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 December 5, 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 (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). YES [ ] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer X Non-accelerated filer Smaller reporting company
--- --- --- ---
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
As of January 8, 2010, the Registrant had a total of 55,859,351 shares of common
stock - $1 par value outstanding.
1
The Great Atlantic & Pacific Tea Company, Inc.
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except share and per share amounts)
(Unaudited)
12 Weeks Ended 40 Weeks Ended
----------------------------- ----------------------------
Dec. 5, 2009 Nov. 29, 2008 Dec. 5, 2009 Nov. 29, 2008
------------ ------------ ------------ ------------
Sales $ 1,962,692 $ 2,120,954 $ 6,817,996 $ 7,226,255
Cost of merchandise sold (1,372,108) (1,460,569) (4,759,185) (5,030,741)
------------ ------------ ------------ ------------
Gross margin 590,584 660,385 2,058,811 2,195,514
Store operating, general and administrative
expense (631,175) (648,476) (2,109,804) (2,193,037)
Goodwill, trademark and long-lived
asset impairment (412,560) -- (412,560) --
------------ ------------ ------------ ------------
(Loss) income from operations (453,151) 11,909 (463,553) 2,477
Nonoperating (loss) income (15,944) 22,777 (24,898) 114,269
Interest expense (45,769) (37,511) (148,576) (119,117)
Interest income 51 86 143 553
------------ ------------ ------------ ------------
Loss from continuing operations
before income taxes (514,813) (2,739) (636,884) (1,818)
Benefit from (provision for) income taxes 12,375 (1,038) 13,983 (3,460)
------------ ------------ ------------ ------------
Loss from continuing operations (502,438) (3,777) (622,901) (5,278)
Discontinued operations:
Loss from operations of discontinued
businesses, net of tax provision of $0
for the 12 and 40 weeks ended 12/5/09
and 11/29/08, respectively (57,148) (12,466) (82,154) (30,624)
Gain on disposal of discontinued
businesses, net of tax provision of $0
for the 12 and 40 weeks ended 12/5/09
and 11/29/08, respectively -- 1,831 -- 4,653
------------ ------------ ------------ ------------
Loss from discontinued operations (57,148) (10,635) (82,154) (25,971)
------------ ------------ ------------ ------------
Net loss $ (559,586) $ (14,412) $ (705,055) $ (31,249)
============ ============ ============ ============
Net loss per share -- basic:
Continuing operations $ (9.43) $ (0.07) $ (11.76) $ (0.10)
Discontinued operations (1.07) (0.20) (1.55) (0.52)
------------ ------------ ------------ ------------
Net loss per share -- basic $ (10.50) $ (0.27) $ (13.31) $ (0.62)
============ ============ ============ ============
Net loss per share -- diluted:
Continuing operations $ (12.85) $ (1.62) $ (22.36) $ (2.69)
Discontinued operations (1.50) (0.28) (3.06) (0.49)
------------ ------------ ------------ ------------
Net loss per share - diluted $ (14.35) $ (1.90) $ (25.42) $ (3.18)
============ ============ ============ ============
Weighted average number of common
shares outstanding
Basic 53,420,248 52,391,948 53,139,840 50,362,875
============ ============ ============ ============
Diluted 37,993,212 37,908,889 26,844,195 52,636,853
============ ============ ============ ============
See Notes to Consolidated Financial Statement
2
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Loss
(Dollars in thousands)
(Unaudited)
(Accumulated
Common Stock Additional Deficit)/ Accumulated Other Total
--------------------------- Paid-in Retained Comprehensive Stockholders'
Shares Amount Capital Earnings (Loss) Income Equity (Deficit)
------------ ----------- ----------- ---------- -------------- ---------------
40 Weeks Ended December 5, 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 (705,055) (705,055)
Other comprehensive loss (188) (188)
Beneficial conversion feature
related to preferred stock 10,246 10,246
Dividends on preferred stock (1,599) (1,599)
Preferred stock financing fees
amortization (209) (209)
Returned shares under Share
Lending agreement (1,000,000) (1,000) 1,000 -
Stock options exercised 10,380 10 33 43
Other share based awards 673,934 674 4,009 4,683
adjusted ------------ ----------- ----------- ---------- ----------- -----------
Balance at end of period 57,359,113 $ 57,359 $ 478,159 $ (832,369) $ (105,335) $ (402,186)
============ =========== =========== =========== ============ ===========
