanding - 57,899,318 and 57,674,799 shares
at June 20, 2009 and February 28, 2009, respectively 57,899 57,675
Additional paid-in capital 467,309 464,679
Accumulated other comprehensive loss (103,769) (105,147)
Accumulated deficit (192,474) (127,314)
-------------- ---------------
Total stockholders' equity 228,965 289,893
------------- --------------
Total liabilities and stockholders' equity $ 3,412,248 $ 3,545,084
============= ==============
See Notes to Consolidated Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
16 Weeks Ended
---------------------------------------
June 20, 2009 June 14, 2008
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income (65,160) $ 1,264
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization 77,788 80,027
Nonoperating income 1,875 (48,597)
Non-cash interest expense 12,877 7,863
Stock compensation expense 2,853 4,846
Asset disposition initiatives (1,012) (1,757)
Occupancy charges for stores closed in the normal course of business 1,260 2,900
Gain on disposal of owned property and write-down of property, net (3,256) (532)
Gain on disposal of discontinued operations - (2,639)
Other property impairments 1,056 781
Pension withdrawal costs 2,445 -
LIFO reserve 1,238 1,416
Other changes in assets and liabilities:
Decrease (increase) in receivables 19,948 (3,477)
Decrease (increase) in inventories 4,063 (17,947)
Increase in prepaid expenses and other current assets (5,661) (14,423)
Increase in other assets (5,131) (8,574)
Increase in accounts payable 6,307 46,823
Decrease in accrued salaries, wages and benefits, and taxes (12,326) (23,531)
(Decrease) increase in other accruals (20,803) 281
Decrease in other non-current liabilities (21,029) (30,451)
Other operating activities, net (641) 312
------------ -----------
Net cash used in operating activities (3,309) (5,415)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (27,009) (29,690)
Proceeds from disposal of property 2,219 3,131
Proceeds from sale of joint venture 5,914 -
Decrease (increase) in restricted cash 78 (68)
Proceeds from maturities of marketable securities 1,373 957
----------- -----------
Net cash used in investing activities (17,425) (25,670)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds under revolving lines of credit 33,150 497,361
Principal payments on revolving lines of credit (63,150) (416,261)
Proceeds under line of credit 308 54,457
Principal payments on line of credit (1,373) (48,951)
Principal payments on long-term borrowings (93) -
Settlement of Series A warrants - (45,735)
Proceeds from long-term real estate liabilities 170 -
Proceeds from sale-leaseback transaction 3,000 -
Principal payments on capital leases (3,374) (2,393)
(Decrease) increase in book overdrafts (3,719) 17,205
Deferred financing fees (64) 1,551
Proceeds from stock options exercised 1 2,175
----------- -----------
Net cash (used in) provided by financing activities (35,144) 59,409
Effect of exchange rate changes on cash and cash equivalents - (4)
----------- ------------
Net (decrease) increase in cash and cash equivalents (55,878) 28,320
Cash and cash equivalents at beginning of period 175,375 100,733
----------- -----------
Cash and cash equivalents at end of period $ 119,497 $ 129,053
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 44,354 $ 31,281
=========== ===========
Cash paid during the year for income taxes $ 4,292 $ 1,494
=========== ===========
See Notes to Consolidated Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share amounts)
(Unaudited)
1. Basis of Presentation
The accompanying Consolidated Statements of Operations, Consolidated Statements
of Stockholders' Equity and Comprehensive (Loss) Income, and Consolidated
Statements of Cash Flows for the 16 weeks ended June 20, 2009 and June 14, 2008,
and the Consolidated Balance Sheets at June 20, 2009 and February 28, 2009 of
The Great Atlantic & Pacific Tea Company, Inc. ("we," "our," "us" or "our
Company") are unaudited and, in the opinion of management, contain all
adjustments that are of a normal and recurring nature necessary for a fair
statement of financial position and results of operations for such periods. The
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes contained in our Fiscal 2008
Annual Report on Form 10-K. Interim results are not necessarily indicative of
results for a full year.
The consolidated financial statements include the accounts of our Company and
all subsidiaries. All intercompany accounts and transactions have been
eliminated.
Certain reclassifications have been made to prior year amounts to conform to
current year presentation. Refer to Note 2 - Impact of New Accounting
Pronouncements below for prior period reclassifications made upon our
retrospective adoption of Financial Accounting Standards Board ("FASB") Staff
Position ("FSP") Accounting Principles Board ("APB") Opinion No. 14-1
("FSP APB 14-1").
2. Impact of New Accounting Pronouncements
Newly Adopted Accounting Pronouncements
---------------------------------------
Convertible Debt
In May 2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt
Instruments that May be Settled in Cash Upon Conversion". FSP APB 14-1 requires
that the liability and equity components of convertible debt instruments that
may be settled in cash upon conversion (including partial cash settlement) be
separately accounted for in a manner that reflects an issuer's nonconvertible
debt borrowing rate. FSP APB 14-1 also requires accretion of the resulting debt
discount over the expected life of the convertible debt. We adopted FSP APB 14-1
during our first fiscal quarter ended June 20, 2009, as required. Since this
standard is required to be applied retrospectively, financial statements for
prior periods have been adjusted to reflect its application.
Our $255 million 6.750% Convertible Senior Notes that were issued in December
2007 are subject to FSP APB 14-1, as our estimated nonconvertible debt borrowing
rate is higher than the current contractual rate on these notes. As a result of
adopting FSP APB 14-1, we retrospectively recognized cumulative additional
non-cash interest expense of $3.9 million from the date of issuance of these
Convertible Senior Notes through February 28, 2009. The adoption of FSP APB 14-1
will also increase our non-cash interest expense in fiscal 2009 by approximately
$4.4 million, and will increase non-cash interest expense in subsequent periods
during which our convertible notes remain outstanding by approximately $18.8
million in total. Upon adopting FSP APB 14-1, we also reclassified $26.4 million
of debt and deferred financing costs to "Additional paid-in capital," net of
deferred taxes.
As a result of our adoption of FSP APB 14-1, our Consolidated Statements
of Operations for the 16 weeks ended June 14, 2008 have been adjusted as
follows:
16 Weeks ended June 14, 2008
--------------------------------------------
As adjusted in As reported
this Quarterly in Quarterly
Report on Report on
Form 10-Q Form 10-K
------------------------ -----------------
Interest expense $ (46,926) $ (45,949)
Income from continuing operations 2,788 3,765
Net income 1,264 2,241
Per share data
--------------
Net income (loss) per share - basic:
Continuing operations 0.06 0.08
Discontinued operations (0.03) (0.03)
------- -------
Net income per share - basic $ 0.03 $ 0.05
======= =======
Net loss per share - diluted:
Continuing operations (0.51) (0.48)
Discontinued operations (0.03) (0.03)
------- -------
Net loss per share - diluted $ (0.54) $ (0.51)
======= =======
As a result of our adoption of FSP APB 14-1, our Consolidated Balance Sheet as
of February 28, 2009 and February 23, 2008 has been adjusted as follows:
As of February 28, 2009 As of February 23, 2008
--------------------------------- -----------------------------------
As adjusted in As reported in As adjusted in As reported in
this Quarterly the 2008 Annual this Quarterly the 2008 Annual
Report Report on Report Report on
On Form 10-Q Form 10-K On Form 10-Q Form 10-K
-------------- --------------- --------------- ----------------
Assets:
Prepaid and other current assets $ 67,465 $ 66,190 $ 96,788 $ 94,969
Current assets 918,522 917,247 886,245 884,426
Other assets 193,954 195,856 234,439 236,995
Total assets 3,545,084 3,545,711 3,643,119 3,643,856
Liabilities:
Long-term debt 919,364 942,514 732,172 758,886
Total liabilities 3,255,191 3,278,341 3,198,999 3,225,713
Stockholders' equity:
Additional paid-in capital 464,679 438,300 399,973 373,594
Retained earnings (127,314) (123,458) 16,021 16,423
Total stockholders' equity 289,893 267,370 444,120 418,143
Total liabilities and stockholders' equity $ 3,545,084 $ 3,545,711 $ 3,643,119 $ 3,643,856
As a result of our adoption of FSP APB 14-1, our Consolidated Statement of Cash
Flows for the 16 weeks ended June 14, 2008 has been adjusted as follows:
As adjusted in As reported
this Quarterly Report in Quarterly Report
on Form 10-Q on Form 10-Q
--------------------- -------------------
Cash flows from operating activities:
Net income $ 1,264 $ 2,241
Non-cash interest expense 7,863 8,840
Net cash used in operating activities (5,415) (5,415)
Subsequent Events
In May 2009, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 165, "Subsequent Events" ("SFAS No. 165"). SFAS No. 165 establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. The standard also includes a new required disclosure of
the date through which an entity has evaluated subsequent events. SFAS No. 165
is effective for interim and annual periods ending after June 15, 2009. We
adopted SFAS No. 165 during our first fiscal quarter ended June 20, 2009. Refer
to Note 19 - Subsequent Events for related disclosure.
Other than Temporary Impairments
On April 9, 2009, the FASB issued FSP Financial Accounting Standard ("FAS")
115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary
Impairments" ("FSP FAS 115-2 and FAS 124-2"), which applies to debt securities
classified as available-for-sale and held-to-maturity. This FSP provides
guidance on when the impairment should be considered to be other-than-temporary,
the determination of the amount of the other-than-temporary impairment to be
recognized in earnings and other comprehensive income, the accounting for debt
securities after an other-than-temporary impairment, and the related disclosure
requirements. We adopted FSP FAS 115-2 and FAS 124-2 during our first fiscal
quarter ended June 20, 2009, as required. The adoption of the FSP did not have a
material effect on the Company's consolidated financial statements.
Fair Value of Financial Instruments
In April 2009, the FASB issued FSP No. FAS 107-1 and APB Opinion No. 28-1 ("FSP
FAS 107-1 and APB 28-1"). FSP FAS 107-1 and APB 28-1 amends SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments," and APB Opinion No. 28,
"Interim Financial Reporting," to require interim and annual disclosures of the
fair value of financial instruments, together with the related carrying amount
and how each amount relates to what is reported in the statement of financial
position. FSP FAS 107-1 and APB 28-1 also requires disclosure of the methods and
significant assumptions used to estimate the fair value of financial
instruments. We adopted FSP FAS 107-1 and APB 28-1 during our first fiscal
quarter ended June 20, 2009. Refer to Note 6 - Fair Value Measurements for
related disclosures.
In April 2009, the FASB issued FSP No. 157-4, "Determining Fair Value when the
Volume Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly" ("FSP No. 157-4"). This FSP
provides guidance for determining the fair value of assets and liabilities that
have experienced a significant decrease in the volume and level of activity in
relation to their
normal market activity and the related transactions or quoted prices may not be
indicative of fair value, or not orderly. This FSP does not apply to assets or
liabilities for which quoted prices may be obtained in an active market, or
Level 1 inputs. FSP No. 157-4 also expands the disclosure requirements of SFAS
No. 157 to include a discussion of the inputs and valuation techniques used to
measure fair value and to provide disclosure for all equity and debt securities
that are measured at fair value by each major security type. We adopted FSP No.
157-4 during our first fiscal quarter ended June 20, 2009, as required. Refer to
Note 6 - Fair Value Measurements for related disclosures.
In February 2008, the FASB issued FSP No. 157-2, "Effective Date of FASB
Statement No. 157" ("FSP No. 157-2"). FSP No. 157-2 delays the effective date of
SFAS No. 157 for all nonrecurring fair value measurements of nonfinancial assets
and nonfinancial liabilities until our first fiscal quarter ended June 20, 2009.
Our Company adopted SFAS No. 157 and FSP No. 157-1 as of February 24, 2008, with
the exception of the application of the statement to nonrecurring nonfinancial
assets and nonfinancial liabilities. Refer to Note 6 - Fair Value Measurements
for related disclosure. We adopted the remaining provision of SFAS No. 157
during our first fiscal quarter ended June 20, 2009, as required. The
nonfinancial assets and liabilities recorded in our Consolidated Balance Sheets
include items such as goodwill, long lived assets and store lease exit costs,
which are measured at fair value to test for and measure impairment, when
necessary. Refer to Note 7 - Valuation of Long-Lived Assets for a summary of
impairment charges recorded during the first quarter of fiscal 2009.
Intangible Assets
In April 2008, the FASB issued FSP FAS 142-3, "Determining the Useful Life of
Intangible Assets" ("FSP FAS 142-3"). FSP FAS 142-3 amends the factors to be
considered in determining the useful life of intangible assets. Its intent is to
improve the consistency between the useful life of an intangible asset and the
period of expected cash flows used to measure its fair value. We adopted FSP FAS
142-3 during our first quarter ended June 20, 2009, as required. The adoption of
this FSP did not have a material impact on our financial statements and
disclosures.
Business Combinations
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS
No. 141R"). SFAS No. 141R establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, the goodwill acquired, and any
noncontrolling interest in the acquiree. This statement also establishes
disclosure requirements to enable the evaluation of the nature and financial
effect of the business combination. SFAS No. 141R is effective for our fiscal
year ended February 27, 2010. In addition, in April 2009, the FASB issued FSP
No. FAS 141(R) - 1, "Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies" ("FSP FAS 141(R) - 1"),
which clarifies SFAS No. 141R on issues relating to initial recognition and
measurement, subsequent measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business combination. This FSP is
effective for assets or liabilities arising from contingencies in business
combinations with the acquisition date during or after our fiscal 2009. Our
acquisition of Pathmark was not impacted by the provisions of SFAS No. 141R and
FSP FAS 141(R) - 1.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
Codification(TM) ("Codification") and the Hierarchy of Generally Accepted
Accounting Principles - a replacement of FASB Statement No. 162" ("SFAS No.
168"). SFAS No. 168 establishes the Codification as the single official source
of authoritative United States accounting and reporting standards for all
non-governmental entities (other than guidance issued by the SEC). The
Codification changes the referencing and organization on financial standards and
is effective for interim and annual periods ending on or after September 15,
2009. We will apply the Codification to our disclosures beginning with our third
quarter of fiscal 2009. As Codification is not intended to change the existing
accounting guidance, its adoption will not have an impact on our financial
statements.
In June 2009, the FASB issued FAS 167, "Amendments to FASB Interpretation No.
46(R)" ("SFAS No. 167"), which amends the consolidation guidance applicable to
variable interest entities. This statement is effective beginning in our fiscal
2010. We currently do not expect that the adoption of this statement will have a
material effect on our financial statements and disclosures.
In June 2009, the FASB issued FAS No. 166, "Accounting for Transfers of
Financial Assets an amendment of FASB Statement No. 140" ("SFAS No. 166"). SFAS
No. 166 eliminates the concept of a "qualifying special-purpose entity," changes
the requirements for derecognizing financial assets, and requires additional
disclosures. This statement will be effective for any financial asset transfers
occurring beginning with our fiscal 2010. We are currently assessing the impact
of SFAS No. 166 on our financial statements.
In June 2009, the FASB Emerging Issues Task Force ("EITF") issued EITF Issue No.
09-1, "Accounting for Own-Share Lending Arrangements in Contemplation of
Convertible Debt Issuance" ("EITF Issue No. 09-1"). The EITF reached a consensus
that a share-lending arrangement entered into on an entity's own shares in
contemplation of a convertible debt offering or other financing is required to
be measured at fair value and recognized as a debt issuance cost in the
Company's financial statements. The debt issuance costs should be amortized
using the effective interest method over the life of the financing arrangement
as interest cost. In addition, the loaned shares should be excluded from the
computations of basic and diluted earnings per share, unless default of the
share-lending arrangement occurs, at which time the loaned shares would be
included in the common and diluted earnings per share calculation. The EITF also
expanded the disclosure requirements for share-lending arrangements. This issue
will be effective during our first quarter of fiscal 2010. Early adoption is not
permitted. Retrospective application is required for all arrangements
outstanding in the beginning of the fiscal year in which this Issue is initially
applied. Our Company is currently assessing the impact of EITF Issue No. 09-1 on
our financial statements. We may have to recognize additional expense if our
counterparty default is deemed to be probable upon adoption of this Issue.
In December 2008, the FASB issued FSP FAS 132(R)-1, "Employer's Disclosures
about Postretirement Benefit Plan Assets" ("FSP FAS 132(R)-1"). FSP FAS 132(R)-1
amends SFAS No. 132 (Revised 2003), "Employers' Disclosures about Pensions and
Other Postretirement Benefits", to provide guidance on an employer's disclosures
about plan assets of a defined benefit pension or other postretirement plan. The
expanded disclosure requirements include: (i) investment policies and
strategies, (ii) the major categories of plan assets, (iii) the inputs and
valuation techniques used to measure plan assets, (iv) the effect of fair value
measurements using significant unobservable inputs (Level 3) on changes in plan
assets for the period, and
(v) significant concentrations of risk within plan assets. These disclosure
requirements are effective for our fiscal year ended February 27, 2010.
3. Goodwill and Other Intangible Assets
The carrying values of our finite-lived intangible assets are reviewed for
possible impairment whenever events or changes in circumstances indicate that
the carrying amount of assets may not be recoverable. Our intangible assets that
have finite useful lives are amortized over their estimated useful lives.
Goodwill and other intangibles with indefinite useful lives that are not subject
to amortization are tested for impairment in the fourth quarter of each fiscal
year, or more frequently whenever events or changes in circumstances indicate
that impairment may have occurred. The latest impairment assessment of goodwill
and indefinite lived intangible assets was completed in the fourth quarter of
fiscal 2008 and concluded there was no impairment as of February 28, 2009. We
considered whether there have been any triggering events requiring an interim
impairment test and concluded that another impairment analysis was not required
in the first quarter of fiscal 2009; however, we will continue to monitor actual
results and projections and if we experience a continued decline in operations,
an impairment charge may be required in the future.
The carrying amount of our goodwill was $483.6 million as of June 20, 2009 and
February 28, 2009. Our goodwill allocation by segment did not change from
February 28, 2009 to June 20, 2009.
Other intangible assets acquired as part of our acquisition of Pathmark in
December 2007 consisted of the following:
Weighted
Average Gross Accumulated Accumulated
Amortization Carrying Amortization at Amortization at
Period (years) Amount June 20, 2009 Feb. 28, 2009
-------------- -------- ------------------ ----------------
Loyalty card customer relationships 5 $ 19,200 $ 4,674 $ 3,376
In-store advertiser relationships 20 14,720 1,132 906
Pharmacy payor relationships 13 75,000 8,876 7,100
Pathmark trademark Indefinite 127,300 - -
---------- --------- --------
Total $ 236,220 $ 14,682 $ 11,382
========== ========= ========
Amortization expense relating to our intangible assets for the first quarter of
fiscal 2009 and 2008 was $3.3 million and $2.8 million, respectively.
The following table summarizes the estimated future amortization expense for our
finite-lived intangible assets:
2009 $ 7,425
2010 10,725
2011 10,725
2012 9,670
2013 6,505
Thereafter 49,188
4. Earnings Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the
weighted average shares outstanding for the reporting period. Diluted earnings
(loss) per share reflects all potential dilution, using either the treasury
stock method or the "if-converted" method, and assumes that the convertible
debt, stock options, restricted stock, performance restricted stock, warrants,
and other potentially dilutive financial instruments were converted into common
stock on the first day of the period. If the conversion of a potentially
dilutive security yields an antidilutive result, such potential dilutive
security is excluded from the diluted earnings per share calculation.
The following table contains common share equivalents, which were not included
in the historical (loss) earnings per share calculations as their effect would
be antidilutive:
16 Weeks Ended 16 Weeks Ended
June 20, 2009 June 14, 2008
-------------------- --------------------
Stock options 1,853,239 1,030,969
Warrants 686,277 4,969,401
Performance restricted stock units 757,888 10,000
Restricted stock units 342,377 -
Financing warrant 11,278,988 -
Convertible debt 3,553,806 11,278,988
The following table sets forth the calculation of basic and diluted earnings per
share:
16 Weeks Ended 16 Weeks Ended
June 20, 2009 June 14, 2008
-------------- ---------------
(Loss) income from continuing operations $ (58,304) $ 2,788
Adjustments for convertible debt (1) (26,840) -
Adjustments on Other financial liabilities (2) 1,875 (27,119)
------------- --------------
Loss from continuing operations-diluted $ (83,269) $ (24,331)
============= =============
Weighted average common shares outstanding 57,814,900 57,606,833
Performance restricted stock options - 313,196
Share lending agreement (3) (4,927,944) (8,134,002)
------------- --------------
Common shares outstanding-basic 52,886,956 49,786,027
Effect of dilutive securities:
Options to purchase common stock - 243,721
Convertible debt (1) 7,725,182 -
Convertible financial liabilities (2) (35,830,098) (1,873,094)
------------- --------------
Common shares outstanding-diluted 24,782,040 48,156,654
============= =============
(1) We have debt instruments with a bifurcated conversion feature that were
recorded at a significant discount. (Refer to Note 10 - Indebtedness and Other
Financial Liabilities). For purposes of determining if an application of the
"if-converted method" to these convertible instruments produces a dilutive
result, we always consider the combined impact of the numerator and denominator
adjustments, including a numerator adjustment for gains and losses, which would
have been incurred had the instruments been converted on the first day of the
period presented.