40 Weeks Ended November 29, 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 loss (31,249) (31,249)
Other comprehensive loss (744) (744)
Conversion features related to
convertible debt 57,422 57,422
Stock options exercised 106,626 107 2,096 2,203
Other share based awards 455,953 456 3,186 3,642
adjusted ------------ ----------- ----------- ---------- ----------- -----------
Balance at end of period 57,663,534 $ 57,664 $ 462,677 (15,228) $ (29,719) $ 475,394
============ =========== =========== =========== ============ ===========
Comprehensive Loss
------------------
12 Weeks Ended 40 Weeks Ended
------------------------------- ------------------------------------
Dec. 5, 2009 Nov. 29, 2008 Dec. 5, 2009 Nov. 29, 2008
-------------- --------------- ---------------- ----------------
Net loss $ (559,586) $ (14,412) $ (705,055) $ (31,249)
-------------- --------------- ---------------- ----------------
Net unrealized (loss) gain on marketable securities,
net of tax (95) -- 543 --
Pension and other post-retirement benefits, net of tax (1,643) (154) (731) (744)
-------------- --------------- ---------------- ----------------
Other comprehensive loss, net of tax (1,738) (154) (188) (744)
-------------- --------------- ---------------- ----------------
Total comprehensive loss $ (561,324) $ (14,566) $ (705,243) $ (31,993)
============== =============== ================ ================
See Notes to Consolidated Financial Statements
3
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands except share amounts)
(Unaudited)
ASSETS December 5, 2009 February 28, 2009
----------------- -----------------
Current assets:
Cash and cash equivalents $ 281,842 $ 175,375
Restricted cash 1,992 2,214
Restricted marketable securities 923 2,929
Accounts receivable, net of allowance for doubtful accounts of
$8,331 and $8,463 at December 5, 2009 and
February 28, 2009, respectively 179,035 196,537
Inventories, net 492,674 474,002
Prepaid expenses and other current assets 60,314 67,465
----------- -----------
Total current assets 1,016,780 918,522
----------- -----------
Non-current assets:
Property:
Property owned, net 1,450,599 1,591,250
Property leased under capital leases, net 119,022 132,960
----------- -----------
Property, net 1,569,621 1,724,210
Goodwill 138,901 483,560
Intangible assets, net 166,688 224,838
Other assets 133,439 193,954
----------- -----------
Total assets $ 3,025,429 $ 3,545,084
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,373 $ 5,283
Current portion of obligations under capital leases 17,659 12,290
Accounts payable 241,481 221,073
Book overdrafts 85,527 60,835
Accrued salaries, wages and benefits 128,511 161,054
Accrued taxes 30,307 39,404
Other accruals 263,241 246,596
----------- -----------
Total current liabilities 768,099 746,535
----------- -----------
Non-current liabilities:
Long-term debt 986,331 919,364
Long-term obligations under capital leases 140,048 147,921
Long-term real estate liabilities 329,505 330,196
Deferred real estate income 88,665 95,000
Other financial liabilities 29,664 4,766
Preferred stock liability 117,250 --
Other non-current liabilities 924,338 1,011,409
----------- -----------
Total liabilities 3,383,900 3,255,191
----------- -----------
Series A redeemable preferred stock--no par value, $1,000 redemption value;
authorized -- 700,000 shares and none; issued -- 57,750 and none at ----------- -----------
Dec. 5, 2009 and Feb. 28, 2009, respectively 43,715 --
----------- -----------
Commitments and contingencies (Note 19)
Stockholders' (deficit) equity:
Common stock--$1 par value; authorized -- 160,000,000 shares; issued and
outstanding -- 57,359,113 and 57,674,799 shares
at Dec. 5, 2009 and Feb. 28, 2009, respectively 57,359 57,675
Additional paid-in capital 478,159 464,679
Accumulated other comprehensive loss (105,335) (105,147)
Accumulated deficit (832,369) (127,314)
----------- -----------
Total stockholders' (deficit) equity (402,186) 289,893
----------- -----------
Total liabilities and stockholders' (deficit) equity $ 3,025,429 $ 3,545,084
=========== ===========
See Notes to Consolidated Financial Statements
4
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
40 Weeks Ended
------------------------------
Dec. 5, 2009 Nov. 29, 2008
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (705,055) $ (31,249)
Adjustments to reconcile net loss to net cash used in operating activities (see next page) 760,536 129,099
Other changes in assets and liabilities:
Decrease (increase) in receivables 17,946 (2,634)
Increase in inventories (19,857) (53,347)
Increase in prepaid expenses and other current assets (32,943) (9,851)
Increase in other assets (5,512) (10,161)
Increase in accounts payable 23,771 21,710
Decrease in accrued salaries, wages and benefits, and taxes (41,703) (27,939)
Increase (decrease) in other accruals 16,145 (13,760)
Decrease in other non-current liabilities (61,092) (48,895)
Other operating activities, net (4,132) (1,187)
----------- -----------
Net cash used in operating activities (51,896) (48,214)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (71,919) (85,659)
Proceeds from disposal of property 3,275 17,702
Proceeds from sale of joint venture 5,914 --
Decrease in restricted cash 222 1,051
Proceeds from maturities of marketable securities 4,212 9,907
----------- -----------
Net cash used in investing activities (58,296) (56,999)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 253,201 --
Principal payments on long-term debt (234) (206)
Proceeds under revolving lines of credit 39,450 1,683,823
Principal payments on revolving lines of credit (238,333) (1,491,940)
Proceeds under line of credit 378 54,936
Principal payments on line of credit (4,211) (58,607)
Proceeds from issuance of preferred stock 175,000 --
Proceeds from promissory note -- 10,000
Settlement of Series A warrants -- (45,735)
Proceeds from long-term real estate liabilities 170 25
Proceeds from sale-leaseback transaction 3,000 --
Principal payments on capital leases (8,388) (5,567)
Increase in book overdrafts 24,692 14,534
Deferred financing fees (26,515) 1,961
Dividends paid (1,594) --
Proceeds from stock options exercised 43 2,203
----------- -----------
Net cash provided by financing activities 216,659 165,427
Effect of exchange rate changes on cash and cash equivalents -- (84)
----------- -----------
Net increase in cash and cash equivalents 106,467 60,130
Cash and cash equivalents at beginning of period 175,375 100,733
----------- -----------
Cash and cash equivalents at end of period $ 281,842 $ 160,863
=========== ===========
See Notes to Consolidated Financial Statements
5
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Cash Flows - Continued
(Dollars in thousands)
(Unaudited)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
---------------------------------------------------------------------------
40 Weeks Ended
-----------------------------
Dec. 5, 2009 Nov. 29, 2008
------------ -------------
Depreciation and amortization $ 191,385 $ 201,362
Impairment of goodwill and trademark 371,740 --
Impairment of long-lived assets 45,986 2,667
Nonoperating loss (income) 24,898 (114,269)
Non-cash interest expense 35,101 20,120
Stock compensation expense 4,683 3,642
Provision for deferred income taxes (12,013) --
Asset disposition initiatives in the normal course of business (2,167) 8,547
Asset disposition initiatives relating to discontinued operations 59,932 1,277
Non-cash occupancy charges for stores closed in the normal course of business 38,589 6,537
Gain on disposal of owned property and write-down of property, net (1,228) (362)
Gain on disposal of discontinued operations -- (4,653)
Pension withdrawal costs 2,445 --
LIFO reserve 1,185 4,231
------------ -------------
Total non-cash adjustments to net loss $ 760,536 $ 129,099
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
--------------------------------------------------
40 Weeks Ended
-----------------------------
Dec. 5, 2009 Nov. 29, 2008
------------ -------------
Cash paid during the year for interest $ 92,736 $ 92,223
============ =============
Cash paid during the year for income taxes, net of refunds $ 3,342 $ 3,147
============ =============
See Notes to Consolidated Financial Statements
6
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share amounts)
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
---------------------------------------
The accompanying Consolidated Statements of Operations, Consolidated Statements
of Stockholders' Equity (Deficit) and Comprehensive Loss, and Consolidated
Statements of Cash Flows for the 12 and 40 weeks ended December 5, 2009 and
November 29, 2008, and the Consolidated Balance Sheets at December 5, 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 11 - Indebtedness and Other Financial
Liabilities for reclassifications made upon our retroactive adoption of the new
accounting guidance for convertible debt with cash settlement features.