(2) Our Series B Warrants are classified as a liability because a third party
has the right to determine their cash or share settlement. (Refer to Note 10 -
Indebtedness and Other Financial Liabilities). These warrants are
marked-to-market on our income statement. For example, in periods when the
market price of our common stock decreases, our income from continuing
operations is increased. For purposes of determining if an application of the
treasury stock method to these warrants produces a dilutive result, we always
consider the combined impact of the numerator and denominator adjustments,
including a denominator adjustment to reduce shares, when the average market
price of our common stock for the period is below the warrant's strike price.
(3) We have 8,134,002 loaned shares under our share lending agreements, which
are considered issued and outstanding. However, the obligation of the financial
institutions to return the borrowed shares has been accounted for as prepaid
forward contract and, accordingly, shares underlying this contract are removed
from the computation of basic and diluted earnings per share, unless the
borrower defaults on returning the related shares. On September 15, 2008, Lehman
Europe, who is a party to a 3,206,058 share lending agreement with the Company
filed under Chapter 11 of the U.S. Bankruptcy Code with the United States
Bankruptcy Court and/or commenced equivalent proceedings in jurisdictions
outside of the United States (collectively, the "Lehman Bankruptcy"). As such,
we have included these loaned shares as issued and outstanding effective
September 15, 2008 for purposes of computing our basic and diluted weighted
average shares and (loss) income per share. For the 16 weeks ended June 20, 2009
and June 14, 2008, weighted average common shares relating to share lending
agreement of 4,927,944 and 8,134,002, respectively, were excluded from the
computation of earnings per share.
5. Cash, Cash Equivalents, Restricted Cash and Restricted Marketable
Securities
At June 20, 2009 and February 28, 2009, we had $2.1 million and $2.2 million,
respectively, in restricted cash held in escrow for services our Company is
required to perform in connection with the sale of our real estate properties.
At June 20, 2009 and February 28, 2009, our restricted marketable securities of
$3.7 million and $4.9 million, respectively, were held by Bank of America in the
Columbia Fund. These securities are classified as available-for-sale. On
December 6, 2007, Bank of America froze the Columbia Fund as a result of the
increased risk in subprime asset backed securities. During the first quarter of
fiscal 2009 and fiscal 2008, we received distributions from the Columbia Fund in
the amount of $1.4 million and $1.0 million, respectively, at an amount less
than 100% of the net asset value of the fund, resulting in realized losses of
$0.3 million and $0.03 million, respectively.
During the first quarter of fiscal 2009, we recorded an unrealized gain of $0.5
million based on the increase in the ending net asset value of the Columbia Fund
at June 20, 2009. The increase in net asset value is primarily a result of the
improved pricing of certain underlying securities included in the fund. As of
February 28, 2009, there were no investments with unrealized gains or losses.
During the first quarter of fiscal 2008, we recorded realized losses of $0.3
million based on the ending net asset value of the Columbia Fund as the decline
in net asset value was considered other than temporary at June 14, 2008 and was
not expected to be recovered from future distributions from the fund.
The carrying amount of our cash, cash equivalents, restricted cash and
restricted marketable securities approximates fair value.
As of As of
June 20, 2009 February 28, 2009
---------------------------------------------------------- -----------------
Gross Gross
Amortized Unrealized Unrealized Fair Fair Value/
Costs Gains Losses Value Amortized Cost
------------ ------------- ------------- ------------- ------------------
Classified as:
--------------
Cash $ 117,507 $ - $ - $ 117,507 $ 173,299
Cash equivalents:
Money market funds 1,990 - - 1,990 2,076
------------ ----------- ----------- ----------- ------------
Total cash and cash equivalents 119,497 - - 119,497 175,375
------------ ----------- ----------- ----------- ------------
Restricted cash 2,136 - - 2,136 2,214
Restricted marketable securities 1,793 519 - 2,312 2,929
Restricted marketable securities
included in other assets 1,428 - - 1,428 1,928
------------ ----------- ----------- ----------- ------------
Total cash, cash equivalents, restricted cash and
restricted marketable securities $ 124,854 $ 519 $ - $ 125,373 $ 182,446
============ =========== =========== =========== ============
Securities available-for-sale:
------------------------------
Maturing within one year $ 1,793 $ 2,312 $ 2,929
============ =========== ============
Maturing greater than one year $ 1,428 $ 1,428 $ 1,928
============ =========== ============
6. Fair Value Measurements
SFAS No. 157 defines and establishes a framework for measuring fair value and
expands related disclosures. This Statement applies to all assets and
liabilities that are being measured and reported on a fair value basis. Our
Company adopted SFAS No. 157 for our financial assets and financial liabilities
during our fiscal 2008 and for our nonfinancial assets and liabilities during
the first quarter of our fiscal 2009.
SFAS 157 establishes a three-tier fair value hierarchy, which classifies the
inputs used in measuring fair value. These tiers include:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Our Company's Level 1 assets include cash equivalents that are traded in an
active exchange market.
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities. Our Company's Level 2 liabilities include borrowings
under our line of credit, credit agreement, related party promissory note, our
debt securities and warrants. The fair value of our debt securities are based on
quoted market prices for such notes in non-active markets. Our warrants are
valued using the Black Scholes pricing model with inputs that are observable in
the market or can be
derived principally from or corroborated by observable market data. Amounts
included in other represent mortgages and bonds on various properties.
Level 3 - Unobservable inputs that are supported by little or no market activity
and that are financial instruments whose value is determined using pricing
models, discounted cash flows, or similar methodologies, as well as instruments
for which the determination of fair value requires significant judgment or
estimation. Our Company's Level 3 assets include restricted marketable
securities for which there is limited market activity. In addition, our goodwill
and other indefinite-lived intangible assets, our long-lived assets and closed
store occupancy costs are measured at fair value on a nonrecurring basis using
Level 3 inputs. Refer to Note 7 for information relating to the valuation of our
long-lived assets.
A financial asset or liability's classification within the hierarchy is
determined based on the lowest level input that is significant to the fair value
measurement.
The following table provides the assets and liabilities carried at fair value
measured on a recurring basis as of June 20, 2009:
Fair Value Measurements at June 20, 2009 Using
------------------------------------------------
Quoted Prices Significant Other Significant
Total Carrying in Active Observable Unobservable
Value at Markets Inputs Inputs
June 20, 2009 (Level 1) (Level 2) (Level 3)
----------------- ------------- ----------------- -------------
Assets:
Cash equivalents $ 1,990 $ 1,990 $ - $ -
Restricted marketable securities 3,740 - - 3,740
----------- -------- ---------- --------
Total $ 5,730 $ 1,990 $ - $ 3,740
=========== ======== ========== ========
Liabilities:
Line of Credit $ 3,935 $ - $ 3,935 $ -
Borrowings under Credit Agreement 301,783 - 301,783 -
Related Party Promissory Note - due Aug. 18, 2011 10,000 - 10,000 -
9.125% Senior Notes, due Dec. 15, 2011 12,840 - 11,466 -
5.125% Convertible Senior Notes,
due June 15, 2011 150,061 - 122,925 -
6.750% Convertible Senior Notes,
due December 15, 2012 217,633 - 161,767 -
9.375% Notes, due August 1, 2039 200,000 - 138,000 -
Series B Warrant 6,640 - 6,640 -
Other 2,160 - 2,160 -
----------- -------- ---------- --------
Total $ 905,052 $ - $ 758,676 $ -
=========== ======== ========== ========
Fair Value Measurements at Feb. 28, 2009 Using
------------------------------------------------
Quoted Prices Significant Other Significant
Total Carrying in Active Observable Unobservable
Value at Markets Inputs Inputs
Feb. 28, 2009 (Level 1) (Level 2) (Level 3)
----------------- ------------- ------------- -------------
Assets:
Cash equivalents $ 2,076 $ 2,076 $ - $ -
Restricted marketable securities 4,857 - - 4,857
--------------- ----------- ------------ -------------
Total $ 6,933 $ 2,076 $ - $ 4,857
=============== =========== ============= =============
Liabilities:
Line of Credit $ 5,000 $ - $ 5,000 $ -
Borrowings under Credit Agreement 331,783 - 331,783 -
Related Party Promissory Note - due Aug. 18, 2011 10,000 - 10,000 -
9.125% Senior Notes, due Dec. 15, 2011 12,840 - 12,399 -
5.125% Convertible Senior Notes,
due June 15, 2011 147,717 - 89,100 -
6.750% Convertible Senior Notes,
due December 15, 2012 (1) 215,054 - 140,250 -
9.375% Notes, due August 1, 2039 200,000 - 90,400 -
Series B Warrant 4,766 - 4,766 -
Other 2,253 - 2,253 -
--------------- ----------- ------------- -------------
Total $ 929,413 $ - $ 685,951 $ -
=============== =========== ============= =============
(1) The balance of the 6.750% Convertible Senior Notes decreased by $18.7
million from the amount reported in our 2008 Annual Report on Form 10-K as a
result of the retrospective application of FSP APB 14-1, which we adopted during
the first quarter of fiscal 2009. Refer to Note 2 - Impact of New Accounting
Pronouncements for additional information.
Level 3 Valuation Techniques:
-----------------------------
Financial assets are considered Level 3 when their fair values are determined
using pricing models, discounted cash flows or similar techniques and at least
one significant model assumption or input is unobservable. Level 3 financial
assets include our restricted marketable securities for which there is limited
market activity such that the determination of fair value requires significant
judgment or estimation. At June 20, 2009 and February 28, 2009, these securities
were valued primarily with the assistance of broker pricing models that
incorporate transaction details such as contractual terms, maturity, timing and
amount of future cash inflows, as well as assumptions about liquidity. Refer to
Note 7 for information relating to the valuation of our long-lived assets.
As discussed in Note 5 - Cash, Cash Equivalents, Restricted Cash and Restricted
Marketable Securities, on June 20, 2009, we had $3.7 million invested in the
Columbia Fund. Due to market liquidity conditions, cash redemptions from the
Columbia Fund were restricted. As a result of this restriction on cash
redemptions, we did not consider the Columbia Fund to be traded in an active
market with observable pricing on June 20, 2009 and these amounts were
categorized as Level 3.
The table below provides a summary of the changes in fair value, including net
transfers in and/or out, of all financial assets measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the period
February 28, 2009 to June 20, 2009:
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
-------------------------------
Restricted
Marketable
Securities
Beginning Balance $ 4,857
Total realized and unrealized (losses) and gains included in:
Earnings (1) (261)
Other comprehensive income (2) 519
Settlements (1,375)
---------
Ending Balance $ 3,740
=========
(1) Amounts are recorded in Store operating, general and administrative expense
in the Consolidated Statements of Operations.
(2) Represents unrealized gains relating to Level 3 assets still held at June
20, 2009.
7. Valuation of Long-Lived Assets
We review the carrying values of our long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. Such review is primarily based upon groups of
assets and the undiscounted estimated future cash flows from such assets to
determine if the carrying value of such assets is recoverable from their
respective cash flows. If such review indicates an impairment exists, we measure
such impairment on a discounted basis using a probability weighted approach and
a U.S. Treasury risk-free rate, which is based on the life of the primary asset
within the asset group.
We review assets in stores planned for closure or conversion for impairment upon
determination that such assets will not be used for their intended useful life.
During the 16 weeks ended June 20, 2009 and June 14, 2008, we recorded
impairment losses on long-lived assets of $1.1 million and $0.8 million,
respectively, related to stores that were or will be closed or converted in the
normal course of business. These amounts were included in "Store operating,
general and administrative expense" in our Consolidated Statements of
Operations.
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
8. Discontinued Operations
We have had multiple transactions throughout the years which met the criteria
for discontinued operations. These events are described based on the year the
transaction was initiated.
2007 Events
-----------
On May 30, 2007, our Company announced advanced negotiations for the sale of our
non-core stores located within the Greater New Orleans area, including inventory
related to these stores. Our Company ceased sales operations in all stores not
sold as of November 1, 2007. Planned sale transactions for these stores have
been completed.
On April 24, 2007, based upon unsatisfactory operating trends and the need to
devote resources to our expanding Northeast core business, our Company announced
negotiations for the sale of our non-core stores within our Midwest operations,
including inventory related to these stores. Our Company ceased sales operations
in all stores not sold as of July 7, 2007. Planned sale transactions for these
stores have been completed.
2005 Event
----------
During the first quarter of fiscal 2005, we announced plans for a major
strategic restructuring that would consolidate efforts in the Midwest. Thus, we
initiated efforts to close a total of 35 stores in the Midwest, all of which
were closed as of February 25, 2006.
2003 Events
-----------
During fiscal 2003, we adopted a formal plan to exit the Wisconsin markets
through the sale and/or disposal of these assets. In February 2003, we announced
the sale of a portion of our non-core assets, including seven stores in Madison,
Wisconsin and 23 stores in Milwaukee, Wisconsin. Also in fiscal 2003, we
announced an initiative to close 6 stores and convert 13 stores to our Food
Basics banner in the Detroit, Michigan and Toledo, Ohio markets.
Summarized below are the operating results for these discontinued businesses,
which are included in our Consolidated Statements of Operations, under the
captions "Loss from operations of discontinued businesses, net of tax" and "Gain
on disposal of discontinued businesses, net of tax" for the 16 weeks ended June
20, 2009 and June 14, 2008.
For the 16 Weeks Ended
-----------------------------------
June 20, 2009 June 14, 2008
------------- -------------
Loss from operations of
discontinued businesses
Sales $ - $ -
============ ===========
Loss from operations of
discontinued businesses, before tax (6,856) (4,163)
Tax benefit - -
------------ -----------
Loss from operations of
discontinued operations, net of tax $ (6,856) $ (4,163)
============ ===========
Gain on disposal of
discontinued operations
Gain on sale of fixed assets $ - $ 2,639
------------ -----------
Gain on disposal of
discontinued operations, before tax - 2,639
Tax benefit - -
------------ -----------
Gain on disposal of
discontinued operations, net of tax $ - $ 2,639
============ ===========
Summarized below is a reconciliation of the liabilities related to restructuring
obligations resulting from these activities.
For the 16 Weeks Ended June 20, 2009
-----------------------------------------------------------------------------------
Balance at Interest Balance at
2/28/2009 Accretion (1) Adjustments(2) Utilization(3) 06/20/2009
--------------- --------------- --------------- -------------- ----------
2007 Events
-----------
Occupancy $ 70,583 $ 2,848 $ (201) $ (8,684) $ 64,546
Severance 59,239 1,139 - (1,334) 59,044
----------- -------- -------- ---------- ---------
2007 events total 129,822 3,987 (201) (10,018) 123,590
2005 Event
----------
Occupancy 60,327 986 - (3,128) 58,185
2003 Events
-----------
Occupancy 18,712 351 - (1,021) 18,042
----------- -------- -------- ---------- ---------
Total $ 208,861 $ 5,324 $ (201) $ (14,167) $ 199,817
=========== ======== ======== ========== =========
Fiscal 2008
-----------------------------------------------------------------------------------
Balance at Interest Balance at
2/23/2008 Accretion (1) Adjustments(2) Utilization(3) 2/28/2009
--------------- --------------- --------------- -------------- ----------
2007 Events
-----------
Occupancy $ 62,873 $ 9,382 $ 28,959 $ (30,631) $ 70,583
Severance 58,520 2,019 3,730 (5,030) 59,239
----------- -------- -------- ---------- ---------
2007 events total 121,393 11,401 32,689 (35,661) 129,822
2005 Event
-----------
Occupancy 66,882 3,324 600 (10,479) 60,327
2003 Events
-----------
Occupancy 21,579 1,230 (902) (3,195) 18,712
----------- -------- -------- ---------- ---------
Total $ 209,854 $ 15,955 $ 32,387 $ (49,335) $ 208,861
=========== ======== ======== ========== =========
(1) The additions to occupancy and severance represent the interest
accretion on future occupancy costs and future obligations for early
withdrawal from multi-employer union pension plans which were recorded
at present value at the time of the original charge. Interest accretion
is recorded as a component of "Loss from operations of discontinued
business" on our Consolidated Statements of Operations.
(2) At each balance sheet date, we assess the adequacy of the balance of
the remaining liability to determine if any adjustments are required as
a result of changes in circumstances and/or estimates. These
adjustments are recorded as a component of "Loss from operations of
discontinued business" on our Consolidated Statements of Operations.
Fiscal 2009
-----------
During the 16 weeks ended June 20, 2009, we recorded an adjustment
reducing occupancy related costs for the 2007 events by $0.2 million
due to changes in our estimation of such future costs for our Greater
New Orleans event.
Fiscal 2008
-----------
The charge to occupancy for the 2007 and 2005 events represents
adjustments for additional occupancy related costs for our properties
of $29.0 million and $0.6 million, respectively, due to changes in our
estimation of such future costs due to continuing deteriorating
conditions in the Midwest real estate market. The charge to severance
for the 2007 events represents an adjustment of $3.7 million for future
obligations for early withdrawal from multi-employer union pension
plans. We also recorded an adjustment of $0.9 million to reduce
occupancy related costs for the 2003 events due to changes in our
estimation of such future costs.
(3) Occupancy utilization represents payments made during those periods for
rent, common area maintenance and real estate taxes. Severance
utilization represents payments made to terminated employees during the
period.
Summarized below are the payments made to date from the time of the original
charge and expected future payments related to these events:
2007 2005 2003
Events Event Events Total
---------- ---------- ---------- ----------
Total severance payments made to date $ 29,486 $ 2,650 $ 22,528 54,664
Expected future severance payments 59,044 - - 59,044
---------- ---------- --------- ----------
Total severance payments expected to be incurred 88,530 2,650 $ 22,528 113,708
---------- ---------- --------- ----------
Total occupancy payments made to date 60,541 49,779 30,542 140,862
Expected future occupancy payments,
excluding interest accretion 64,546 58,185 18,042 140,773
---------- ---------- --------- ----------
Total occupancy payments expected to be incurred,
excluding interest accretion 125,087 107,964 48,584 281,635
---------- ---------- --------- ----------
Total severance and occupancy payments made to date 90,027 52,429 53,070 195,526
Expected future severance and occupancy payments,
excluding interest accretion 123,590 58,185 18,042 199,817
---------- ---------- --------- ----------
Total severance and occupancy payments
expected to be incurred, excluding interest accretion $ 213,617 $ 110,614 $ 71,112 $ 395,343
========== ========== ========= ==========
Payments to date were primarily for occupancy related costs such as rent, common
area maintenance, real estate taxes, lease termination costs, severance, and
benefits. The remaining obligation relates to expected future payments under
long term leases and expected future payments for early withdrawal from
multi-employer union pension plans. The expected completion dates for the 2007,
2005 and 2003 events are 2028, 2022 and 2022, respectively.
Summarized below are the amounts included in our balance sheet captions on our
Company's Consolidated Balance Sheets related to these events:
June 20, 2009
-------------------------------------------------------------------
2007 2005 2003
Events Event Events Total
--------------- --------------- --------------- ---------------
Accrued salaries, wages and benefits $ 43 $ - $ - $ 43
Other accruals $ 27,493 $ 10,993 $ 3,114 $ 41,600
Other non-current liabilities $ 96,054 $ 47,192 $ 14,928 $ 158,174
February 28, 2009
-------------------------------------------------------------------
2007 2005 2003
Events Event Events Total
--------------- --------------- --------------- ---------------
Accrued salaries, wages and benefits $ 43 $ - $ - $ 43
Other accruals $ 31,890 $ 11,016 $ 3,249 $ 46,155
Other non-current liabilities $ 97,889 $ 49,311 $ 15,463 $ 162,663
We evaluated the reserve balances as of June 20, 2009 based on current
information and have concluded that they are adequate to cover future costs. We
will continue to monitor the status of the vacant and subsidized properties,
severance and benefits, and pension withdrawal liabilities, and adjustments to
the reserve balances may be recorded in the future, if necessary.
9. Asset Disposition Initiatives
In addition to the events described in Note 8 - Discontinued Operations, there
were restructuring transactions which were not primarily related to our
discontinued operations businesses. These events are referred to based on the
year the transaction was initiated, as described below.
Restructuring charges relate principally to employee severance and occupancy
costs resulting from the closure of facilities and other workforce reductions
attributable to our efforts to reduce costs. The costs of these reductions have
been and will be funded through cash from operations. Occupancy costs represent
facility consolidation and lease termination costs associated with our decision
to consolidate and close duplicative or excess warehouse and office facilities,
unproductive and excess facilities.
2005 Event
----------
During fiscal 2005, our Company sold our U.S. distribution operations and some
warehouse facilities and related assets to C&S Wholesale Grocers, Inc. The Asset
Purchase Agreement included the assignment of our leases in Central Islip, New
York and Baltimore, Maryland, and a warranty deed for our owned facilities in
Dunmore, Pennsylvania.
2001 Event
----------
During the third quarter of fiscal 2001, our Company determined that certain
underperforming operations, including 39 stores (30 in the United States and 9
in Canada) and 3 warehouses (2 in the United States and 1 in Canada) should be
closed and/or sold, and certain administrative streamlining should take place.