Significant Accounting Policies
-------------------------------
A summary of our significant accounting policies are found in our Annual Report
on Form 10-K for the year ended February 28, 2009. There have been no
significant changes in these policies during the 40 weeks ended December 5,
2009, except as described below.
Redeemable Preferred Stock. The initial carrying amount of our preferred stock
issued in August 2009 was valued at fair value on the date of issuance, net of
closing and issuance costs. Based on the terms of the preferred stock agreement,
our preferred stock cannot be converted into more than 19.99% of the common
stock outstanding prior to its issuance without shareholder approval. The shares
that are convertible without shareholder approval are recorded within temporary
stockholders' equity, and the shares requiring shareholder approval to become
convertible are classified as a liability. Refer to Note 10 - Redeemable
Preferred Stock for additional information relating to our preferred stock
issuance.
Our preferred stock recorded within temporary stockholders' equity contains an
embedded beneficial conversion feature since the fair value of our Company's
common stock on the date of issuance was in excess of the effective conversion
price. The embedded beneficial conversion feature was recorded by allocating a
portion of the proceeds equal to the intrinsic value of the feature to
Additional paid-in-capital. The intrinsic value of the feature is calculated on
the issuance date by multiplying the difference between the quoted market price
of our common stock and the effective conversion price by the number of common
shares into which the shares recorded within temporary stockholders' equity
convert. The resulting discount will be amortized over the period from the date
of issuance to the stated redemption date into "Additional paid-in capital" in
absence of retained earnings. We will record a beneficial conversion feature on
the portion of the issuance currently classified within "Preferred stock
liability" upon receiving
7
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
shareholder approval for conversion of those shares. See Note 20 - Subsequent
Events for additional information relating to the accounting treatment upon
shareholder approval.
Our "Preferred stock liability" was initially recorded at its fair value, with
the related issuance cost amortization recorded within "Interest expense" over
its life. Dividends relating to preferred stock classified as a liability are
also recorded within "Interest expense". The portion of the issuance classified
within temporary stockholders' equity is recorded at liquidation value, net of
transaction costs and the embedded beneficial conversion feature. The discount
for shares classified within temporary stockholders' equity is accreted through
"Additional paid-in capital", in absence of retained earnings, over the period
from the date of issuance to the earliest redemption date. Dividends relating to
preferred stock recorded within temporary stockholders' equity are recorded
within "Additional paid-in capital" in absence of retained earnings.
Recently Adopted Accounting Guidance
------------------------------------
Convertible Debt. During the 16 weeks ended June 20, 2009, we adopted the new
accounting guidance for convertible debt instruments that may be settled in cash
upon conversion, which requires separate recognition of the liability and equity
components of convertible debt instruments with cash settlement features in a
manner that reflects an issuer's nonconvertible debt borrowing rate and
accretion of the resulting debt discount over the expected life of the
convertible debt. Financial statements for prior periods have been adjusted to
reflect the retroactive application of this guidance. Refer to Note 11 -
Indebtedness and Other Financial Liabilities for related disclosures and tables.
Other than Temporary Impairments. During the 16 weeks ended June 20, 2009, we
adopted the amended accounting guidance for determining whether impairment in
debt securities should be considered other-than-temporary and the related
accounting and disclosure requirements. The adoption of this guidance did not
have a material effect on our consolidated financial statements.
Fair Value Measurement. During the 16 weeks ended June 20, 2009, we adopted the
new accounting guidance relating to fair value measurements of our nonrecurring
nonfinancial assets and nonfinancial liabilities, which include goodwill, long
lived assets and store exit costs, and are measured at fair value to test for
and measure impairment, when necessary. Refer to Note 3 - Goodwill and Other
Intangible Assets and Note 5 - Valuation of Long-Lived Assets for a summary of
impairment charges recorded during the 12 and 40 weeks ended December 5, 2009.
During the 16 weeks ended June 20, 2009, we adopted the new accounting guidance
for interim and annual disclosures of the fair value of financial instruments,
and the methods and significant assumptions used to estimate fair value. Refer
to Note 4 - Fair Value Measurements for related disclosures.
During the 16 weeks ended June 20, 2009, we adopted the new accounting guidance
for determining fair value when the volume level of activity for the asset or
liability has significantly decreased and identifying transactions that are not
orderly, as well as the expanded fair value disclosure requirements for all
equity and debt securities by major security type. Refer to Note 4 - Fair Value
Measurements for related disclosures.