1998 Event
----------
In May 1998, we initiated an assessment of our business operations in order to
identify the factors that were impacting our performance. As a result of this
assessment, in fiscal 1998 and 1999, we announced a plan to close two warehouse
facilities and a coffee plant in the U.S., a bakery plant in Canada and 166
stores (156 in the United States and 10 in Canada) including the exit of the
Richmond, Virginia and Atlanta, Georgia markets.
Summarized below is a reconciliation of the liabilities related to restructuring
obligations resulting from these activities:
For the 16 Weeks Ended June 20, 2009
-------------------------------------------------------------------------------------
Balance at Interest Balance at
2005 Event 2/28/2009 Accretion (1) Adjustments(2) Utilization(3) 6/20/2009
---------- --------------- -------------- --------------- -------------- --------------
Continuing Operations
Occupancy $ 1,114 $ 11 $ (1,120) $ (5) $ -
Severance 904 - - (92) 812
--------------- -------------- --------------- -------------- --------------
2005 event total 2,018 11 (1,120) (97) 812
2001 Event
----------
Continuing Operations
Occupancy 7,080 146 - (210) 7,016
Discontinued Operations
Occupancy 11,307 201 - (856) 10,652
--------------- -------------- --------------- -------------- --------------
2001 event total 18,387 347 - (1,066) 17,668
1998 Event
----------
Continuing Operations
Occupancy 8,696 91 310 (1,200) 7,897
Severance 824 - - (40) 784
Discontinued Operations
Occupancy 543 8 (2) (182) 367
--------------- -------------- --------------- -------------- --------------
1998 event total 10,063 99 308 (1,422) 9,048
--------------- -------------- --------------- -------------- --------------
Total $ 30,468 $ 457 $ (812) $ (2,585) $ 27,528
=============== ============== =============== ============== ==============
Fiscal 2008
------------------------------------------------------------------------------------
Balance at Interest Balance at
2005 Event 2/23/2008 Accretion (1) Adjustments(2) Utilization(3) 2/28/2009
---------- --------------- --------------- --------------- -------------- --------------
Continuing Operations
Occupancy $ 1,231 $ 48 $ (91) $ (74) $ 1,114
Severance 1,686 - - (782) 904
--------------- -------------- -------------- -------------- --------------
2005 event total 2,917 48 (91) (856) 2,018
2001 Event
----------
Continuing Operations
Occupancy 6,755 385 1,794 (1,854) 7,080
Discontinued Operations
Occupancy 12,281 688 (166) (1,496) 11,307
--------------- -------------- --------------- -------------- --------------
2001 event total 19,036 1,073 1,628 (3,350) 18,387
1998 Event
----------
Continuing Operations
Occupancy 6,958 316 4,111 (2,689) 8,696
Severance 1,000 - - (176) 824
Discontinued Operations
Occupancy 1,093 49 (8) (591) 543
--------------- -------------- --------------- -------------- --------------
1998 event total 9,051 365 4,103 (3,456) 10,063
--------------- -------------- --------------- ------------- --------------
Total $ 31,004 $ 1,486 $ 5,640 $ (7,662) $ 30,468
=============== ============== =============== ============= ==============
(1) The additions to occupancy represent the interest accretion on future
occupancy costs which were recorded at present value at the time of
the original charge. These adjustments are recorded to "Store
operating, general and administrative expense" for continuing
operations and "Loss from operations of discontinued operations" for
discontinued operations on our Consolidated Statements of Operations.
(2) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. These adjustments are recorded to
"Store operating, general and administrative expense" for continuing
operations and "Loss from operations of discontinued operations" as
noted for discontinued operations on our Consolidated Statements of
Operations.
For the 16 Weeks Ended June 20, 2009
------------------------------------
For the 16 weeks ended June 20, 2009, we recorded an adjustment
eliminating occupancy related costs of $1.1 million for the 2005 event
due to the termination of the lease on the one remaining property
included in the 2005 Event. We also recorded an adjustment for
additional occupancy related costs of $0.3 million for the 1998 event
due to changes in our estimation of such future costs.
Fiscal 2008
-----------
During fiscal 2008, we recorded an adjustment reducing occupancy
related costs by $0.1 million for the 2005 event due to changes in our
estimation of such future costs. We also recorded adjustments for
additional occupancy related costs of $1.6 million and $4.1 million,
respectively, for the 2001 and 1998 events due to changes in our
estimation of such future costs.
(3) Occupancy utilization represents payments made during those periods for
rent. Severance and benefits utilization represents payments made to
terminated employees during the period.
Summarized below are the payments made to date from the time of the original
charge and expected future payments related to these events:
2005 2001 1998
Event Event Event Total
--------------- -------------- --------------- -------------
Total severance payments made to date $ 48,807 $ 28,205 $ 30,680 $ 107,692
Expected future severance payments 812 - 784 1,596
--------------- -------------- --------------- -------------
Total severance payments expected
to be incurred 49,619 28,205 31,464 109,288
--------------- -------------- --------------- -------------
Total occupancy payments made to date 13,856 63,436 116,607 193,899
Expected future occupancy payments,
excluding interest accretion - 17,668 8,264 25,932
--------------- -------------- --------------- -------------
Total occupancy payments expected
to be incurred, excluding interest
accretion 13,856 81,104 124,871 219,831
--------------- -------------- --------------- -------------
Total severance and occupancy
payments made to date $ 62,663 $ 91,641 $ 147,287 $ 301,591
Expected future severance and
occupancy payments, excluding
interest accretion 812 17,668 9,048 27,528
--------------- -------------- --------------- -------------
Total severance and occupancy payments
expected to be incurred, excluding
interest accretion $ 63,475 $ 109,309 $ 156,335 $ 329,119
=============== ============== =============== =============
Payments to date were primarily for occupancy related costs such as rent, common
area maintenance, real estate taxes, lease termination costs, severance, and
benefits. The remaining obligation relates to expected future payments under
long-term leases and expected future payments for early withdrawal from
multi-employer union pension plans. The expected completion dates for the 2005,
2001 and 1998 events are 2015, 2022 and 2020, respectively.
Summarized below are the amounts included in our balance sheet captions on our
Company's Consolidated Balance Sheets related to these events:
June 20, 2009
---------------------------------------------------------------------
2005 2001 1998
Event Event Event Total
--------------- --------------- --------------- ----------------
Other accruals $ 258 $ 2,875 $ 3,803 $ 6,936
Other non-current liabilities $ 554 $ 14,793 $ 5,245 $ 20,592
February 28, 2009
---------------------------------------------------------------------
2005 2001 1998
Event Event Event Total
--------------- --------------- --------------- ----------------
Other accruals $ 384 $ 2,965 $ 4,142 $ 7,491
Other non-current liabilities $ 1,634 $ 15,422 $ 5,921 $ 22,977
We evaluated the reserve balances as of June 20, 2009 based on current
information and have concluded that they are adequate to cover future costs. We
will continue to monitor the status of the vacant and subsidized properties,
severance and benefits, and pension withdrawal liabilities, and adjustments to
the reserve balances may be recorded in the future, if necessary.
10. Indebtedness and Other Financial Liabilities
Series A and B Warrants
-----------------------
As part of the acquisition of Pathmark on December 3, 2007, we issued 4,657,378
and 6,965,858 roll-over stock warrants in exchange for Pathmark's 2005 Series A
and Series B warrants, respectively. The Series A warrants were exercisable at
$18.36 and expired on June 9, 2008 and the Series B warrants are exercisable at
$32.40 and expire on June 9, 2015. The Tengelmann stockholders have the right to
approve any issuance of common stock under these warrants upon exercise
(assuming Tengelmann's outstanding interest is at least 25% and subject to
liquidity impairments defined within the Tengelmann Stockholder Agreement). In
addition, Tengelmann has the ability to exercise a "Put Right" whereby it has
the ability to require A&P to purchase A&P stock held by Tengelmann to settle
these warrants. Based on the rights provided to Tengelmann, A&P does not have
sole discretion to determine whether the payment upon exercise of these warrants
will be settled in cash or through issuance of an equivalent portion of A&P
shares. Therefore, these warrants are recorded as liabilities and
marked-to-market each reporting period based on A&P's current stock price.
On May 7, 2008, the 4,657,378 Series A warrants were exercised by Yucaipa
Corporate Initiatives Fund I, L.P., Yucaipa American Alliance Fund I, L.P. and
Yucaipa American Alliance (Parallel) Fund I, L.P. We opted to settle the Series
A warrants in cash totaling $45.7 million rather than issuing additional common
shares. Included in "Nonoperating income" on our Consolidated Statements of
Operations for the 16 weeks ended June 14, 2008, is a loss of $1.2 million for
the Series A warrants through the settlement date of May 7, 2008. "Nonoperating
income" for the 16 weeks ended June 20, 2009 and 16 weeks ended June 14, 2008
also includes a loss of $1.9 million and a gain of $27.1 million, respectively,
relating to market value adjustments for Series B warrants. The value of the
Series B warrants as of June 20, 2009 and February 28, 2009 was $6.6 million and
$4.8 million, respectively, and is included in "Other financial liabilities" on
our Consolidated Balance Sheets. The following assumptions and estimates were
used in the Black-Scholes model for the Series B warrants:
June 20, 2009 February 28, 2009
------------- -----------------
Expected life 5.97 years 6.28 years
Volatility 65.8% 61.3%
Dividend yield range 0% 0%
Risk-free interest rate 2.82% 2.69%
Public Debt Obligations
-----------------------
On December 18, 2007, we completed a public offering and issued $165 million
5.125% Convertible Senior Notes due 2011 and $255 million 6.750% Convertible
Senior Notes due 2012. The 5.125% Notes are not redeemable at our option at any
time. The 6.750% Notes are redeemable at our option on or after December 15,
2010, at a redemption price of 102.70% and on or after December 15, 2011, at a
redemption price of 101.35%. The initial conversion price of the 5.125% Notes is
$36.40, representing a 30.0% premium to the offering price of $28.00 and the
initial conversion price of the 6.750% Notes is $37.80, representing a 35.0%
premium to the offering price of $28.00 at maturity, and at our option, the
notes are convertible into shares of our stock, cash, or a combination of stock
and cash.
As of December 18, 2007, our Company did not have sufficient authorized shares
to provide for all potential issuances of common stock. Therefore, our Company
accounted for the conversion features as freestanding instruments. The notes
were recorded with a discount equal to the value of the conversion features at
the transaction date and will be accreted to the par value of the notes over the
life of the notes. The value of the conversion features were determined
utilizing the Black-Scholes option pricing model and recorded as a long-term
liability. The portion of the conversion features for which there was not shares
available for settlement of conversions were marked to market each balance sheet
date. On June 26, 2008, at a special meeting of stockholders, the number of
shares of common stock we have the authority to issue was increased to
160,000,000, based on a majority vote by our stockholders. During the 16 weeks
ended June 14, 2008, the gain that was recorded in "Nonoperating income" on our
Consolidated Statements of Operations for the conversion features of the 5.125%
and 6.750% convertible senior notes was $11.1 million and $5.1 million,
respectively. Based on an increase in available shares primarily due to the
settlement of our Series A warrants, $3.6 million and $14.7 million for the
conversion features of the 5.125% and 6.750% convertible senior notes,
respectively, were reclassified to "Additional paid-in-capital" on our
Consolidated Statements of Stockholder's Equity and Comprehensive (Loss) Income
during the first quarter of fiscal 2008. The following assumptions and estimates
were used in the Black-Scholes model:
For the 16 Weeks
Ended
June 14, 2008
---------------------
Expected life 3.0 years - 4.5 years
Volatility 33.0%
Dividend yield range 0%
Risk-free interest rate range 3.38% - 3.73%
The $255 million aggregate principal amount of the 6.750% Convertible Senior
Notes due 2012 is subject to the provisions of FSP APB 14-1, which we adopted
during our first quarter ended June 20, 2009 (refer to Note 2 - Impact of New
Accounting Pronouncements). We estimate that our effective interest rate for
similar debt without the conversion feature is approximately 12%. During the 16
weeks ended June 20, 2009 and June 14, 2008, we recognized additional non-cash
interest expense of $1.2 million and $1.0 million, respectively, relating to our
adoption of FSP APB 14-1. The net carrying value of outstanding debt as of June
20, 2009 and February 28, 2009 was $217.6 million and $215.1 million,
respectively, net of unamortized discount of $37.4 million and $39.9 million,
respectively. As of June 20, 2009, our remaining unamortized discount will be
recognized as follows:
Remainder of 2009 $ 6,205
2010 9,884
2011 11,139
2012 10,140
----------
$ 37,368
==========
Call Option and Financing Warrants
----------------------------------
Concurrent with the issuance of the convertible senior notes, our Company issued
financing warrants in conjunction with the call options recorded as equity in
the Consolidated Balance Sheet to effectively increase the conversion price of
these notes and reduce the potential dilution upon future conversion. The
financing warrants allow holders to purchase common shares at $46.20 with
respect to the 5.125% Notes and $49.00 with respect to the 6.750% Notes. The
financing warrants were valued at $36.8 million at the issuance date. At the
issuance date, our Company did not have sufficient authorized shares to provide
for all potential issuances of common stock. Therefore, the financing warrants
are accounted for as freestanding derivatives, required to be settled in cash
until sufficient shares are available and are recorded as a long-term liability
in the Consolidated Balance Sheet. On June 26, 2008, at a special meeting of
stockholders, the number of shares of common stock we have the authority to
issue was increased to 160,000,000 based on a majority vote by our stockholders.
Thus, the financing warrants were marked to market through June 26, 2008
utilizing the Black-Scholes option pricing model. These financing warrants are
no longer classified as a liability as of June 26, 2008. During the 16 weeks
ended June 14, 2008, we recorded a gain of $6.5 million included in
"Nonoperating income" on our Consolidated Statements of Operations. The
following assumptions and estimates were used in the Black-Scholes model:
For the 16 Weeks
Ended
June 14, 2008
---------------------
Expected life 3.3 years - 4.8 years
Volatility 33.0%
Dividend yield range 0%
Risk-free interest rate range 3.38% - 3.73%
We understand that on or about October 3, 2008, Lehman Brothers OTC Derivatives,
Inc. or "LBOTC" who accounts for 50% of the call option and financing warrant
transactions filed for bankruptcy protection, which is an event of default under
such transactions. We are carefully monitoring the developments affecting LBOTC,
noting the impact of the LBOTC bankruptcy effectively reduced conversion prices
for 50% of our convertible senior notes to their stated prices of $36.40 for the
5.125% Notes and $37.80 for the 6.750% Notes.
In the event we terminate these transactions, or they are canceled in
bankruptcy, or LBOTC otherwise fails to perform its obligations under such
transactions, we would have the right to monetary damages in the form of an
unsecured claim against LBOTC in an amount equal to the present value of our
cost to replace these transactions with another party for the same period and on
the same terms.
11. Interest Expense
Interest expense is comprised of the following:
For the 16 Weeks Ended
-------------------------------
June 20, 2009 June 14, 2008(1)
----------------- -------------
$675 million Credit Agreement $ 6,170 $ 5,369
Related Party Promissory Note, due August 2, 2011 183 -
9.125% Senior Notes, due December 15, 2011 360 360
5.125% Convertible Senior Notes, due June 15, 2011 2,602 2,595
6.750% Convertible Senior Notes, due December 15, 2012 5,296 5,282
9.375% Notes, due August 1, 2039 5,844 5,753
Capital Lease Obligations and Real Estate Liabilities 16,083 17,079
Amortization of Deferred Financing Fees and Discounts 7,233 6,829
Self Insurance and GHI Contract Liability Accretion 9,200 2,550
Other 1,277 1,109
----------- -----------
Total $ 54,248 $ 46,926
=========== ===========
(1) The interest expense associated with the 6.750% convertible senior notes
increased by $1.0 million from the amount reported in our Form 10-Q for the 16
weeks ended June 14, 2008 as a result of the retrospective application of FSP
APB 14-1, which we adopted during the first quarter of fiscal 2009. Refer to
Note 2 - Impact of New Accounting Pronouncements for additional information.
12. Other Accruals
Other accruals are comprised of the following:
At At
June 20, 2009 Feb. 28, 2009
------------- -------------
Self-insurance Reserves $ 76,751 $ 77,560
Closed Store and Warehouse Reserves 56,414 64,508
Pension Withdrawal Liabilities 10,461 5,393
GHI Contract Liability 5,912 5,742
Accrued Occupancy Related Costs for Open Stores 23,696 27,439
Deferred Income 24,779 33,558
Deferred Real Estate Income 2,558 2,558
Accrued Audit, Legal and Other 9,343 11,719
Accrued Interest 7,043 9,000
Other Postretirement and Postemployment Benefits 4,153 4,153
Accrued Advertising 2,042 1,493
Other 2,642 3,473
----------- -----------
Total $ 225,794 $ 246,596
=========== ===========
13. Other Non-Current Liabilities
Other non-current liabilities are comprised of the following:
At At
June 20, 2009 Feb. 28, 2009
------------- -------------
Unrecognized Tax Benefits $ 156,267 $ 156,267
Self-insurance Reserves 152,115 153,870
Closed Store and Warehouse Reserves 132,318 140,593
Pension Withdrawal Liabilities 107,260 109,714
GHI Contract Liability for Employee Benefits 88,234 85,690
Pension Plan Benefits 92,121 89,842
Other Postretirement and Postemployment Benefits 34,482 34,295
Corporate Owned Life Insurance Liability 57,918 59,529
Deferred Rent Liabilities 54,848 54,047
Deferred Income 78,177 83,128
Unfavorable Lease Liabilities 29,199 30,708
Other 15,072 13,726
----------- -----------
Total $ 998,011 $ 1,011,409
=========== ===========
14. Retirement Plans and Benefits
Defined Benefit Plans
We provide retirement benefits to certain non-union and union employees under
various defined benefit plans. Our defined benefit pension plans are
non-contributory and benefits under these plans are generally determined based
upon years of service and, for salaried employees, compensation. We fund these
plans in amounts consistent with the statutory funding requirements. We use our
fiscal year end as the measurement date. The components of net pension cost
(income) were as follows:
For the 16 Weeks Ended
--------------------------------
June 20, June 14,
2009 2008
----------- ----------
Service cost $ 2,023 1,534
Interest cost 8,819 7,590
Expected return on plan assets (7,611) (9,066)
Amortization of:
Net prior service cost 91 74
Actuarial loss 1,435 36
Special Termination benefits 400 -
----------- ---------
Net pension cost $ 5,157 $ 168
=========== =========
Contributions
As of June 20, 2009, we contributed approximately $2.1 million to our defined
benefit plans. We plan to contribute approximately $4.9 million to our plans
during the remainder of fiscal 2009.
Postretirement Plans
We provide postretirement health care and life insurance benefits to certain
union and non-union employees. We recognize the cost of providing postretirement
benefits during employees' active service periods. We use our fiscal year end as
the measurement date for our postretirement benefits. The components of net
postretirement benefits cost (income) were as follows:
For the 16 Weeks Ended
-------------------------------
June 20, June 14,
2009 2008
----------- ----------
Service cost $ 156 $ 312
Interest cost 599 705
Amortization of:
Prior service credit (415) (414)
Actuarial gain (252) -
------------ ---------
Net postretirement benefits cost $ 88 $ 603
=========== =========
GHI Contractual Obligation
We have a contractual obligation to fund pension benefits for certain employees
of Grocery Haulers, Inc. ("GHI") who handle transportation and logistics
services for our Pathmark stores. Upon our acquisition of Pathmark in December
2007, this obligation was accounted for as an unfavorable contract based on
liabilities allocable to GHI, net of related assets, which were held by the
Multiemployer Pension Plan ("the Fund") jointly sponsored by the Local 863 Union
and various other employers. Effective August 29, 2008, GHI, the Fund, and our
Company entered into a series of agreements which collectively provided that:
(i) GHI withdrew from the Fund; (ii) our Pathmark Pension Plan would be amended
to become a multiple employer plan to provide for the participation in the plan
by certain GHI employees; and (iii) the Fund liabilities allocable to GHI and a
portion of the Fund assets would be transferred to the Pathmark Pension Plan. As
a result, pension assets attributable to GHI's employees of $13.6 million were
transferred from the Fund in January 2009 and combined with the existing
Pathmark Pension Plan's assets. Since the assets in the Pathmark Pension Plan
are available to pay pension benefits of both the Company's employees and GHI's
employees servicing our Pathmark stores, the transferred assets are treated as
pension plan assets. However, since GHI's employees covered by this plan are not
employees of the Company, our obligation to fund their pension benefits is
accounted for as a separate contractual obligation at its fair value.
As of June 20, 2009 and February 28, 2009, the fair value of our contractual
obligation to GHI's employees was $94.1 million and $91.4 million, respectively,
using discount rates of 6.5% and 7.0%, respectively, which were derived from
the published zero-coupon AA corporate bond yields. Our contractual obligation
relating to pension benefits for GHI's employees is included within "Other
accruals" and "Other non-current liabilities" in our Consolidated Balance
Sheets. Additions to our GHI contractual obligation for current service costs
and actuarial gains and losses are recorded within "Cost of merchandise sold" in
our Consolidated Statements of Operations at their current value. Accretion of
the obligation to present value is recorded within "Interest expense" in our
Consolidated Statements of Operations. During the first quarter ended June 20,
2009, we recognized $0.2 million of service costs and $6.4 million of interest
expense, representing interest accretion and the impact of the lower discount
rate used to value this obligation, resulting from a decline in the published
zero-coupon AA corporate bond yields. The related benefits payments of $3.9
million were made by the Pathmark Pension Plan during the first quarter ended
June 20, 2009.