8
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
During the 12 weeks ended December 5, 2009, we adopted the new accounting
guidance for estimating the fair value of a liability when a quoted price in an
active market for the identical liability is not available. The adoption of this
guidance did not have a material impact on our consolidated financial
statements.
Intangible Assets. During the 16 weeks ended June 20, 2009, we adopted the new
accounting guidance relating to determining the useful life of intangible
assets. The adoption of the new guidance did not have a material impact on our
consolidated financial statements.
Business Combinations. During the 16 weeks ended June 20, 2009, we adopted the
new accounting guidance for business combinations for recognizing and measuring
in the acquirer's financial statements of any noncontrolling interest in the
acquiree, the identifiable assets and goodwill acquired and the liabilities
assumed, including those that arose from contingencies. Our acquisition of
Pathmark was not impacted by this guidance as it applies to transactions with
acquisition dates during or after our fiscal 2009.
2. Recently Issued Accounting Pronouncements
Investments in Certain Entities That Calculate Net Asset Value per Share (or Its
Equivalent). In September 2009, the Financial Accounting Standards Board
("FASB") issued new accounting guidance to allow net asset value to be used in
estimating the fair value of alternative investments without readily
determinable fair values. It also requires additional disclosures of redemption
restrictions, unfunded commitments and investment strategies. This guidance is
effective beginning with the 12 weeks ended February 27, 2010, with early
adoption permitted. We are currently assessing the impact of this guidance on
our consolidated financial statements.
Variable Interest Entities. In June 2009, the FASB issued new accounting
guidance relating to consolidation of variable interest entities ("VIEs"), with
additional disclosure requirements relating to involvement in VIEs. The new
guidance is effective beginning in our fiscal 2010. We are currently assessing
the impact of this guidance on our consolidated financial statements.
Share Lending Arrangements. In June 2009, the FASB issued new guidance on
accounting for own-share lending arrangements in contemplation of convertible
debt issuance or other financing, which requires share lending arrangements to
be measured at fair value and recognized as a debt issuance cost, amortized
using the effective interest method over the life of the financing arrangement
as interest cost. The loaned shares are excluded from basic and diluted earnings
per share, unless a default occurs. In case default becomes probable, expense
equal to the fair value of the unreturned loaned shares, net of any probable
recoveries, must be recognized. This guidance is effective beginning with our
fiscal 2010, with retrospective application required. We are currently assessing
the impact of this guidance on our financial statements.
Postretirement Plans. In December 2008, the FASB issued new accounting guidance
to expand employer's disclosures about plan assets of a defined benefit pension
or other postretirement plan to 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 disclosures are effective for our fiscal year ended February 27,
2010.
9
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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 annual impairment assessment of
goodwill and indefinite lived intangible assets was completed in the fourth
quarter of fiscal 2008 and is scheduled to be performed again in the fourth
quarter of fiscal 2009.
Goodwill
As disclosed in our Form 10-Q for the second quarter of fiscal 2009, we continue
to monitor our results and projections for the necessity of a possible
impairment charge. During the third quarter of fiscal 2009, we concluded that an
interim triggering event had occurred for purposes of testing goodwill for
impairment within our Price Impact reporting unit due to:
o The severity and duration of operating losses within the Price Impact
reporting unit;
o Changes in our management's long-term forecasts relating to the Price
Impact reporting unit;
o The significant impairment of long-lived assets within the Price
Impact reporting unit (Refer to Note 5 -- Valuation of Long-Lived
Assets ); and
As a result, we performed an interim evaluation to determine whether any portion
of the $321.8 million goodwill balance attributable to our Price Impact segment
has been impaired. We performed the first step of goodwill impairment testing by
estimating the fair value of the Price Impact reporting unit using a net present
value methodology, which is dependent on significant assumptions related to
estimated future discounted cash flows, discount rates and tax rates.
Assumptions included reduced shorter term internal revenue and profitability
forecasts based on recent trends, partially offset by an estimate for
improvement for remodeling certain stores that were underperforming against our
expectations and a perpetual growth rate for cash flow in the terminal year,
subsequent to all planned remodels, of 1.5%. We assumed a market-based weighted
average cost of capital of 11.0% to discount cash flows and a blended tax rate
of 42.0%. We determined that our carrying value exceeded our fair value
indicating that goodwill was potentially impaired.