15. Stock Based Compensation
During the first quarter of fiscal 2009, compensation expense related to
share-based incentive plans was $2.9 million, after tax, compared to $4.9
million, after tax, during the first quarter of fiscal 2008. Included in
share-based compensation expense recorded during the first quarter of fiscal
2009 and fiscal 2008 was $0.4 million and $0.6 million, respectively, related to
expensing of stock options, $0.1 million and nil, respectively, relating to
expensing of restricted stock units, $2.2 million and $4.1 million,
respectively, relating to expensing of performance restricted stock units, and
$0.2 million and $0.2 million, respectively, relating to expensing of common
stock granted to our Board of Directors at the Annual Meeting of
Stockholders. We did not capitalize any of our stock based compensation costs
during the first quarters of fiscal 2009 and fiscal 2008.
At June 20, 2009, we had two stock-based compensation plans, the 2008 Long Term
Incentive and Share Award Plan and the 2004 Non-Employee Director Compensation
Plan. The general terms of each plan are reported in our Fiscal 2008 Annual
Report on Form 10-K.
Stock options
The following is a summary of the stock option activity during the first quarter
ended June 20, 2009:
Weighted Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term (years) Value
------------- ----------- ---------------- -----------
Outstanding at February 28, 2009 1,551,934 $ 23.77
Granted 1,010,319 4.01
Canceled or expired (18,421) 29.83
Exercised (397) 3.86
-------------- ----------
Outstanding at June 20, 2009 2,543,435 $ 15.88 5.7 $ 0.6
============= ========== ======== ========
Exercisable at:
June 20, 2009 1,376,978 $ 23.15 2.6 $ -
======== ========
Nonvested at:
June 20, 2009 1,166,457 $ 7.30 9.5 $ 0.5
======== ========
Fair values for each stock option grant were estimated using a Black-Scholes
valuation model which utilized assumptions as detailed in the following table
for expected life based upon historical option exercise patterns, historical
volatility and risk-free rate based on the U.S. Treasury constant maturities in
effect at the time of grant. Our stock options have a contractual term of 10
years. The following assumptions were in place for grants that occurred during
the 16 weeks ended June 20, 2009 and June 14, 2008:
16 Weeks Ended 16 Weeks Ended
June 20, 2009 June 14, 2008
------------------ -----------------
Expected life 7 years 7 years
Volatility 126% 52%
Risk-free interest rate 0.05% 2.96%
The weighted average grant date fair value of stock options granted during the
first quarter ended June 20, 2009 and June 14, 2008 was $3.63 and $14.64,
respectively. Options granted during fiscal 2009 vest 33% during each of the
fiscal years 2009, 2010 and 2011. Options granted during the first quarter of
fiscal 2008 vest 25% on each anniversary date of issuance over a four year
period. As of June 20, 2009, approximately $5.1 million, after tax, of total
unrecognized compensation expense related to unvested stock option awards will
be recognized over a weighted average period of 2.7 years.
The total intrinsic value of options exercised during the first quarter ended
June 20, 2009 and June 14, 2008 was nil and $0.5 million, respectively.
The amount of cash received from the exercise of stock options during the first
quarter of fiscal 2009 was not significant.
Restricted Stock Units
----------------------
During the first quarter of fiscal 2009, our Company granted 1,440,176 shares of
time-vested restricted stock awards to certain eligible employees, with a total
grant date fair value of $5.8 million, which is based on the fair market value
of the Company's common stock at the date of grant. One-fourth of these awards
will vest at the end of fiscal 2009 and three-fourths will vest at the end of
fiscal 2011, subject to meeting the appropriate eligibility and service
conditions. Approximately $4.4 million, net of tax, of unrecognized compensation
expense relating to these restricted stock units is expected to be recognized
through fiscal 2012.
Performance Restricted Stock Units
----------------------------------
The following is a summary of the performance restricted stock units activity
during the first quarter ended June 20, 2009:
Weighted
Average
Grant Date
Shares Fair Value
------------- -------------
Nonvested at February 28, 2009 1,815,537 $ 26.17
Granted 1,439,673 4.01
Canceled or expired (77,202) 29.69
Vested (224,122) 11.78
-------------- -------------
Nonvested at June 20, 2009 2,953,886 $ 16.37
============= =============
Performance restricted stock units are granted at the fair market value of the
Company's common stock at the date of grant, adjusted by an estimated forfeiture
rate.
During the first quarter of fiscal 2009 and fiscal 2008, our Company granted
1,439,673 shares and 424,782 shares, respectively, of performance restricted
stock units to selected employees for a total grant date fair value of $5.8
million and $11.1 million, respectively. Approximately $10.1 million of
unrecognized fair value compensation expense relating to these performance
restricted stock units, and those issued in the previous year is expected to be
recognized through fiscal 2011, based on estimates of attaining vesting
criteria.
Performance restricted stock units issued during fiscal 2009 are earned based on
our Company achieving certain operating targets in fiscal 2009. One-third of
these awards will vest at the end of fiscal 2009 and two-thirds will vest at the
end of fiscal 2010, subject to meeting the appropriate eligibility and service
conditions.
On May 21, 2009, our Board of Directors modified the terms of the performance
restricted stock units granted in fiscal 2007 under our executive and
non-executive Closing & Integration Incentive Plan ("CLIIP"), by removing the
achievement of specific stock price targets as a precondition to the vesting of
earned units. The Board also approved a modification of the vesting schedule for
non-executives such that earned units will vest as follows: one-third in July
2009, one-third in July 2010 and one-third in July 2011. Vesting of earned units
for executives will occur on December 3, 2010. All vesting remains subject to
the other terms and conditions of the CLIIP. Additionally, on July 16, 2009, the
Board determined that 100% of the restricted stock units had been earned under
the CLIIP.
As a result of the foregoing modification and Board determination, our Company
will incur an additional incremental compensation cost of $1.6 million which is
being recognized over the remainder of the new vesting period.
The total fair value of units that vested during the first quarter ended June
20, 2009 and June 14, 2008 was $0.9 million and $12.1 million, respectively.
16. Income Taxes
The income tax provisions recorded for the 16 weeks ended June 20, 2009 and June
14, 2008 reflect our estimated expected annual tax rates applied to our
respective domestic and foreign financial results.
A deferred tax asset is recognized for temporary differences that will result in
deductible amounts in future years and for carryforwards. In addition, a
valuation allowance is recognized if, based on existing facts and circumstances,
it is more likely than not that some portion or all of the deferred tax asset
will not be realized. Based upon our continued assessment of the realization of
our net deferred tax asset and our historic cumulative losses, we concluded that
it was appropriate to record a valuation allowance in an amount that would
reduce our net deferred tax asset to zero. For the 16 weeks ended June 20, 2009,
the valuation allowance increased by $23.9 million to reflect generation of
additional operating losses. For the 16 weeks ended June 14, 2008, the valuation
allowance increased by $46.6 million to reflect the increase in deferred income
tax assets recorded relating to the purchase price allocation adjustment
relating to our acquisition of Pathmark Stores, Inc., as well as generation of
additional net operating losses. To the extent that our operations generate
sufficient taxable income in future periods, we will reverse the income tax
valuation allowance. In future periods, we will continue to record a valuation
allowance against net deferred tax assets that are created by losses until such
time as the certainty of future tax benefits can be reasonably assured.
Our Company is subject to U.S. federal income tax, as well as income tax in
multiple state and foreign jurisdictions. As of June 20, 2009, we remain subject
to examination by federal, state and local tax authorities for tax years 2004
through 2008. With a few exceptions, we are no longer subject to federal, state
or local examinations by tax authorities for tax years 2003 and prior.
As of June 20, 2009, there have been no material changes to the Company's
uncertain tax position disclosures as discussed in Note 14 of the Company's
Fiscal 2008 Annual Report on Form 10-K. At this time, we estimate that the
amount of our gross unrecognized tax positions may decrease by up to
approximately $154 million within the next 12 months, primarily due to the
settlement of ongoing audits and lapses of statutes of limitations in certain
jurisdictions. Any decrease in our Company's gross unrecognized tax positions
would require a re-evaluation of our Company's valuation allowance maintained on
our net deferred tax asset and, therefore, is not expected to effect our
effective tax rate.
For the 16 weeks ended June 20, 2009 and June 14, 2008, no amounts were recorded
for interest and penalties within "Provision for income taxes" in our
Consolidated Statements of Operations.
The effective tax rate on continuing operations of 0.7% and 33.2% for the 16
weeks ended June 20, 2009 and June 14, 2008, respectively, varied from the
statutory rate of 35%, primarily due to the recording of state and local income
taxes, the recording of additional valuation allowance and the impact of the
Pathmark financing.
On July 30, 2008, The Housing Assistance Act of 2008 ("the Act") was signed into
law. The Act contained a provision allowing corporate taxpayers to make an
election to treat certain unused research and Alternative Minimum Tax credit
carryforwards as refundable in lieu of claiming bonus and accelerated
depreciation for "eligible qualified property" placed in service through the end
of fiscal 2008. The American Reinvestment and Recovery Tax Act, which was
enacted on February 17, 2009, extended this election through 2009. We expect the
refund to be approximately $1.0 million for the 16 weeks ended June 20, 2009,
for a total refund of $3.4 million to date.
As of June 20, 2009 we had $503.2 million in federal Net Operating Loss ("NOL")
carryforwards that expire between 2023 and 2029, some of which are subject to an
annual limitation. The federal NOL carryforwards include $7.4 million related to
the excess tax deductions relating to stock option plans that have yet to reduce
income taxes payable. Upon utilization of these carryforwards, the associated
tax benefits of approximately $2.6 million will be recorded in "Additional
paid-in capital". In addition, our Company had state loss carryforwards of $9.0
million that expire during fiscal 2009 and approximately $1.0 billion that will
expire between fiscal 2010 and fiscal 2029. Our Company's general business
credits consist of federal and state work incentive credits, which expire
between fiscal 2010 and fiscal 2029, some of which are subject to an annual
limitation.
At June 20, 2009 and February 28, 2009, we had a net current deferred tax asset
which is included in "Prepaid expenses and other current assets" on our
Consolidated Balance Sheets of $35.1 million and $36.9 million, respectively, a
net non-current deferred tax asset which is included in "Other Assets" on our
Consolidated Balance Sheets of $67.7 million and $65.9 million, respectively,
and a non-current tax liability for uncertain tax positions which is included in
"Other non-current liabilities" and "Other assets" on our Consolidated Balance
Sheets of $162.8 million as of both dates.
17. Operating Segments
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Our chief operating decision maker is our President and
Chief Executive Officer.
During the second quarter of fiscal 2008, our chief operating decision maker
changed the manner by which our results are evaluated; therefore, our reportable
segments have been revised to be consistent with the way we currently manage our
business. Accordingly, we have revised our segment reporting to report in four
reportable segments: Fresh, Price Impact, Gourmet and Other. The Other segment
includes our Food Basics and Liquor businesses. The criteria necessary to
classify the Midwest and Greater New Orleans areas as discontinued were
satisfied in fiscal 2007 and these operations have been presented as such in our
Consolidated Statements of Operations for all periods presented. Refer to Note 8
- Discontinued Operations for further discussion. Prior year information has
been restated to conform to current year presentation.
The accounting policies for these segments are the same as those described in
the summary of significant accounting policies included in our Fiscal 2008
Annual Report. We measure segment performance based upon segment income (loss).
Reconciling amounts between segment income (loss) and income (loss) from
operations include corporate-level activity not specifically attributed to a
segment, which includes (i) the purchase of all merchandise (including the
design and production of private label merchandise sold in our retail stores),
(ii) real estate management and (iii) information technology, finance and other
corporate administrative personnel, as well as, other reconciling items
primarily attributed to nonrecurring activities.
Assets and capital expenditures are not allocated to segments for internal
reporting presentations.
Interim information on segments is as follows:
For the 16 Weeks Ended June 20, 2009
-------------------------------------------------------------------
Grocery (1) Meat (2) Produce (3) Total
--------------- -------------- --------------- --------------
Sales by Category $ 1,939,600 $ 526,771 $ 323,872 $ 2,790,243
=============== ============== =============== ==============
For the 16 Weeks Ended June 14, 2008
-------------------------------------------------------------------
Grocery (1) Meat (2) Produce (3) Total
--------------- -------------- --------------- --------------
Sales by Category $ 2,035,849 $ 549,755 $ 337,061 $ 2,922,665
=============== ============== =============== ==============
(1) The grocery category includes grocery, frozen foods, dairy, general
merchandise/health and beauty aids, liquor and pharmacy.
(2) The meat category includes meat, deli, bakery and seafood.
(3) The produce category includes produce and floral.
For the 16 Weeks Ended
----------------------------------------------
June 20, 2009 June 14, 2008
-------------------- -------------------
Sales
Fresh $ 1,386,740 $ 1,461,833
Price Impact** 1,239,223 1,302,189
Gourmet 85,381 85,028
Other 78,899 73,615
-------------------- -------------------
Total sales $ 2,790,243 $ 2,922,665
==================== ===================
Segment income (loss)
Fresh $ 41,241 $ 36,191
Price Impact** (1,775) 20,380
Gourmet 8,119 7,415
Other 923 664
-------------------- -------------------
Total segment income 48,508` 64,650
Corporate (46,236) (48,463)
Reconciling items * (4,108) (14,096)
-------------------- -------------------
(Loss) income from operations (1,836) 2,091
Nonoperating income (1,875) 48,597
Interest expense (1) (54,248) (46,926)
Interest and dividend income 41 410
-------------------- -------------------
(Loss) income from continuing operations before income taxes $ (57,918) $ 4,172
==================== ===================
(1) The interest expense associated with the 6.750% Convertible Senior Notes
increased by $1.0 million from the amount reported in our Form 10-Q for the
16 weeks ended June 14, 2008 as a result of the retrospective application of
FSP APB 14-1, which we
adopted during the first quarter of fiscal 2009. Refer to Note 2 - Impact of
New Accounting Pronouncements for additional information.
For the 16 Weeks Ended
----------------------------------------------
June 20, 2009 June 14, 2008
-------------------- -------------------
Segment depreciation and amortization - continuing operations
Fresh $ 26,294 $ 28,653
Price Impact** 30,558 30,162
Gourmet 2,901 3,183
Other 1,220 1,128
---------------------- -------------------
Total segment depreciation and amortization - continuing operations 60,973 63,126
Corporate 16,815 16,901
---------------------- -------------------
Total depreciation and amortization $ 77,788 $ 80,027
====================== ===================
* Reconciling items for the 16 weeks ended June 20, 2009, which are not
included in segment income include: (i) pension withdrawal costs of $2.4
million, (ii) Pathmark integration and other restructuring costs of $2.4
million, (iii) LIFO reserve adjustment of $1.2 million and (iv) net loss on
marketable securities of $0.3 million, partially offset by net gain
relating to real estate related activity of $2.2 million. Reconciling items
for the 16 weeks ended June 14, 2008 include: (i) Pathmark integration
costs of $11.9 million, (ii) LIFO reserve adjustment of $1.4 million, and
(iii) real estate related activity of $0.8 million.
** Includes results from Fresh stores that have been subsequently converted to
Price Impact stores.
18. Commitments and Contingencies
SUPPLY AGREEMENT
On March 7, 2008, we entered into a definitive agreement with C&S Wholesale
Grocers, Inc. ("C&S") whereby C&S will provide warehousing, logistics,
procurement and purchasing services (the "Services") in support of the Company's
entire supply chain. This agreement replaces and supersedes three (3) separate
wholesale supply agreements under which the parties have been operating. The
term of the agreement is ten and one-half (10-1/2) years, which includes a
six-month "ramp-up" period during which the parties will transition to the new
contractual terms and conditions. The agreement provides that the actual costs
of performing the services shall be reimbursed to C&S on an "open-book" or
"cost-plus" basis, whereby the parties will negotiate annual budgets that will
be reconciled against actual costs on a periodic basis. The parties will also
annually negotiate services specifications and performance standards that will
govern warehouse operations. The agreement defines the parties' respective
responsibilities for the procurement and purchase of merchandise intended for
use or resale at our Company's stores, as well as the parties' respective
remuneration for warehousing and procurement/purchasing activities. In
consideration for the services it provides under the agreement, C&S will be paid
an annual fee and will have incentive income opportunities based upon our cost
savings and increases in retail sales volume. The contract provides that we will
purchase virtually all of our warehoused inventory from C&S. Although there are
a limited number of distributors that can supply our stores, we believe that
other suppliers could provide similar product on comparable terms. However, a
change in suppliers could cause a delay in distribution and a possible loss of
sales which would affect our results adversely.
LEASE RELATED
Lease Assignment
----------------
On August 14, 2007, Pathmark entered into a leasehold assignment contract for
the sale of its leasehold interests in one of its stores to CPS Operating
Company LLC, a Delaware limited liability company ("CPS"). Pursuant to the terms
of the agreement, Pathmark was to receive $87 million for assigning and
transferring to CPS all of Pathmark's interest in the lease and CPS was to have
assumed all of the duties and obligations of Pathmark under the lease. CPS
deposited $6 million in escrow as a deposit against the purchase price for the
lease, which is non-refundable to CPS, except as otherwise expressly provided in
the agreement. The assignment of the lease was scheduled to close on December
28, 2007. On December 27, 2007, CPS issued a notice terminating the agreement
for reason of a purported breach of the agreement, which, if proven, would
require the return of the escrow. We are disputing the validity of CPS's notice
of termination as we believe CPS's position is without merit. Because we are
challenging the validity of CPS's December 27, 2007 notice of termination, we
issued our own notice to CPS on December 31, 2007, asserting CPS's breach of the
agreement as a result of their failure to close on December 28, 2007. CPS's
breach, if proven, would entitle us to keep the escrow. Both parties have taken
legal action to obtain the $6 million deposit held in escrow.
Other
-----
In the normal course of business, we have assigned to third parties various
leases related to former operating stores (the "Assigned Leases") for which we
generally remained secondarily liable. As such, if any of the assignees were to
become unable to make payments under the Assigned Leases, we could be required
to assume the lease obligation. As of June 20, 2009, 205 Assigned Leases remain
in place. Assuming that each respective assignee became unable to make payments
under an Assigned Lease, an event we believe to be remote, we estimate our
maximum potential obligation with respect to the Assigned Leases to be
approximately $632.7 million, which could be partially or totally offset by
reassigning or subletting these leases.
LEGAL PROCEEDINGS
Antitrust Class Action Litigation
---------------------------------
In connection with a settlement reached in the VISA/MasterCard antitrust class
action litigation, our Company is entitled to a portion of the settlement fund
that will be distributed to class members. Pursuant to our review of our
historical records as well as estimates provided by the Claims Administrator, we
recorded a pre-tax recovery of $2.2 million as a credit to "Store operating,
general and administrative expense" in our Statements of Consolidated Operations
during fiscal 2008. During fiscal 2009, we will continue to work with the Claims
Administrator to ensure that any additional monies owed to our Company in
connection with this litigation are received. This process may result in
additional recoveries being recorded in future periods.
LaMarca et al v. The Great Atlantic & Pacific Tea Company, Inc et al.
---------------------------------------------------------------------
("Defendants")
--------------
On June 24, 2004, a class action complaint was filed in the Supreme Court of the
State of New York against The Great Atlantic & Pacific Tea Company, Inc., d/b/a
A&P, The Food Emporium, and Waldbaum's alleging violations of the overtime
provisions of the New York Labor Law. Three named plaintiffs, Benedetto LaMarca,
Dolores Guiddy, and Stephen Tedesco, alleged on behalf of a class that our
Company failed to pay overtime wages to full-time hourly employees who were
either required or permitted to work more than 40 hours per week.
In April 2006, the plaintiffs filed a motion for class certification. In July
2007, the Court granted the plaintiffs' motion and certified the class as
follows: All full-time hourly employees of Defendants who were employed in
Defendants' supermarket stores located in the State of New York, for any of the
period from June 24, 1998 through the date of the commencement of the action,
whom Defendants required or permitted to perform work in excess of 40 hours per
week without being paid overtime wages. In December 2008, the Court approved the
Form of Notice, which included an "opt-out" provision and in January 2009, the
Plaintiffs mailed the Notice to potential class members and the opt-out deadline
expired in March 2009. The parties have commenced discovery. The Company intends
to move to decertify the class once certain discovery has been completed.
As discovery on the plaintiffs has recently commenced, neither the number of
class participants nor the sufficiency of their respective claims can be
determined at this time.
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.
19. Subsequent Events
Our Company has evaluated and disclosed any subsequent events that have occurred
from June 20, 2009 through the date of filing of this Quarterly Report on Form
10-Q. We were not required to recognize the effect of our subsequent events in
our financial statements, as they arose after our balance sheet date. The
following is a summary of our nonrecognized subsequent events:
Pension Withdrawal
On June 30, 2007, the UFCW Local 174 Retail Pension Fund ("UFCW") experienced a
mass withdrawal termination, which caused our Company to incur a mass withdrawal
liability. On July 14, 2009, our Company signed a Transfer Agreement, whereas a
portion of our mass withdrawal liability will be settled by transferring the
existing pension benefit liabilities relating to our employees and retirees from
UFCW to the A&P Pension Plan. Our Company has also agreed to pay UFCW $0.7
million, representing the amount of the mass withdrawal liability owed to UFCW,
including benefit payments from July 2007 through July 2009, which has already
been accrued in our Consolidated Financial Statements as of June 20, 2009.
Convertible Preferred Stock
On July 23, 2009, our Company entered into an investment agreement with
affiliates of Tengelmann Warenhandelsgesellschaft KG ("Tengelmann") and entered
into a separate investment agreement with the affiliates of Yucaipa Companies
LLC ("Yucaipa") for the issuance and sale of 60,000 shares and 115,000 shares,
respectively of 8.0% Cumulative Convertible Preferred Stock for approximately
$60.0 million and $115.0 million, respectively. The closing of the sale of the
Preferred Stock is subject to certain conditions, as described in the amended
investment agreements, including the completion of a private placement of Senior
Secured Notes (see below). The Preferred Stock will be convertible into shares
of our Company's common stock, par value $1.00 per share (the "Common Stock"),
at an initial conversion rate of $5.00 per share of Common Stock upon the one
year anniversary of the issuance of the Preferred Stock, subject to the
stockholder approval requirements of the New York Stock Exchange. Our Company is
required to redeem all of the outstanding Preferred Stock on the seventh
anniversary of the date of issuance (the "Maturity Date"), at 100.0% of the
liquidation preference, plus all accrued and unpaid dividends. The Preferred
Stock is not redeemable prior to the Maturity Date. In connection with the
purchase and sale of the Preferred Stock, each of Tengelmann and Yucaipa will
enter into agreements pursuant to which they will be entitled to certain rights.
The holders of the Preferred Stock will be entitled to an 8.0% dividend, payable
quarterly in arrears in cash or additional shares of Preferred Stock, if the
Company is not able to pay the dividends in full in cash. If our Company elects
to make a dividend payment in additional shares of Preferred Stock, the
Preferred Stock shall be valued at the liquidation preference of the Preferred
Stock and the dividend rate will be 8.0% plus 1.5% in connection with any
dividend paid.
Senior Secured Notes
On July 23, 2009, we announced that, subject to market and other conditions, we
plan to offer $225 million aggregate principal amount of senior secured notes
due 2015 (the "Notes") to qualified institutional buyers in reliance on Rule
144A under the Securities Act of 1933. The Notes will be second lien secured
obligations, guaranteed by all of the Company's domestic subsidiaries. The Notes
will bear interest at a fixed rate payable semi-annually in cash. The interest
rate will be determined at the time of closing, which is anticipated to be
during the Company's second fiscal quarter.
Credit Agreement
On July 23, 2009, our Company entered into an amended Credit Agreement that is
contingent upon consummation of a private offering of senior secured notes and
the sale of preferred stock. The amendment increases interest rates, reduces
commitments, reduces the borrowing base and provides for certain other
amendments.
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
INTRODUCTION
------------
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations is intended to help the reader understand the financial
position, operating results, and cash flows of The Great Atlantic & Pacific Tea
Company, Inc. It should be read in conjunction with our consolidated financial
statements and the accompanying notes ("Notes"). It discusses matters that
Management considers relevant to understanding the business environment,
financial position, results of operations and our Company's liquidity and
capital resources. These items are presented as follows:
o Basis of Presentation - a discussion of our Company's results during the
first quarter of fiscal 2009 and fiscal 2008.
o Overview - a general description of our business; the value drivers of our
business; measurements; opportunities; challenges and risks; and
initiatives.
o Outlook - a discussion of certain trends or business initiatives for the
remainder of fiscal 2009 to assist in understanding the business.
o Results of Continuing Operations and Liquidity and Capital Resources - a
discussion of results for the 16 weeks ended June 20, 2009 compared to the
16 weeks ended June 14, 2008; current and expected future liquidity; and
the impact of various market risks on our Company.
o Critical Accounting Estimates - a discussion of significant estimates made
by Management.
o Market Risk - a discussion of the impact of market changes on our
consolidated financial statements.
BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements of The Great Atlantic &
Pacific Tea Company, Inc. for the 16 weeks ended June 20, 2009 and June 14, 2008
are unaudited and, in the opinion of management, contain all adjustments that
are of a normal and recurring nature necessary for a fair statement of financial
position and results of operations for such periods. The consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes contained in our Fiscal 2008 Annual Report to
Stockholders on Form 10-K. Interim results are not necessarily indicative of
results for a full year.
The consolidated financial statements include the accounts of our Company and
all subsidiaries.
OVERVIEW
--------
The Great Atlantic & Pacific Tea Company, Inc., based in Montvale, New Jersey,
operates conventional supermarkets, combination food and drug stores and
discount food stores in 8 U.S. states and the District of Columbia. Our
Company's business consists strictly of our retail operations, which totaled 435
stores as of June 20, 2009.
For the 16 weeks ended June 20, 2009, we operated in four reportable segments:
Fresh, Price Impact, Gourmet and Other. The Other segment includes our Food
Basics and Liquor businesses. The criteria necessary to classify the Midwest and
Greater New Orleans area as discontinued were satisfied in fiscal 2007 and these
operations have been classified as such in our Consolidated Statements of
Operations for the 16 weeks ended June 20, 2009 and June 14, 2008.
OPERATING RESULTS
-----------------
This quarter was challenging for our Company as the retail market experienced
one of the most difficult economic environments in history, with a combination
of increased food costs, lower home values and less available credit. As a
result, our comparable store sales for this quarter declined by 3.3%, compared
to a decline of 1.3% for the fourth quarter of fiscal 2008. Our comparable
stores include stores that been in operation for at least one fiscal year and
replacement stores. As consumers have continued to trade down to less expensive
products, our Company has seen increased competition and as a result has
invested more in value driven pricing programs and offerings.
Our business operates in four formats, which enable us to service customers in
every market we serve, with the following operating results:
Fresh Format
(A&P, Waldbaum's and SuperFresh)
Our Fresh format continues to deliver strong year-over-year improvement in
segment income, primarily driven by the higher gross margin rate in the first
quarter of fiscal 2009 due to negotiated cost reductions with our vendors,
partially offset by a decline in sales.
Price Impact
(Pathmark and Pathmark Sav-A-Center)
Our Price Impact format's performance continued to be disappointing during the
first quarter of our fiscal 2009. This segment experienced a year-over-year
decline in segment income, which was driven by negative comparable store sales
and lower gross margins, primarily resulting from higher promotional spending
and reduction in everyday prices to stay competitive. Our consumers have been
very value focused in this difficult economic environment and have continued to
take advantage of our promotions, requiring us to invest more in value driven
programs in order to stay competitive. Although, in the shorter term, this has
negatively impacted our earnings, we believe that this strategic investment
well-positions us to generate long-term growth over time and once the overall
economy improves. Our business optimization initiatives within the Pathmark
banner have allowed us to mitigate some of the downward pressures by increasing
labor efficiencies and reducing utility expenses. We expect to see continuing
and increasing favorable results from our business optimization initiatives
relating to decreased costs, increased private label penetration and decreased
stock loss for the remainder of fiscal 2009, which should help to stabilize
results in this recessionary economy.
Stores converted from the Fresh segment to the Price Impact format are
performing very well. To date, we have 8 stores converted with several more
scheduled for the remainder of the fiscal year. Converted stores retain the more
favorable A&P legacy cost structure, while taking advantage of the higher sales
per square foot generated by the traditional Pathmark locations.
Gourmet
(The Food Emporium)
Our Gourmet stores located in Manhattan continue to generate sales and segment
income growth despite the economic crisis. This growth is due primarily to
increased gross margin rate.
Other
(Food Basics, Best Cellars and A&P Liquors)
Our Discount business operating under the Food Basics banner is doing extremely
well as it is a particularly relevant format during this challenging economic
environment. This banner is experiencing a year-over-year increase in segment
income due to positive comparable store sales and improved gross margin rate.
The Company recently premiered the first new Food Basics store in almost three
years with very positive initial sales. Additional Food Basics openings are
scheduled for the remainder of the fiscal year.
OUTLOOK
-------
Our Company has undertaken substantial business optimization initiatives to
combat these difficult economic times. The target of the business optimization
efforts is to take advantage of the best practices between the legacy A&P and
the acquired Pathmark businesses. We have identified the following key areas as
opportunities:
Improved private label penetration
Our programs under this initiative are expected to increase gross margins
offsetting more promotional investment. We have recently introduced our latest
Green Way organic product line, which is part of our comprehensive private label
program, with much success. We believe that our expansive private label program
is a critical component of our long-term strategy and will enable us to continue
to meet our customers' needs, while addressing their financial restraints with
products comparable in quality to their national brand equivalents. During the
quarter, our private label penetration has improved by approximately 17% from
last year.
Operating expenses
We have a multi-faceted approach to reducing operating expenses, with the
following primary areas expected to be targeted:
o Productive labor - we are improving productive labor rates through a
number of planned activities, including working with our teams to
increase productivity through utilizing a variety of labor
optimization processes.
o Utility costs - we continue to reduce these costs through negotiated
contract reductions, as well as through continuing our successful
sustainability programs, including installing LED case lighting and
Real Time Pricing equipment.
o Grocery Stock Losses - the Price Impact business continues to
experience stock losses well above that of the other formats. We have
implemented a formal program to reduce losses, including conducting
internal theft and stock loss awareness training, increasing amount of
security in high risk stores, upgrading in-store security cameras and
implementing technology to reduce bottom of the basket losses.
o Trucking and Warehousing Costs - working with C&S and GHI we have
implemented a number of cost reduction initiatives and believe we have
additional opportunities to further reduce our costs. Initiatives
include reducing amount of deliveries, optimizing trucking routes,
increasing direct store deliveries, optimizing warehousing and
trucking work schedules and restructuring contracts.
Store Conversions
We are completing an evaluation of each neighborhood marketplace in which
our stores operate and are assessing the best opportunities for our four
formats within these neighborhoods. We are prioritizing the most
cost-beneficial use of funds to convert stores from existing formats to the
format that will best serve the neighborhood marketplace and return
improved results.
This year marks our Company's historic 150th anniversary. We believe that our
strong strategic position in the Northeast, our successful format strategy and
our resolve to implement strategic changes, positions us to effectively manage
the challenging economic environment and remain cautiously optimistic in our
long-term prospects. The US retail market continues to face one of the most
difficult and challenging years as our customers are expected to have lower
disposable income. However, we are hopeful that the economists are on target
with the prediction that this recession will end in late 2009, and our Company
will then improve our overall performance.
We believe that our present cash resources, including invested cash on hand,
available borrowings from our $675 million Credit Agreement and other sources,
are sufficient to meet our needs for the next twelve months. Based on
information available to us, as of our filing date, we have no indication that
the financial institutions acting as lenders under our $675 million Credit
Agreement would be unable to fulfill their commitments. However, given the
current economic environment and credit market crisis, there is no assurance
that this may not change in the foreseeable future.
Additionally, on July 23, 2009, we entered into an investment agreement with the
affiliates of Tengelmann Warenhandelsgesellschaft KG ("Tengelmann") for the
issue and sale of 60,000 shares of 8.0% Cumulative Convertible Preferred Stock,
Series A-T, without par value for approximately $60.0 million and an investment
agreement with the affiliates of Yucaipa Companies LLC ("Yucaipa") for the issue
and sale of 115,000 shares of 8.0% Cumulative Convertible Preferred Stock,
Series A-Y, without par value for approximately $115.0 million. In addition, we
have announced the launch of the issuance of $225 million Senior Secured Notes.
Upon consummation, we believe that these financings will allow us to better
manage our liquidity through this recessionary economic environment.
RESULTS OF CONTINUING OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------
Our consolidated financial information presents the results related to our
operations of discontinued businesses separate from the results of our
continuing operations. The discussion and analysis that follows focuses on
continuing operations. All amounts are in millions, except share and per share
amounts.
16 WEEKS ENDED JUNE 20, 2009 COMPARED TO THE 16 WEEKS ENDED JUNE 14, 2008
-------------------------------------------------------------------------
OVERALL
-------
Sales for the first quarter of fiscal 2009 were $2,790.2 million, compared with
$2,922.7 million for the first quarter of fiscal 2008 due primarily to the
comparable store sales, which include stores that have been in operation for at
least one full fiscal year and replacement stores, which decreased by 3.3%.
Income from continuing operations decreased from $2.8 million for the first
quarter of fiscal 2008 to a loss from continuing operations of $58.3 million for
the first quarter of fiscal 2009, primarily due to a $50.5 million decline in
nonoperating income associated with the fair value adjustments for our Series A
and Series B warrants, our convertible senior notes, and our financing warrants,
as well as $6.4 million of interest expense recorded during the first quarter of
fiscal 2009 in connection with our GHI contractual obligation. Loss from
discontinued operations of $1.5 million for the first quarter of fiscal 2008
increased to a loss from discontinued operations of $6.9 million for the first
quarter of fiscal 2009 due to the absence of the $2.6 million settlement gain
recorded during the first quarter of fiscal 2008 relating to our sale of the
Eight O'Clock Coffee business, combined with higher occupancy related costs for
closed stores recorded during the first quarter of fiscal 2009. Net loss per
share - basic and diluted for the first quarter of fiscal 2009 was $(1.23) and
$(3.64), respectively, compared to net income per share - basic of $0.03 and
net loss per share - diluted of $(0.54), respectively, for the first quarter of
fiscal 2008.
16 Weeks 16 Weeks
Ended Ended Favorable
June 20, 2009 June 14, 2008 (Unfavorable) % Change
--------------- --------------- ------------ ----------
(in millions, except percentages)
Sales $ 2,790.2 $ 2,922.7 $ (132.5) (4.5)%
(Decrease) increase in
comparable store sales (3.3)% 3.2% NA NA
(Loss) income from continuing operations (58.3) 2.8 (61.1) >100%
Loss from discontinued operations (6.9) (1.5) (5.4) >100%
Net (loss) income (65.2) 1.3 (66.5) >100%
Net (loss) income per share - basic (1.23) 0.03 (1.26) >100%
Net loss per share - diluted (3.64) (0.54) (3.10) >100%
Average weekly sales per supermarket were approximately $420,700 for the first
quarter of fiscal 2009 versus $429,900 for the corresponding period of the prior
year, a decrease of 2.1%, primarily due to the overall decline in our sales
resulting from the current economic environment and its negative effect on
consumer spending, as well as a lower rate of inflation.
SALES
-----
For the 16 weeks ended
----------------------
June 20, 2009 June 14, 2008
------------- -------------
(in thousands)
Fresh $ 1,386,740 $ 1,461,833
Price Impact* 1,239,223 1,302,189
Gourmet 85,381 85,028
Other 78,899 73,615
----------- -----------
Total sales $ 2,790,243 $ 2,922,665
=========== ===========
-------------------
* Includes sales from Fresh stores that have been subsequently converted to
Price Impact stores.
Sales decreased from $2,922.7 million for the 16 weeks ended June 14, 2008 to
$2,790.2 million for the 16 weeks ended June 20, 2009, primarily due to a
decrease in comparable stores sales and the absence of sales due to store
closures, partially offset by sales from new stores. The decrease in sales in
our Fresh segment of $75.1 million was primarily related to a decline in the
comparable store sales of $53.4 million and the absence of sales due to store
closures of $21.7 million. The decrease in sales in our Price Impact segment of
$63.0 million was primarily due to a decline in comparable store sales of $47.2
million and the absence of sales due to store closures of $21.1 million,
partially offset by an increase in sales from new stores of $5.4 million. Sales
generated by our Gourmet segment increased by $0.4 million, primarily due to
increased comparable store sales. The sales increase of $5.3 million, or 7.2%,
in our Other segment, representing Discount and Liquor, was driven by increased
sales generated by our Discount business, primarily due to increased comparable
store sales of $5.6 million.
GROSS MARGIN
------------
Gross margin of $844.9 million increased 5 basis points as a percentage of sales
to 30.28% for the first quarter of fiscal 2009 from gross margin of $883.6
million or 30.23% for the first quarter of fiscal 2008, as lower margins from
our Price Impact segment were offset by improved margins from our Fresh and
Gourmet segments.
The following table details the dollar impact of items affecting the gross
margin dollar increase (decrease) from the first quarter of fiscal 2008 to the
first quarter of fiscal 2009 (in millions):
Sales Volume Gross Margin Rate Total
------------ ----------------- --------
Total Company $ (40.0) $ 1.3 $ (38.7)
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
---------------------------------------------------
Our Store operating, general and administrative ("SG&A") expense was $846.7
million or 30.34% as a percentage of sales for the first quarter of fiscal 2009,
as compared to $881.5 million or 30.16% as a percentage of sales for the first
quarter of fiscal 2008.
Included in SG&A for the first quarter of fiscal 2009 are (i) pension withdrawal
costs of $2.4 million, or 9 basis points, (ii) Pathmark integration and other
restructuring related costs of $2.4 million, or 9 basis points and (iii) net
loss on marketable securities of $0.3 million, or 1 basis point. These charges
were partially offset by net real estate income of $2.2 million, or 8 basis
points.
SG&A for the first quarter of fiscal 2008 included (i) Pathmark integration and
other restructuring related costs of $14.1 million, or 48 basis points and (ii)
net losses on real estate activity of $0.8 million, or 3 basis points.
Excluding the items listed above, SG&A as a percentage of sales increased by 59
basis points during the first quarter of fiscal 2009 as compared to the first
quarter of fiscal 2008, primarily due to lower sales leverage on fixed costs,
including increased labor costs of 52 basis points and increased occupancy
related costs of 12 basis points, partially offset by a decrease in corporate
and banner administrative expenses of 11 basis points.
During the 16 weeks ended June 20, 2009 and June 14, 2008, we recorded
impairment losses on long-lived assets for impairments due to closure or
conversion of stores in the normal course of business of $1.1 million and $0.8
million, respectively.
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense. If current operating levels do not improve, there may be a
need to take further actions which may result in additional future impairments
on long-lived assets, including the potential for impairment of assets that are
held and used.
SEGMENT INCOME
--------------
For the 16 weeks ended
----------------------
June 20, 2009 June 14, 2008
------------- -------------
(in thousands)
Fresh $ 41,241 $ 36,191
Price Impact* (1,775) 20,380
Gourmet 8,119 7,415
Other 923 664
-------- ---------
Total segment income $ 48,508 $ 64,650
======== =========
-------------------
* Includes results from Fresh stores that have been subsequently converted to
Price Impact stores.
Segment income decreased $16.1 million from $64.6 million for the 16 weeks ended
June 14, 2008 to $48.5 million for the 16 weeks ended June 20, 2009. Our Fresh
segment experienced an increase in segment income of $5.1 million, primarily
driven by an increase in the gross margin rate due to negotiated cost
reductions, partially offset by lower sales. The decline in the segment income
of $22.2 million in our Price Impact segment was primarily attributable to the
decline in sales and lower gross margins, resulting from higher promotional
spending and reductions in everyday prices for this segment, partially offset by
reduced productive labor and utility expenses. Segment income from our Gourmet
business improved by $0.7 million, primarily as a result of an improved sales
and gross margin rate. The increase in segment income of $0.3 million in our
Other segment, representing Discount and Liquor, is primarily driven by improved
sales and gross margins rates from our Discount business. Refer to Note 17 -
Operating Segments for further discussion of our reportable operating segments.
NONOPERATING INCOME
-------------------
During the first quarter of fiscal 2009 and 2008, we recorded losses of $1.9
million and gains of $48.6 million, respectively, relating to fair value
adjustments for our Series A and Series B warrants acquired in connection with
our purchase of Pathmark, the conversion features related to our 5.125%
convertible senior notes and our 6.750% convertible senior notes, and our
financing warrants issued in connection with our convertible senior notes.
INTEREST EXPENSE
----------------
Interest expense of $54.2 million for the first quarter of fiscal 2009 increased
from the prior year expense of $46.9 million, primarily due to $6.4 million of
interest expense recorded during the first quarter of fiscal 2009, to reflect
interest accretion relating to our GHI contractual obligation and the impact of
the lower discount rate used to revalue this obligation during the quarter,
which is derived each period from published zero-coupon AA corporate bond
yields. In addition, during the first quarter of fiscal 2009 and 2008, we
recorded additional non-cash interest expense of $1.3 million and $1.0 million,
respectively, relating to our $255 million aggregate principal amount of the
6.750% Convertible Senior Notes that were issued in December 2007, upon our
adoption of FSP APB Opinion No. 14-1, "Accounting for Convertible Debt
Instruments that May be Settled in Cash Upon Conversion."
INCOME TAXES
------------
The provision for income taxes from continuing operations for the first quarter
of fiscal 2009 was $0.4 million, compared to $1.4 million for the first quarter
of fiscal 2008. Consistent with prior year, we continue to record a valuation
allowance against our net deferred tax assets.
The effective tax rates on continuing operations of 0.7% and 33.2% for the 16
weeks ended June 20, 2009 and June 14, 2008, respectively, varied from the
statutory rate of 35%, primarily due to the recording of state and local income
taxes, the recording of additional valuation allowance and the impact of the
Pathmark financing.
DISCONTINUED OPERATIONS
-----------------------
The loss from operations of discontinued businesses, net of tax, for the first
quarter of fiscal 2009 of $6.9 million increased from a loss from operations of
discontinued businesses, net of tax, of $4.2 million for the first quarter of
fiscal 2008, primarily due to higher occupancy related expenses recorded during
the first quarter of fiscal 2009. The gain on disposal of discontinued
operations of $2.6 million, net of tax, recorded during the first quarter of
fiscal 2008 related to the sale of our Eight O'Clock Coffee business in fiscal
2003. This gain was a result of the settlement of a contingent note and the
value and payment was based upon certain elements of the future performance of
the Eight O'Clock Coffee business and was not originally recorded in the gain
during fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
CASH FLOWS
----------
The following table presents excerpts from our Consolidated Statement of Cash
Flows (in thousands):
16 weeks ended
--------------------------------
June 20, 2009 June 14, 2008
------------- -------------
Net cash used in operating activities $ (3,309) $ (5,415)
----------- ----------
Net cash used in investing activities $ (17,425) $ (25,670)
----------- ----------
Net cash (used in) provided by financing activities $ (35,144) $ 59,409
----------- ----------
Net cash used in operating activities of $3.3 million for the 16 weeks ended
June 20, 2009 primarily reflected our net loss of $65.2 million, adjusted for
net non-cash charges $97.1 million. In addition, cash used in operating
activities reflected (i) a decrease in other non-current liabilities of $21.0
million, (ii) a decrease in other accruals of $20.8 million and (iii) a decrease
in accrued salaries, wages, benefits and taxes of $12.3
million, partially offset by a decrease in accounts receivable of $19.9
million. Refer to Working Capital below for discussion of changes in working
capital items. Net cash used in operating activities of $5.4 million for the 16
weeks ended June 14, 2008 primarily reflected our net income of $1.3 million,
adjusted for net non-cash charges of $44.3 million. Cash used in operating
activities also reflected (i) a decrease in other non-current liabilities of
$30.5 million primarily due to payments on closed locations, (ii) a decrease in
accrued salaries, wages and benefits and taxes of $23.5 million, (iii) an
increase in inventories of $17.9 million, (iv) an increase in prepaid expenses
and other current assets of $14.4 million and (v) an increase in other assets of
$8.6 million, partially offset by an increase in accounts payable of $46.8
million mainly due to the timing of payments.
Net cash used in investing activities of $17.4 million for the 16 weeks ended
June 20, 2009 primarily reflected property expenditures totaling $27.0 million,
which included 2 additions, 4 remodels and 2 conversions, partially offset by
proceeds from the sale of our joint venture of $5.9 million, proceeds from
disposal of property of $2.2 million. For fiscal 2009, we plan to focus our
capital expenditures on enlarging and remodeling supermarkets and converting
supermarkets to more optimal formats. Net cash used in investing activities of
$25.7 million for the 16 weeks ended June 14, 2008 primarily reflected property
expenditures totaling $29.7 million, which included 1 major remodel, 1 major
enlargement and 3 minor remodels partially offset by proceeds from disposal of
property of $3.1 million.
Net cash used in financing activities of $35.1 million for the 16 weeks ended
June 20, 2009 primarily reflected net principal payments on our revolving lines
of credit of $30.0 million, a decrease in book overdrafts of $3.7 million and
principal payments on capital leases of $3.4 million, partially offset by
proceeds from a sale-leaseback transaction of $3.0 million. Net cash provided by
financing activities of $59.4 million for the 16 weeks ended June 14, 2008
primarily reflected net proceeds under our revolving lines of credit of $81.1
million, net proceeds under line of credit of $5.5 million, an increase in book
overdrafts of $17.2 million, partially offset by the settlement of Series A
warrants of $45.7 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 2009 has been approved and we believe that our present cash resources,
including invested cash on hand, available borrowings from our Credit Agreement
and other sources, are sufficient to meet our needs for the next twelve months.
Profitability, cash flow, asset sale proceeds and timing can be impacted by
certain external factors such as unfavorable economic conditions, competition,
labor relations and fuel and utility costs which could have a significant impact
on cash generation. If our profitability and cash flow do not improve in line
with our plans or if they do not otherwise provide sufficient resources to
operate effectively, we anticipate that we would be able to modify the operating
plan, by reducing capital investments and through other contingency actions. In
addition, proceeds anticipated from the recently announced Yucaipa and
Tengelmann investment and the planned Senior Secured Notes financing would
strengthen our balance sheet, mitigate near-term financing risk and provide
additional liquidity. However, there is no assurance that we will be successful
in generating such resources.
WORKING CAPITAL
---------------
We had working capital of $125.8 million at June 20, 2009, compared to working
capital of $172.0 million at February 28, 2009. We had cash and cash equivalents
aggregating $119.5 million at June 20, 2009, compared to $175.4 million at
February 28, 2009. The decrease in working capital was primarily attributable to
the following:
o A decrease in cash and cash equivalents, as detailed in our
Consolidated Statements of Cash Flows
o A decrease in accounts receivable, primarily related to timing
Partially offset by the following:
o A decrease in accrued salaries, wages and benefits, primarily due to
payments made during the first quarter of fiscal 2009 related to our
annual incentive program
o A decrease in other accruals (Refer to Note 12 to our Consolidated
Financial Statements - Other Accruals).
LINE OF CREDIT
--------------
On January 16, 2008, we entered into a secured line of credit agreement with
Blue Ridge Investments, L.L.C. This agreement enables us to borrow funds on a
revolving basis of up to $32.7 million, or up to the value of the investment in
the Columbia Fund. Each borrowing bears interest at a rate per annum equal
to the BBA Libor Daily Floating Rate plus 0.10%. Our weighted-average interest
rates on this line of credit were 0.5% and 2.7% for the first quarter of
fiscal 2009 and 2008, respectively. At June 20, 2009 and February 28, 2009, we
had borrowings outstanding under this line of credit agreement of $3.9 million
and $5.0 million, respectively. This agreement had an original expiration of
December 31, 2008. However, on November 26, 2008, this agreement was extended to
expire on December 31, 2009. These loans are collateralized by a first priority
perfected security interest in our ownership interest in the Columbia Fund.
Refer to Note 5 to our Consolidated Financial Statements - Cash, Cash
Equivalents, Restricted Cash and Restricted Marketable Securities, for further
discussion on the Columbia Fund.
CREDIT AGREEMENT
----------------
On December 3, 2007, the 2005 Revolving Credit Agreement and Letter of Credit
Agreement were refinanced pursuant to a new $675 million Credit Agreement
("Credit Agreement") with Banc of America Securities LLC and Bank of America,
N.A. as the co-lead arranger. Subject to borrowing base requirements, the Credit
Agreement provides for a five-year term loan of $82.9 million and a five-year
revolving credit facility of $592.1 million enabling us to borrow funds and
issue letters of credit on a revolving basis. The Credit Agreement includes a
$100 million accordion feature, which provides us with the ability to increase
commitments from $675 million to $775 million, subject to agreement of new and
existing lenders. Our obligations under the Credit Agreement are secured by some
of the assets of the Company, including, but not limited to, inventory, certain
accounts receivable, pharmacy scripts, owned real estate and certain Pathmark
leaseholds. The Pathmark leaseholds are removed as eligible collateral
throughout fiscal 2009, which resulted in a reduction in borrowing availability
of $25.0 million on March 1, 2009 and $25.0 million on June 1, 2009 and will
result in reductions of an additional $23.0 million on December 1, 2009, for a
total reduced borrowing availability of approximately $73.0 million. Borrowings
under the Credit Agreement bear interest based on LIBOR or Prime interest rate
pricing. Subject to certain conditions, we are permitted to pay cumulative cash
dividends on common shares, as well as make bond repurchases. As of June 20,
2009, there were $301.8 million of loans and $201.0 million in letters of credit
outstanding under this agreement. As of June 20, 2009, after reducing
availability for borrowing base requirements, we had $102.8 million available
under the Credit Agreement. In addition, we have invested cash available to
reduce borrowings under this Credit Agreement or to use for future operations of
$19.3 million as of June 20, 2009.
On December 27, 2007, in order to facilitate the syndication of the Credit
Agreement under current market conditions, we entered into an Amended and
Restated Credit Agreement, whereby a portion of the
revolving commitment was converted into a $50.0 million term loan tranche, which
was collateralized by certain real estate assets at an increased margin rate.
This agreement expires in December 2012.
Based on information available to us, as of our filing date, we have no
indication that the financial institutions acting as lenders under our Credit
Agreement would be unable to fulfill their commitments.
RELATED PARTY PROMISSORY NOTE
-----------------------------
On September 2, 2008, our Company issued a three year, unsecured promissory note
in the amount of $10 million to Erivan Karl Haub. Erivan Haub is the father of
Christian W. E. Haub, our Executive Chairman, and is a limited partner of
Tengelmann which owns an interest in our Company's stock. The principal is due
in a lump sum payment on August 18, 2011 and bears interest at a rate of 6% per
year, payable in twelve equal quarterly payments of $0.15 million over the term
of the note. During the first quarter ended June 20, 2009, $0.3 million of
interest was paid on this note and we recorded interest expense of $0.2 million.
PUBLIC DEBT OBLIGATIONS
-----------------------
As of June 20, 2009, we had outstanding notes of $580.5 million, which consisted
of $12.8 million of 9.125% Senior Notes due December 15, 2011, $150.1 million of
5.125% Convertible Senior Notes due June 15, 2011, $217.6 million of 6.750%
Convertible Senior Notes due December 15, 2012 and $200.0 million of 9.375%
Notes due August 1, 2039. Interest is payable quarterly on the 9.375% Notes and
semi-annually on the 9.125%, 6.750% and 5.125% Notes. The 9.375% Notes are now
callable at par ($25 per bond) and the 9.125% Senior Notes are now callable at a
premium to par (103.042%). The 9.375% Notes are unsecured obligations and were
issued under the terms of our senior debt securities indenture, which contains
among other provisions, covenants restricting the incurrence of secured debt.
The 9.375% Notes are effectively subordinated to the Credit Agreement and do not
contain cross default provisions. All covenants and restrictions for the 9.125%
Senior Notes have been eliminated in connection with the cash tender offer in
fiscal 2005. Our notes are not guaranteed by any of our subsidiaries.
On December 18, 2007, we completed a public offering and issued $165 million
5.125% Convertible Senior Notes due 2011 and $255 million 6.750% Convertible
Senior Notes due 2012. The 5.125% Notes are not redeemable at our option at any
time. The 6.750% Notes are redeemable at our option on or after December 15,
2010, at a redemption price of 102.70% and on or after December 15, 2011, at a
redemption price of 101.35%. The initial conversion price of the 5.125% Notes is
$36.40, representing a 30.0% premium to the offering price of $28.00 and the
initial conversion price of the 6.750% Notes is $37.80, representing a 35.0%
premium to the offering price of $28.00 at maturity, and at our option, the
notes are convertible into shares of our stock, cash, or a combination of stock
and cash.
As of December 18, 2007, our Company did not have sufficient authorized shares
to provide for all potential issuances of common stock. Therefore, our Company
accounted for the conversion features as freestanding instruments. The
convertible senior notes were recorded with a discount equal to the value of the
conversion features at the transaction date and will be accreted to the par
value of the notes over the life of the notes. The value of the conversion
features were determined utilizing the Black-Scholes option pricing model and
recorded as a long-term liability. The portion of the conversion features for
which there was not shares available for settlement of conversions were marked
to market each balance sheet date. On June 26, 2008, at a special meeting of
stockholders, the number of shares of common stock we have the authority to
issue was increased to 160,000,000, based on a majority vote by our
stockholders. During the 16 weeks ended June 14, 2008, we recorded gains of
$11.1 million and $5.1 million, respectively, within "Nonoperating income" on
our
Consolidated Statements of Operations relating to the conversion features of the
5.125% and 6.750% Convertible Senior Notes.
The $255 million aggregate principal amount of the 6.750% Convertible Senior
Notes due 2012 is subject to the provisions of FASB Staff Position ("FSP")
Accounting Principles Board ("APB") Opinion No. 14-1 ("FSP APB 14-1"),
"Accounting for Convertible Debt Instruments that May be Settled in Cash Upon
Conversion." ("FSP APB 14-1"), which we adopted during our first quarter ended
June 20, 2009. We estimate that our effective interest rate for similar debt
without the conversion feature is approximately 12%. During the 16 weeks ended
June 20, 2009 and June 14, 2008, we recognized additional non-cash interest
expense of $1.2 million and $1.0 million, respectively, relating to our adoption
of FSP APB 14-1. The net carrying value of outstanding debt as of June 20, 2009
and February 28, 2009 was $217.6 million and $215.1 million, respectively, net
of unamortized discount of $37.4 million and $39.9 million, respectively. As of
June 20, 2009, our remaining unamortized discount will be recognized as follows
(in thousands):
Remainder of 2009 $ 6,205
2010 9,884
2011 11,139
2012 10,140
--------
$ 37,368
========
CALL OPTION AND FINANCING WARRANTS
----------------------------------
Concurrent with the issuance of the convertible senior notes, our Company issued
financing warrants in conjunction with the call options recorded as equity in
the Consolidated Balance Sheet to effectively increase the conversion price of
these notes and reduce the potential dilution upon future conversion. The
financing warrants allow holders to purchase common shares at $46.20 with
respect to the 5.125% Notes and $49.00 with respect to the 6.750% Notes. The
financing warrants were valued at $36.8 million at the issuance date. At the
issuance date, we did not have sufficient authorized shares to provide all
potential issuances of common stock. Therefore, the financing warrants were
accounted for as freestanding derivatives, required to be settled in cash until
sufficient shares were available and were recorded as a long-term liability in
the Consolidated Balance Sheet. On June 26, 2008, at a special meeting of
stockholders, the number of shares of common stock we have the authority to
issue was increased to 160,000,000 based on a majority vote by our stockholders.
Thus, the financing warrants were marked to market through June 26, 2008
utilizing the Black-Scholes option pricing model. During the 16 weeks ended June
14, 2008, we recorded a gain of $6.5 million included in "Nonoperating income"
on our Consolidated Statements of Operations. As of June 26, 2008, we
reclassified $28.9 million to "Additional paid-in-capital" on our Consolidated
Statements of Stockholder's Equity and Comprehensive (Loss) Income. These
financing warrants are no longer classified as a liability as of June 20, 2009.
We understand that on or about October 3, 2008, Lehman Brothers OTC Derivatives,
Inc. or "LBOTC" who accounts for 50% of the call option and financing warrant
transactions filed for bankruptcy protection, which is an event of default under
such transactions. We are carefully monitoring the developments affecting LBOTC,
noting the impact of the LBOTC bankruptcy effectively reduced conversion prices
for 50% of our convertible senior notes to their stated prices of $36.40 for the
5.125% Notes and $37.80 for the 6.750% Notes. In the event we terminate these
transactions, or they are canceled in bankruptcy, or LBOTC otherwise fails to
perform its obligations under such transactions, we would have the right to
monetary damages in the form of an unsecured claim against LBOTC in an amount
equal to the present value of our cost to replace these transactions with
another party for the same period and on the same terms.
SERIES A AND SERIES B WARRANTS
------------------------------
As part of the acquisition of Pathmark on December 3, 2007, we issued 4,657,378
and 6,965,858 roll-over stock warrants in exchange for Pathmark's 2005 Series A
and Series B warrants, respectively. The Series A warrants were exercisable at
$18.36 and expired on June 9, 2008 and the Series B warrants are exercisable at
$32.40 and expire on June 9, 2015. The Tengelmann stockholders have the right to
approve any issuance of common stock under these warrants upon exercise
(assuming Tengelmann's outstanding interest is at least 25% and subject to
liquidity impairments defined within the Tengelmann Stockholder Agreement). In
addition, Tengelmann has the ability to exercise a "Put Right" whereby it has
the ability to require A&P to purchase A&P stock held by Tengelmann to settle
these warrants. Based on the rights provided to Tengelmann, A&P does not have
sole discretion to determine whether the payment upon exercise of these warrants
will be settled in cash or through issuance of an equivalent portion of A&P
shares. Therefore, these warrants are recorded as liabilities and
marked-to-market each reporting period based on A&P's current stock price.
On May 7, 2008, the 4,657,378 Series A warrants were exercised by Yucaipa
Corporate Initiatives Fund I, L.P., Yucaipa American Alliance Fund I, L.P. and
Yucaipa American Alliance (Parallel) Fund I, L.P. We opted to settle the Series
A warrants in cash totaling $45.7 million rather than issuing additional common
shares. Included in "Nonoperating income" on our Consolidated Statements of
Operations for the 16 weeks ended June 20, 2009 is a loss of $1.9 million for
Series B warrants. Included in "Nonoperating income" for the 16 weeks ended June
14, 2008, is a loss of $1.2 million for the Series A warrants through the
settlement date of May 7, 2008 and a gain of $27.1 million for the Series B
warrants market value adjustment. The value of the Series B warrants as of June
20, 2009 was $6.6 million and is included in "Other financial liabilities" on
our Consolidated Balance Sheets. The following assumptions and estimates were
used in the Black-Scholes model for the Series B warrants:
June 20, 2009
-------------
Expected life 5.97 years
Volatility 65.8%
Dividend yield range 0%
Risk-free interest rate range 2.82%
SHARE LENDING AGREEMENTS
------------------------
We entered into share lending agreements, dated December 12, 2007, with certain
financial institutions, under which we agreed to loan up to 11,278,988 shares of
our common stock (subject to certain adjustments set forth in the share lending
agreements). These borrowed shares must be returned to us no later than December
15, 2012 or sooner if certain conditions are met. If an event of default should
occur under the stock lending agreement and a legal obstacle exists that
prevents the Borrower from returning the shares, the Borrower shall, upon
written request of our Company, pay our Company, using available funds, in lieu
of the delivery of loaned shares, to settle its obligation. On June 26, 2008,
our stockholders approved a loan of up to an additional 1,577,569 shares of our
Company's common stock pursuant to the share lending agreement.
These financial institutions will sell the "borrowed shares" to investors to
facilitate hedging transactions relating to the issuance of our 5.125% and
6.750% Senior Convertible Notes. Pursuant to these agreements, we loaned
8,134,002 shares of our stock of which 6,300,752 shares were sold to the public
on December 18, 2007 in a public offering. We did not receive any proceeds from
the sale of the borrowed shares. We received a nominal lending fee from the
financial institutions pursuant to the share lending agreements.
Any shares we loan are considered issued and outstanding. Investors that
purchase borrowed shares are entitled to the same voting and dividend rights as
any other holders of our common stock; however, the financial institutions will
not have such rights pursuant to the share lending agreements. The obligation of
the financial institutions to return the borrowed shares has been accounted for
as a prepaid forward contract and, accordingly, shares underlying this contract,
except as described below, are removed from the computation of basic and
dilutive earnings per share. On a net basis, this transaction will have no
impact on earnings per share, with the exception of the below.
On September 15, 2008, Lehman and certain of its subsidiaries, including, Lehman
Europe filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the
United States Bankruptcy Court and/or commenced equivalent proceedings in
jurisdictions outside of the United States (collectively, the "Lehman
Bankruptcy"). Lehman Europe is party to a 3,206,058 share lending agreement with
our Company. Due to the circumstances of the Lehman Bankruptcy, we have recorded
these loaned shares as issued and outstanding effective September 15, 2008, for
purposes of computing and reporting our Company's basic and diluted weighted
average shares and earnings per share.
OTHER
-----
In the normal course of business, we have assigned to third parties various
leases related to former operating stores (the "Assigned Leases") for which we
generally remained secondarily liable. As such, if any of the assignees were to
become unable to make payments under the Assigned Leases, we could be required
to assume the lease obligation. As of June 20, 2009, 205 Assigned Leases remain
in place. Assuming that each respective assignee became unable to make payments
under an Assigned Lease, an event we believe to be remote, we estimate our
maximum potential obligation with respect to the Assigned Leases to be
approximately $632.7 million, which could be partially or totally offset by
reassigning or subletting these leases.
Our existing corporate rating with Moody's Investors Service ("Moody's") is B3
with a negative outlook. Our senior unsecured debt is rated Caa1 and our
liquidity rating is SGL3.
Our corporate credit rating with Standard & Poor's Ratings Group ("S&P") is B-
with a stable outlook. Our senior unsecured debt is rated CCC+ and our recovery
rating is 6, indicating that lenders can expect a negligible (0%-10%) recovery
in the event of a payment default.
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 with respect to self-insured
workers' compensation and general liability claims. We estimate the required
liability of such claims on a discounted basis, utilizing an actuarial method,
which is based upon various assumptions, which include, but are not limited to,
our historical loss experience, projected loss development factors, actual
payroll, legal costs and other data. 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 and Finite-Lived Intangibles
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.
The value of the assets is determined based on estimates of future cash flows.
If our review indicates that impairment exists, we measure such impairment on a
discounted basis using a probability weighted approach and a U.S. Treasury
risk-free rate, which is based on the life of the primary asset within the asset
group. Any impairment amounts are included in "Store operating, general and
administrative expenses" in our Consolidated Statements of Operations. The
effects of changes in estimates of useful lives were not material to ongoing
depreciation expense. If current operating levels do not improve, there may be a
need to take further actions which may result in future impairments on
long-lived assets, including the potential for impairment of assets that are
held and used.
Goodwill and Other Indefinite-Lived Intangible Assets
Our Company tests goodwill and other indefinite-lived intangibles for impairment
in the fourth quarter of each fiscal year, unless events or changes in
circumstances indicate that impairment may have occurred in an interim period. A
significant amount of judgment is involved in determining if an indicator of
impairment has occurred. Possible indicators of impairment include, but are not
limited to: sustained operating losses or poor operating performance trends, a
significant decline in our expected future cash flows for a reporting unit, a
decrease in our market capitalization below our book value for a sustained
period of time, and an expectation that a reporting unit will be disposed of or
sold.
A two-step impairment test is performed for goodwill. The first step of the
impairment analysis is performed by comparing the estimated fair value of each
reporting unit to the related carrying value. The estimated fair value of a
reporting unit is determined by using discounted cash flow analyses or by using
market multiples, as appropriate. In determining fair value, we make various
assumptions, including management's expectations of future cash flows based on
projections or forecasts derived from its analysis of business prospects,
economic or market trends and any regulatory changes that may occur. Our cash
flow projections for each reporting unit are based on a five-year financial
forecast developed by management to manage the business. Our forecast assumes
that the current recessionary environment will continue through fiscal 2009,
stabilize during fiscal 2010 and resume normalized long-term growth rates in
2011. Significant assumptions, which contemplate our existing plans for new
store openings and conversions, include revenue growth rates, operating expense
growth rates, capital expenditures and future working capital requirements. The
future cash flows used to perform the impairment analysis were tax effected at
42%, which represents our blended federal and state rate. Terminal values for
all reporting units are calculated using a Gordon growth methodology using a
discount rate and a long-term growth rate
indicative of our industry. We also compare the sum of the estimated fair values
of our reporting units to our overall estimated market capitalization plus a
reasonable control premium, estimated as an amount that would be received if the
Company was sold to a market participant in an orderly transaction.
If the carrying value exceeds the fair market value, the second step of the
impairment test would be performed to determine the amount of impairment, if
any. The second step of the goodwill impairment test compares the fair value of
the reporting unit's goodwill with the carrying value of goodwill. If the
carrying amount of a reporting unit's goodwill exceeds the fair value of that
goodwill, an impairment loss is recognized for the difference.
Our computation of impairment utilizes quantitative and qualitative information,
any changes in which can impact the valuation of an intangible asset in a short
period of time. We completed an in-depth analysis of the fair value of our
Company during the fourth quarter of fiscal 2008 and noted that goodwill was not
impaired. We considered whether there have been any triggering events requiring
an interim impairment test and concluded that another impairment analysis was
not required in the first quarter of fiscal 2009; however, we will continue to
monitor actual results and projections and if we experience a continued decline
in operations, an impairment charge may be required in the future.
Our only other indefinite-lived intangible asset is the Pathmark Trademark. We
estimate the fair value of this intangible asset using the relief-from-royalty
method, which uses assumptions related to projected revenues from our annual
long-range plan; assumed royalty rates that could be payable if we did not own
the trademarks; and a discount rate indicative of our industry. We would
recognize an impairment loss when the estimated fair value of the
indefinite-lived intangible asset is less than its carrying value. During the
first quarter of fiscal 2009, we determined that another impairment analysis was
not required.
Closed Store and Closed Warehouse Reserves
For closed stores and warehouses that are under long-term leases, we adjust the
charges originally accrued for these events for (i) interest accretion, (ii)
settlements on leases or sold properties, and (iii) changes in estimates in
future sublease rental assumptions. Net adjustments, all of which have been
disclosed in the Notes to the Consolidated Financial Statements, for changes
have been cumulatively approximately 1% from the date of inception. Adjustments
are predominantly due to fluctuations in the real estate market from the time
the original charges are incurred until the properties are actually settled.
As of June 20, 2009, we had recorded liabilities for estimated probable
obligations of $189.4 million. Of this amount, $22.7 million relates to stores
closed in the normal course of business, $25.9 million relates to stores and
warehouses closed as part of the asset disposition initiatives (refer to Note 9
of our Consolidated Financial Statements), and $140.8 million relates to stores
closed as part of our discontinued operations (refer to Note 8 of our
Consolidated Financial Statements).
Due to the long-term nature of the lease commitments, it is possible that
current accruals, which are based on estimates of vacancy costs and sublease
income, will change in the future as economic conditions change in the real
estate market; however, we are unable to estimate the impact of such changes at
this time and the existing obligations are management's best estimate of these
obligations at this time.
Warrant Liability
We have issued warrants, which are recorded as liabilities in our financial
statements and marked to market each reporting period using the Black-Scholes
option pricing model. The value of these liabilities may
change as a result of changes in A&P's stock price, volatility, the remaining
time until maturity, and the current interest rate.
Pension, Other Benefit Plans and GHI Contractual Obligation
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 the weighted average discount rate at which obligations can
be effectively settled, the anticipated rate of future increases in compensation
levels, the expected long-term rate of return on plan assets, increases or
trends in health care cost, and certain employee related factors, such as
turnover, retirement age and mortality.
The discount rate is determined by taking into account the actual pattern of
maturity of the benefit obligations. To generate the year-end discount rate, a
single rate is developed using a yield curve which is derived from multiple high
quality corporate bonds, discounting each future year's projected cash flow, and
determining the equivalent single discount rate. A discount rate of 7.25% was
selected for the February 28, 2009 disclosures. We use independent actuaries to
assist us in determining the discount rate assumption and measuring our plans'
obligations.
The rate of compensation increase is determined based upon a scale of merit and
promotional increases according to duration plus an economic increase per year.
Our long-term rate of return is developed by taking into account the target
allocations contained in each plan's investment policy, as of the beginning of
the year, and reflecting long term historical data, with greater weight given to
recent years. Under this approach, separate analyses are performed to determine
the expected long-term rate of inflation, real rates of return for each asset
class, and the correlations among the returns for the various asset classes. We
use independent actuaries to assist us in determining our long-term rate of
return assumptions.
We believe that our current assumptions used to estimate plan obligations and
annual expense are appropriate in the current economic environment. However, if
economic conditions change, we may need to change some of our assumptions, and
the resulting changes may materially affect our pension and other postretirement
obligations in the Consolidated Balance Sheets and our future expense in the
Consolidated Statement of Operations. Actual results that differ from our
Company's assumptions are accumulated and amortized over future periods into the
Consolidated Statement of Operations.
Our obligation to fund pension benefits for certain employees of Grocery
Haulers, Inc. ("GHI") who handle transportation and logistics services for our
Pathmark stores is accounted for as a contractual obligation at fair value. The
discount rate is derived from published zero-coupon AA corporate bond yields. It
is determined by considering the actual pattern of maturity of the benefit
obligations of approximately fifteen years. We utilized a 6.5% and a 7% discount
rate, respectively, to value this obligation as of June 20, 2009 and February
28, 2009. Due to their long-term nature, other assumptions used to value this
contractual obligation, such as compensation levels, trends in health care
costs, and certain related factors, such as turnover, retirement age and
mortality, are reevaluated on an annual basis and are consistent with those used
to determine the Projected Benefit Obligation for our pension plans. We use
independent actuaries to assist us in determining the discount rate assumptions
and measuring this obligation.
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. Physical inventory counts are taken every period for fresh inventory,
approximately twice per fiscal year on a staggered basis for the remaining
merchandise inventory in stores, and annually for inventory in distribution
centers and for supplies. The average shrinkage rate resulting from the physical
inventory counts is applied to the ending inventory balance in each store as of
the balance sheet date to provide for estimated shrinkage from the date of the
last physical inventory count for that location. Adjustments to the stock loss
reserve based on physical inventories were less than 1% of our ending inventory
balance as of June 20, 2009.
Income Taxes
As discussed in Note 16 of the Consolidated Financial Statements, we record a
valuation allowance for the entire U.S. net deferred tax asset since it is more
likely than not that the net deferred tax asset would not be utilized based on
historical cumulative losses. This valuation allowance could be reversed in
future periods if we experience improvement in our U.S. operations.
At June 20, 2009 and February 28, 2009, we had unrecognized tax benefits of
$162.8 million that, if recognized would affect the effective tax rate. However,
they would be offset by an increase in our valuation allowance. It is reasonably
possible that the amount of unrecognized tax benefit with respect to certain of
our unrecognized tax positions will significantly decrease within the next 12
months. At this time, we estimate that the amount of our gross unrecognized tax
positions may decrease by up to approximately $154 million within the next 12
months, primarily due to the settlement of ongoing audits and lapses of statutes
of limitations in certain jurisdictions. Any decrease in our Company's gross
unrecognized tax positions would require a re-evaluation of our Company's
valuation allowance maintained on our net deferred tax asset and, therefore, is
not expected to affect our effective tax rate.
We recognize interest and penalties as incurred within "(Provision for) benefit
from income taxes" in our Consolidated Statements of Operations. 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. Our Company makes
estimates of the potential liability based on our assessment of all potential
tax exposures. In addition, we use factors such as applicable tax laws and
regulations, current information and past experience with similar issues to make
these adjustments.
CAUTIONARY NOTE
---------------
This Form 10-Q may contain forward-looking statements about the future
performance of our Company, and is based on our assumptions and beliefs in light
of information currently available. We assume no obligation to update this
information. These forward-looking statements are subject to uncertainties and
other factors that could cause actual results to differ materially from such
statements including but not limited to: various operating factors and general
economic conditions; competitive practices and pricing in the food industry
generally and particularly in our principal geographic markets; our
relationships with our employees; the terms of future collective bargaining
agreements; the costs and other effects of lawsuits and administrative
proceedings; the nature and extent of continued consolidation in the food
industry; changes in the capital markets which may affect our cost of capital
or the ability to access capital; supply or quality control problems with our
vendors; regulatory compliance; and changes in economic conditions, which may
affect the buying patterns of our customers. Refer to PART II. ITEM 1A - Risk
Factors included in this quarterly report on Form 10-Q.
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
-----------
Market risk represents the risk of loss from adverse market changes that may
impact our consolidated financial position, results of operations or cash flows.
Among other possible market risks, we are exposed to interest rate risk. From
time to time, we may enter hedging agreements in order to manage risks incurred
in the normal course of business.
Interest Rates
--------------
Our exposure to market risk for changes in interest rates relates primarily to
our debt obligations. As of June 20, 2009, we do not have cash flow exposure due
to rate changes on any of our debt securities with an aggregate book value of
$592.7 million, because they are at fixed interest rates ranging from 2.0% to
9.375%. However, we do have cash flow exposure on our committed bank lines of
credit of $305.7 million due to our variable
floating rate pricing. Accordingly, during the first quarters of fiscal 2009 and
fiscal 2008, a presumed 1% change in the variable floating rate would have
impacted interest expense by $1.0 million and $0.6 million, respectively.
Foreign Exchange Risk
---------------------
As of June 20, 2009, we did not have exposure to foreign exchange risk as we did
not hold any significant assets denominated in foreign currency.
ITEM 4 - Controls and Procedures
We have established and maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our Company's
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to our Company's management, including our
President and Chief Executive Officer and Senior Vice President, Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
We carried out an evaluation, under the supervision and with the participation
of our Company's management, including our Company's President and Chief
Executive Officer along with our Company's Senior Vice President, Chief
Financial Officer, of the effectiveness of the design and operation of our
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15(b). Based upon the foregoing, our Company's President and Chief Executive
Officer along with our Company's Senior Vice President, Chief Financial Officer,
concluded that our Company's disclosure controls and procedures were effective
as of the period covered by this report.
There have been no changes during our Company's fiscal quarter ended June 20,
2009 in our Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, our Company's
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1 - Legal Proceedings
Refer to Note 18 - Commitments and Contingencies - Legal Proceedings in our
Notes to Consolidated Financial Statements for a discussion of our legal
proceedings.
ITEM 1A - Risk Factors
Various risk factors could have a negative effect on our Company's business,
financial position, cash flows and results of operations. These risk factors
include, among others, the following:
RISKS RELATING TO OUR BUSINESS
VARIOUS OPERATING FACTORS AND GENERAL ECONOMIC CONDITIONS AFFECTING THE FOOD
INDUSTRY MAY AFFECT OUR BUSINESS AND MAY ADVERSELY AFFECT OUR OPERATING RESULTS.
The retail food and food distribution industries and the operation of our
business, specifically in the New York -- New Jersey and Philadelphia regions,
are sensitive to a number of economic conditions and other factors such as:
o food price deflation or inflation,
o softness in local and national economies,
o increases in commodity prices,
o the availability of favorable credit and trade terms,
o changes in business plans, operations, results and prospects,
o potential delays in the development, construction or start-up of
planned projects, and
o other economic conditions that may affect consumer buying habits.
Any one or more of these economic conditions can affect our retail sales, the
demand for products we distribute to our retail customers, our operating costs
and other aspects of our business. Failure to achieve sufficient levels of cash
flow at reporting units could result in impairment charges on goodwill and/or
long-lived assets.
Changes in the general business and economic conditions in our markets,
including the rate of inflation, population growth, the rising prices of oil and
gas, the nature and extent of continued consolidation in the food industry and
employment and job growth in the markets in which we operate, may affect our
ability to hire and train qualified employees to operate our stores. This would
negatively affect earnings and sales growth. General economic changes may also
affect the shopping habits and buying patterns of our customers, which could
affect sales and earnings.
Our ability to achieve our profit goals will be affected by, among other
things:
o our success in executing category management and purchasing
programs that we have underway, which are designed to improve our
gross margins and reduce product costs while making our product
selection more attractive to consumers,
o our ability to achieve productivity improvements and reduce shrink
in our stores,
o our success in generating efficiencies in our supporting
activities, and
o our ability to eliminate or maintain a minimum level of supply
and/or quality control problems with our vendors.
WE FACE A HIGH LEVEL OF COMPETITION, INCLUDING THE THREAT OF FURTHER
CONSOLIDATION IN THE FOOD INDUSTRY, WHICH COULD ADVERSELY AFFECT OUR SALES AND
FUTURE PROFITS.
The retail food business is extremely competitive and is characterized by
high inventory turnover and narrow profit margins. The retail food business is
subject to competitive practices that may affect:
o the prices at which we are able to sell products at our
retail locations,
o sales volume, and
o our ability to attract and retain customers.
In addition, the nature and extent of consolidation in the retail food
industry could affect our competitive position in the markets we serve.
Our retail food business and the grocery retailing industry continue to
experience aggressive competition from mass merchandisers, warehouse clubs, drug
stores, convenience stores, discount merchandisers, dollar stores, restaurants,
other retail chains, nontraditional competitors and emerging alternative formats
in the markets where we have retail operations. Competition with these outlets
is based on price, store location, advertising and promotion, product mix,
quality and service. Some of these competitors may have greater financial
resources, lower merchandise acquisition costs and lower operating expenses than
we do, and we may be unable to compete successfully in the future. A decrease in
the rate of inflation in food prices and increasingly competitive markets have
made it difficult generally for grocery store operators to achieve comparable
store sales gains. Because sales growth has been difficult to attain, our
competitors have attempted to maintain market share through increased levels of
promotional activities and discount pricing, creating a more difficult
environment in which to consistently increase year-over-year sales. Price-based
competition has also, from time to time, adversely affected our operating
margins. Competitors' greater financial strengths enable them to participate in
aggressive pricing strategies such as selling inventory below costs to drive
overall increased sales. Our continued success is dependent upon our ability to
effectively compete in this industry and to reduce operating expenses, including
managing health care and pension costs contained in our collective bargaining
agreements. The competitive practices and pricing in the food industry generally
and particularly in our principal markets may cause us to reduce our prices in
order to gain or maintain our market share of sales, thus reducing margins.
Our in-store pharmacy business is also subject to intense competition. In
particular, an adverse trend for drug retailing has been the significant growth
in mail-order and internet-based prescription processors, including importation
from Canada and other countries. Due to the rapid rise in drug costs experienced
in recent years, mail-order prescription distribution methods are perceived by
employers and insurers as being less costly than traditional distribution
methods and are being mandated by an increasing number of third party pharmacy
benefit managers, many of which also own and manage mail-order distribution
operations. As a result, some labor unions and employers are requiring, and
others may encourage, that their members or employees obtain medications from
mail-order pharmacies which offer drug prescriptions at prices that are lower
than we are able to offer. In addition to these forms of mail-order
distribution, there has also been increasing competition from a number of
internet-based prescription distributors, which specialize in offering certain
high demand lifestyle drugs at deeply discounted prices, and importers from
Canada and other foreign countries. These alternate distribution channels have
acted to restrain the rate of sales growth for traditional chain drug retailers
in the last few years. There can be no assurance that our efforts to offset the
effects of alternate distribution channels and eligibility changes will be
successful.
WE ARE CONCENTRATED IN THE NEW YORK -- NEW JERSEY AND PHILADELPHIA METROPOLITAN
AREAS AND, AS A RESULT, OUR BUSINESS IS SIGNIFICANTLY INFLUENCED BY THE ECONOMIC
CONDITIONS AND OTHER CHARACTERISTICS OF THESE AREAS.
We are vulnerable to economic downturns in the New York -- New Jersey and
Philadelphia metropolitan areas, in addition to those that may affect the
country as a whole, as well as other factors that may impact that region, such
as the regulatory environment, the cost of real estate, insurance, taxes and
rent, reliance on the financial industry, increasing unemployment, weather and
natural catastrophes, demographics, the availability of labor, and geopolitical
factors such as war and terrorism.
We cannot predict economic conditions in this region, and factors such as
interest rates, energy costs and unemployment rates may adversely affect our
sales which may lead to higher losses, and may also adversely affect our future
growth and expansion. Any unforeseen events or circumstances that affect the
area could also materially adversely affect our revenues and profitability.
Further, since we are concentrated in densely populated metropolitan areas,
opportunities for future store expansion may be limited, which may adversely
affect our business and results of operations.
WE RELY ON C&S FOR A SUBSTANTIAL AMOUNT OF OUR PRODUCTS.
Pursuant to the terms of a long-term supply agreement, which our Company
entered into in conjunction with the sale of its distribution business and
certain of its assets to C&S, we currently acquire a significant amount of our
saleable inventory, including groceries and perishables, from one supplier, C&S.
During the twelve months ended February 28, 2009, products supplied from C&S
accounted for over 69% of our Company's supermarket inventory purchases. Our
agreement with C&S is for a term of ten years, during which we expect to acquire
a substantial portion of our saleable inventory from C&S. Although we have not
experienced difficulty in the supply of these products to date, supply
interruptions by C&S could occur in the future. Any significant interruption in
this supply stream, either as a result of disruptions at C&S or if our supply
agreement with C&S were terminated for any reason, could have a material adverse
effect on our business and results of operations. We are therefore subject to
the risks of C&S's business, including potential labor disruptions at C&S
facilities, increased regulatory obligations and distribution problems which may
affect C&S's ability to obtain products. While we believe that other suppliers
could provide similar products on reasonable terms, they are limited in number.
In addition, a change in suppliers could cause a delay in distribution and a
possible loss of sales, which would affect operating results adversely.
OUR RENOVATION AND EXPANSION PLANS MAY NOT BE SUCCESSFUL, AND THOUGH WE PLAN TO
CONVERT THE REMAINING CONVENTIONAL STORES TO ONE OF OUR THREE NEW FORMATS, WE
MAY NOT HAVE THE FUNDS TO DO SO.
A key to our business strategy has been, and will continue to be, the
renovation and expansion of total selling square footage, including the
continued transition of our existing conventional stores into one of our three
new formats. We have reduced our planned capital expenditures for fiscal 2009,
which relate primarily to opening new supermarkets under the optimal format
based on local demographics, opening new liquor stores, and converting certain
A&P conventional banner stores to the optimal format based on local
demographics. Our capital expenditures could differ from our estimates if
development and remodel costs vary from those budgeted, if performance varies
significantly from expectations or if we are unsuccessful in acquiring suitable
sites for new stores. We expect that cash flows from operations, supplemented by
borrowing capacity under our credit facility and the availability of capital
lease financing will be sufficient to fund our capital renovation and expansion
programs; however, in the event that cash flows from operations decrease we may
decide to limit our future capital expenditure program. In addition, the greater
financial resources of some of our competitors for acquiring real estate sites
could adversely affect our ability to open new stores. The inability to renovate
our existing stores, add new stores or increase the selling area of existing
stores could adversely affect our business, our results of operations and our
ability to compete successfully.
WE MAY BE ADVERSELY AFFECTED BY FLUCTUATING UTILITY AND FUEL COSTS.
Fluctuating fuel costs may adversely affect our operating costs since we
incur the cost of fuel in connection with the transportation of goods from our
warehouse and distribution facilities to our stores. In addition, operations at
our stores are sensitive to rising utility fuel costs due to the amount of
electricity and gas required to operate our stores. In the event of rising fuel
costs, we may not be able to recover rising utility and fuel costs through
increased prices charged to our customers. Oil prices directly affect our
product transportation costs and fuel costs due to the amount of electricity and
gas required to operate our stores as well as our utility and petroleum-based
supply costs, including plastic bags.
CURRENT ECONOMIC CONDITIONS HAVE BEEN, AND MAY CONTINUE TO BE VOLATILE.
As a result of concern about the stability of the capital markets and the
strength of counterparties, many financial institutions have reduced and, in
some cases, ceased to provide funding to borrowers. Based on information
available to us, we have no indication that the financial institutions acting as
lenders under our credit facility would be unable to fulfill their commitments.
Continued turbulence in the global credit markets and U.S. economy may adversely
affect our results of operations, financial condition and liquidity.
WE HAVE CERTAIN SUBSTANTIAL EQUITY HOLDERS THAT MAY SUPPORT STRATEGIES THAT ARE
OPPOSED TO YOUR INTERESTS OR WITH WHICH YOU DISAGREE.
Tengelmann, our Company's former majority stockholder, owns beneficially and
of record a substantial percentage of our common stock on a fully diluted basis,
which will increase upon completion of the proposed issuance of convertible
preferred stock. As a result of this equity ownership and our stockholder
agreement with Tengelmann, Tengelmann has the power to significantly influence
the results of stockholder votes and the election of our board of directors, as
well as transactions involving a potential change of control of our Company.
Tengelmann may support strategies and directions for our Company which are in
its best interests but which are opposed to other stakeholders. So long as
Tengelmann retains sufficient ownership of the Company's voting power,
Tengelmann has rights to board representation, as well as consent rights in
connection with certain major Company actions including changes to Company
policies and organizational documents, dispositions and financing activity.
Upon completion of the proposed issue of convertible preferred stock, Yucaipa
will become a significant holder of our common stock on a fully diluted basis.
Upon entry into the proposed stockholder's agreement in connection with the
convertible preferred issue, and so long as Yucaipa retains sufficient ownership
of the Company's voting power, Yucaipa will have rights to board representation,
as well as consent rights in connection with certain major Company actions
including changes to Company policies and organizational documents, dispositions
and financing activity. Yucaipa may support strategies and directions for our
Company which are in its best interests but which are opposed to other
stakeholders.
WE COULD BE AFFECTED IF CONSUMERS LOSE CONFIDENCE IN THE FOOD SUPPLY CHAIN OR
THE QUALITY AND SAFETY OF OUR PRODUCTS.
We could be adversely affected if consumers lose confidence in the safety and
quality of the food supply chain. Adverse publicity about these concerns,
whether or not ultimately based on fact, and whether or not involving products
sold at our stores, could discourage consumers from buying our products. The
real or perceived sale of contaminated food products by us could result in a
loss of consumer confidence and product liability claims, which could have a
material adverse effect on our sales and operations.
To the extent that we are unable to maintain appropriate sanitation and
quality standards in our stores, food safety and quality issues could involve
expense and damage to our various brand names. Additionally, concerns about the
safety or effectiveness of certain drugs or negative publicity surrounding
certain categories of drugs may have a negative impact on our pharmacy sales.
THREATS OR POTENTIAL THREATS TO SECURITY OF FOOD AND DRUG SAFETY MAY ADVERSELY
AFFECT OUR BUSINESS.
Acts or threats of war or terror or other criminal activity directed at the
grocery or drug store industry, the transportation industry, or computer or
communications systems, whether or not directly involving our stores, could
increase our security costs, adversely affect our operations, or impact general
consumer behavior and spending as well as customer orders and our supply chain.
Other events that give rise to actual or potential food contamination, drug
contamination, or food-borne illnesses could have an adverse effect on our
operating results.
VARIOUS ASPECTS OF OUR BUSINESS ARE SUBJECT TO FEDERAL, STATE AND LOCAL LAWS AND
REGULATIONS. OUR COMPLIANCE WITH THESE REGULATIONS MAY REQUIRE ADDITIONAL
EXPENDITURES AND COULD ADVERSELY AFFECT OUR ABILITY TO CONDUCT OUR BUSINESS AS
PLANNED. CHANGES IN THESE LAWS AND REGULATIONS COULD INCREASE OUR COMPLIANCE
COSTS.
We are subject to federal, state and local laws and regulations relating to
zoning, land use, environmental protection, work place safety, public health,
community right-to-know, beer and wine sales, pharmaceutical sales and gasoline
station operations. A number of states and local jurisdictions regulate the
licensing of supermarkets, including beer and wine license grants. In addition,
under certain local regulations, we are prohibited from selling beer and wine in
certain of our stores. Employers are also subject to laws governing their
relationship with employees, including minimum wage requirements, overtime,
working conditions, disabled access and work permit requirements. Compliance
with these laws could reduce the revenue and profitability of our supermarkets
and could otherwise adversely affect our business, financial condition or
results of operations. In addition, any changes in these law or regulations
could significantly increase our compliance costs and adversely affect our
results of operations, financial condition and liquidity.
A number of federal, state and local laws exist that impose burdens or
restrictions on owners with respect to access by disabled persons. Our
compliance with these laws may result in modifications to our properties, or
prevent us from performing certain further renovations.
Our pharmacy business is subject to certain government laws and regulations,
including those administered and enforced by Medicare, Medicaid, the Drug
Enforcement Administration (DEA), Consumer Product Safety Commission, U.S.
Federal Trade Commission and Food and Drug Administration. For example, the
conversion of various prescription drugs to over-the-counter medications may
reduce our pharmacy sales, and if the rate at which new prescription drugs
become available slows or if new prescription drugs that are introduced into the
market fail to achieve popularity, our pharmacy sales may be adversely affected.
The withdrawal of certain drugs from the market may also adversely affect our
pharmacy business. Changes in third party reimbursement levels for prescription
drugs, including changes in Medicare Part D or state Medicaid programs, could
also reduce our margins and have a material adverse effect on our business. In
order to dispense controlled substances, we are required to register our
pharmacies with the DEA and to comply with security, recordkeeping, inventory
control and labeling standards.
In addition, our pharmacy business is subject to local regulations in the
states where our pharmacies are located, applicable Medicare and Medicaid
regulations and state and federal prohibitions against certain payments intended
to induce referrals of patients or other health care business. Failure to
properly adhere to these and other applicable regulations could result in the
imposition of civil, administrative and criminal penalties including suspension
of payments from government programs; loss of required government
certifications; loss of authorizations to participate in, or exclusion from,
government reimbursement programs such as Medicare and Medicaid; loss of
licenses; significant fines or monetary penalties for anti-kickback law
violations, submission of false claims or other failures to meet reimbursement
program requirements and could adversely affect the continued operation of our
business. Our pharmacy business is also subject to the Health Insurance
Portability and Accountability Act, including its obligations to protect the
confidentiality of certain patient information and other obligations. Failure to
properly adhere to these requirements could result in the imposition of civil as
well as criminal penalties.
CERTAIN RISKS ARE INHERENT IN PROVIDING PHARMACY SERVICES, AND OUR INSURANCE MAY
NOT BE ADEQUATE TO COVER ANY CLAIMS AGAINST US.
Pharmacies are exposed to risks inherent in the packaging and distribution of
pharmaceuticals and other healthcare products, such as risks of liability for
products which cause harm to consumers. Although we maintain professional
liability insurance and errors and omissions liability insurance, we cannot
assure you that the coverage limits under our insurance programs will be
adequate to protect us against future claims, or that we will be able to
maintain this insurance on acceptable terms in the future. Our results of
operations, financial condition or cash flows may be adversely affected if in
the future our insurance coverage proves to be inadequate or unavailable, or
there is an increase in liability for which we self-insure, or we suffer harm to
our reputation as a result of an error or omission.
LITIGATION, LEGAL OR ADMINISTRATIVE PROCEEDINGS AND OTHER CLAIMS COULD EXPOSE US
TO SIGNIFICANT LIABILITIES AND THUS NEGATIVELY AFFECT OUR FINANCIAL RESULTS.
We are, from time to time, subject to various claims, administrative
proceedings and litigation, which if determined adversely to us could negatively
affect our financial results. We have estimated our exposure to claims,
administrative proceedings and litigation and believe we have made adequate
provisions for them, where appropriate. Unexpected outcomes in both the costs
and effects of these matters could result in an adverse effect on our business
and our results of operation and earnings.
WE ARE AFFECTED BY INCREASING LABOR, BENEFIT AND OTHER OPERATING COSTS AND A
COMPETITIVE LABOR MARKET AND ARE SUBJECT TO THE RISK OF UNIONIZED LABOR
DISRUPTIONS.
The majority of our operating costs are attributed to labor costs and,
therefore, our financial performance is greatly influenced by increasing wage
and benefit costs, including pension and health care costs, a competitive labor
market and the risk of labor disruption of our highly unionized workforce.
We have approximately 47,000 employees, of which approximately 69% are
employed on a part-time basis. Over the last few years, increased benefit costs
have caused our Company's labor costs to increase. We cannot assure you that our
labor costs will not continue to increase, or that such increases can be
recovered through increased prices charged to customers. Any significant failure
to attract and retain qualified employees, to control our labor costs or to
recover any increased labor costs through increased prices charged to customers
could have a material adverse effect on our results of operations.
As of February 28, 2009, approximately 92% of the our employees were
represented by unions and covered by collective bargaining or similar agreements
that are subject to periodic renegotiations. Although we believe that we will
successfully negotiate new collective bargaining agreements when our agreements
expire, these negotiations may not prove successful, may result in a significant
increase in the cost of labor or may result in the disruption of our operations.
We are currently negotiating or will negotiate ten labor agreements covering
approximately 4,300 employees in fiscal 2009. In each of these negotiations,
rising health care and pension costs will be important issues, as will the
nature and structure of work rules. The actual terms of the renegotiated
collective bargaining agreements and/or a prolonged work stoppage affecting a
substantial number of stores could have a material adverse effect on our
results. We cannot assure you that our labor negotiations will conclude
successfully or that any work stoppage or labor disturbances will not occur. We
expect that we will incur additional costs and face increased competition for
customers during any work stoppages or labor disturbances, which would adversely
affect operating results.
WE PARTICIPATE IN VARIOUS MULTI-EMPLOYER PENSION PLANS FOR SUBSTANTIALLY ALL
EMPLOYEES REPRESENTED BY UNIONS.
We will be required to make contributions to these multi-employer pension
plans in amounts established under collective bargaining agreements. Pension
expenses for these plans, which are recognized as contributions, are currently
funded. Benefits generally are based on a fixed amount for each year of service.
We contributed $48.2 million, $34.4 million and $32.1 million to multi-employer
pension plans in fiscal 2008, fiscal 2007 and fiscal 2006, respectively. We
could, under certain circumstances, be liable for unfunded vested benefits or
other expenses of jointly administered union/management plans, which benefits
could be significant and material for us. To date, we have not established any
liabilities for future withdrawals because such withdrawals from these plans are
not probable and the amount cannot be estimated. As a result, we expect that
contributions to these plans may increase. Additionally, the benefit levels and
related items will be issues in the negotiation of our collective bargaining
agreements. Under current law, an employer that withdraws or partially withdraws
from a multi-employer pension plan may incur withdrawal liability to the plan,
which represents the portion of the plan's underfunding that is allocable to the
withdrawing employer under complex actuarial and allocation rules. The amount of
any increase or decrease in our required contributions to these multi-employer
pension plans will depend upon the outcome of collective bargaining, actions
taken by trustees who manage the plans affecting the costs of future service
benefits, government regulations and the actual return on assets held in the
plans, among other factors.
WE FACE THE RISK OF BEING HELD LIABLE FOR ENVIRONMENTAL DAMAGES THAT HAVE
OR MAY OCCUR.
Our operations subject us to various laws and regulations relating to the
protection of the environment, including those governing the management and
disposal of hazardous materials and the cleanup of contaminated sites. Under
some environmental laws, such as the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, also known as CERCLA or the Superfund
law, and similar state statutes, responsibility for the entire cost of cleanup
of a contaminated site can be imposed upon any current or former site owners or
operators, or upon any party who sent waste to the site, regardless of the
lawfulness of the original activities that led to the contamination. From time
to time we have been named as one of many potentially responsible parties at
Superfund sites, although our share of liability has typically been de minimis.
Although we believe that we are currently in substantial compliance with
applicable environmental requirements, future developments such as more
aggressive enforcement policies, new laws or discoveries of unknown conditions
may require expenditures that may have a material adverse effect on our business
and financial condition.
IF ANY OF THE ASSIGNEES UNDER OUR OPERATING LEASES WERE TO BECOME UNABLE TO
CONTINUE MAKING PAYMENTS UNDER THE ASSIGNED LEASES WE COULD BE REQUIRED TO
ASSUME THE LEASE OBLIGATION.
We are the primary obligor for a significant number of long-term leases
related to closed stores and warehouses. When possible, we have assigned these
leases to third parties (the "Assigned Leases"). However, our ability to
sublease or assign these leases depends on the economic conditions in the real
estate markets in which these leases are located. When the Assigned Leases were
assigned, we generally remained secondarily liable with respect to these lease
obligations. As such, if any of the assignees were to become unable to continue
making payments under our Assigned Leases, we could be required to assume the
lease obligation. As of [June 20, 2009], [217] of our Assigned Leases remained
in place. Assuming that each respective assignee became unable to continue to
make payments under an Assigned Lease, an event we believe to be unlikely, we
estimate our maximum potential obligation with respect to the Assigned Leases to
be approximately $686.1 million as of [June 20, 2009], an amount which could be
partially or totally offset by reassigning or subletting such leases. In the
event the assignees do not make payments under any or all of the Assigned
Leases, we could be required to assume any or all of the lease obligations,
which could materially adversely affect our financial condition or results of
operations.
THE LOSS OF KEY PERSONNEL COULD NEGATIVELY AFFECT OUR BUSINESS.
We are dependent upon a number of key personnel and members of management. If
we were to lose the services of a significant number of key personnel or
management within a short period of time, this could have a material adverse
effect on our operations. We do not maintain key person insurance on any
personnel or management. Our continued success is also dependent upon our
ability to attract and retain qualified personnel to meet our future growth
needs. We face intense competition for qualified personnel, many of whom are
subject to offers from competing employers. We may not be able to attract and
retain necessary team members to operate our business.
ANY DIFFICULTIES WE EXPERIENCE WITH RESPECT TO OUR INFORMATION TECHNOLOGY
SYSTEMS COULD LEAD TO SIGNIFICANT COSTS OR LOSSES.
We have large, complex information technology systems that are important to
our business operations. We could encounter difficulties developing new systems
or maintaining and upgrading existing systems. Such difficulties could lead to
significant expenses or losses due to disruption in our business operations.
Despite our considerable efforts to secure and maintain our computer network,
security could be compromised, confidential information could be
misappropriated, or system disruptions could occur. This could lead to
disruption of operations, loss of sales or profits or cause us to incur
significant costs to reimburse third parties for damages.
WE MAY MAKE ACQUISITIONS AND CONSEQUENTLY FACE INTEGRATION, MANAGEMENT
DIVERSION AND OTHER RISKS.
We may pursue acquisitions in the future. Any future acquisitions could be of
significant size and may involve either domestic or international parties. To
acquire and integrate a separate organization would divert management attention
from other business activities. This diversion, together with the difficulties
we may encounter in integrating an acquired business, could have a material
adverse effect on our business, financial conditions or results of operations.
Moreover, we may not realize any of the anticipated benefits of an acquisition
and integration costs may exceed anticipated amounts. In connection with future
acquisitions, we may also assume the liabilities of the businesses we acquire.
These liabilities could materially and adversely affect our business and
financial condition.
OUR FINANCIAL STATEMENTS MUST BE RECAST DUE TO THE APPLICATION OF RECENT
ACCOUNTING CHANGES RELATING TO THE ACCOUNTING FOR CONVERTIBLE SECURITIES, WHICH
MAY RESULT IN RESULTS THAT ARE NOT CURRENTLY ANTICIPATED.
During the 16 weeks ended June 20, 2009, we adopted FSP 14-1, that became
effective for fiscal years beginning after December 15, 2008 and which impacts
the accounting for the components of convertible debt that can be settled wholly
or partly in cash upon conversion. The new requirements of FSP 14-1 are to be
applied retrospectively to previously issued convertible debt instruments. Had
we recast our prior period annual consolidated financial statements
stockholders' deficit would have increased by approximately $3.9 million and
$0.4 million as of February 28, 2009 and February 23, 2008, respectively, and
net income would have decreased by $3.5 million and $0.4 million for the years
ended February 28, 2009, and February 23, 2008, respectively.
OUR SUBSTANTIAL INDEBTEDNESS COULD IMPAIR OUR FINANCIAL CONDITION AND OUR
ABILITY TO FULFILL OUR DEBT OBLIGATIONS, INCLUDING OUR OBLIGATIONS UNDER THE
NOTES.
We have substantial indebtedness. Our indebtedness could have important
consequences to you. For example, it could:
o make it more difficult for us to satisfy our obligations with
respect to the notes and our other indebtedness, which could in
turn result in an event of default on the notes or such other
indebtedness,
o require us to dedicate a substantial portion of our cash flow from
operations to debt service payments, thereby reducing the
availability of cash for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes,
o impair our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes,
o diminish our ability to withstand a downturn in our business, the
industry in which we operate or the economy generally,
o limit our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate, and
o place us at a competitive disadvantage compared to certain
competitors that have proportionately less debt.
If we are unable to meet our debt service obligations, we could be forced to
restructure or refinance our indebtedness, seek additional equity capital or
sell assets. We may be unable to obtain financing or sell assets on satisfactory
terms, or at all.
In addition, at June 20, 2009, we had $305.7 million of variable rate debt.
If market interest rates increase, such variable-rate debt will have higher debt
service requirements, which could adversely affect our cash flow. While we may
enter into agreements limiting our exposure to higher interest rates, any such
agreements may not offer complete protection from this risk.
PROVISIONS IN OUR AMENDED AND RESTATED ARTICLES OF INCORPORATION PERMIT OUR
BOARD OF DIRECTORS TO ISSUE PREFERRED STOCK WITHOUT FIRST OBTAINING STOCKHOLDER
APPROVAL WHICH COULD BE DILUTIVE TO COMMON STOCKHOLDERS AND AFFECT THE PRICE OF
OUR COMMON STOCK.
Our amended and restated articles of incorporation permit our board of directors
to issue preferred stock without first obtaining stockholder approval. If we
issued preferred stock, these additional securities may have dividend or
liquidation preferences senior to our common stock. If we issued convertible
preferred shares, a subsequent conversion may dilute the current common
stockholders' interest. Issuance of such preferred stock could adversely affect
the price of our common stock.
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3 - Defaults Upon Senior Securities
None
ITEM 4 - Submission of Matters to a Vote of Security Holders
None
ITEM 5 - Other Information
As discussed in the Company's 2009 Proxy Statement, the Company's named
executive officers, except for the Executive Chairman, are each a party to an
employment agreement which provides certain benefits upon termination without
cause or for good reason upon a change of control. In connection with compliance
under Section 409A of the Internal Revenue Code, as amended, and the regulations
thereunder (the "Code"), the Company entered into amendments to such agreements
in December 2008 which were amended and restated in June 2009 to clarify the
change of control definition to keep it consistent with the original intent of
such agreements.
For purposes of such agreements, a "Change of Control" means a
change in the effective control of the Company, or a change in the ownership of
a substantial portion of the assets of the Company, within the meaning of
Section 409A of the Code. However, a Change of Control shall not occur where (i)
the Company, any subsidiary of the Company, or Tengelmann
Warenhandelgesellschaft KG (a partnership organized under the laws of the
Federal Republic of Germany or any successor to such partnership (with its
affiliates, "Tengelmann")) acquires effective control of the Company, or
acquires ownership of a substantial portion of the assets of the Company or (ii)
the acquisition of voting power would otherwise constitute a change in effective
control of the Company but such voting power does not exceed the then-current
voting power of Tengelmann, all within the meaning of Section 409A of the Code.
The form of the June 2009 amendment is attached as Exhibit 10.2 to this Form
10-Q.
ITEM 6 - Exhibits
(a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1++ Form of Amendment to Restricted Share Unit Award Agreement under E-CLIIP
dated May 21, 2009 (incorporated by reference to Item 5.02(e) of Form 8-K filed
on May 28, 2009) (File No. 1-4141)
10.2*++ Form of Amendment to Employment Agreement, dated June 16, 2009, between
the Company and certain named executive officers
31.1* Certification of the Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2* Certification of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
* Filed with this 10-Q
++ Management contract or compensatory plan arrangement
The Great Atlantic & Pacific Tea Company, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
Date: July 23, 2009 By: /s/ Melissa E. Sungela
-----------------------------------------------
Melissa E. Sungela, Vice President,
Corporate Controller
(Chief Accounting Officer and
Duly Authorized Officer)