As a result, we performed the second step of the goodwill impairment test by
calculating the implied fair value of goodwill. We allocated the fair value to
the assets and liabilities of the Price Impact reporting unit other than
goodwill. The remaining difference between the fair value of the Price Impact
reporting unit and the sum of the allocated fair value of the assets and
liabilities was considered the implied fair value of goodwill. The carrying
value of goodwill exceeded the implied fair value by $321.8 million, which was
recorded as impairment during the third quarter of fiscal 2009. Subsequent to
the impairment, no goodwill remains at the Price Impact reporting unit.
We determined that a triggering event did not occur in our third quarter for the
remaining reporting units. We will perform our annual goodwill impairment
testing of the remaining reporting units (other than the
10
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Price Impact reporting unit) during the fourth quarter of fiscal 2009. We can
provide no assurances that we will not be required to recognize an impairment of
goodwill in the future due to market conditions or other factors related to our
performance. These events could include a decline in the forecasted results in
our business plan, such as changes in forecasted on-going profitability or
capital investment budgets or changes in our interest rates. Recognition of
additional impairment of a significant portion of our goodwill would negatively
affect our Company's reported results of operations and total capitalization.
Changes in the carrying amount of goodwill by reportable segment during the 40
weeks ended December 5, 2009 are as follows:
Fresh Price Impact Gourmet Other Total
--------- ----------- --------- --------- ---------
Balance as of February 28, 2009:
--------------------------------
Goodwill $ 126,609 $ 338,048 $ 12,720 $ 6,183 $ 483,560
Accumulated impairment losses -- -- -- -- --
--------- --------- --------- --------- ---------
126,609 338,048 12,720 6,183 483,560
Adjustment to goodwill* (5,792) (16,208) (610) (209) (22,819)
Impairment losses -- (321,840) -- -- (321,840)
Balance as of December 5, 2009:
-------------------------------
Goodwill 120,817 321,840 12,110 5,974 460,741
Accumulated impairment losses -- (321,840) -- -- (321,840)
--------- --------- --------- --------- ---------
$ 120,817 $ -- $ 12,110 $ 5,974 $ 138,901
========= ========= ========= ========= =========
*During the second quarter of fiscal 2009, the amount of Goodwill related to the
Pathmark acquisition was reduced by $22.8 million as a result of an adjustment
to the deferred tax valuation allowance that should have been released in
connection with the original purchase price allocation.
Intangible Assets, net
Intangible assets, net were acquired upon our acquisition of Pathmark in
December 2007 and consisted of the following:
Weighted Avg. Gross Accumulated Accumulated
Amortization Carrying Amortization at Amortization at
Period (years) Amount Dec. 5, 2009 Feb. 28, 2009
-------------- -------- --------------- ---------------
Loyalty card customer relationships 5 $ 19,200 $ 6,622 $ 3,376
In-store advertiser relationships 20 14,720 1,472 906
Pharmacy payor relationships 13 75,000 11,538 7,100
Pathmark trademark Indefinite 77,400 -- --
-------- --------- --------
Total $186,320 $ 19,632 $ 11,382
======== ========= ========
Based on the lower revenues within our Price Impact reporting unit, as well as
the impairment trigger of goodwill during the third quarter of fiscal 2009, we
evaluated the fair value of the Pathmark Trademark using the relief-from-royalty
method with assumptions consistent with those used to fair value goodwill.
Further assumptions include lower estimated market royalty rate expectations due
to current general economic conditions, as well as our near term profitability
projections.
The carrying value exceeded the indicated fair value of the Pathmark Trademark,
resulting in an impairment charge of $49.9 million which we recorded this
quarter. We believe that our estimates are
11
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
appropriate based upon the current assumptions. However, we may be required to
record impairment charges in future periods if our revenues differ from our
current projections. We will perform our annual trademark impairment testing
during the fourth quarter of fiscal 2009. We currently estimate that the fair
value of our trademark decreases by approximately $20.0 million for each 5 basis
point decrease in the market royalty rate and by approximately $8.0 million for
each 10% decline in sales from our current projections.
During the third quarter of fiscal 2009, we also determined that we had a
triggering event requiring us to evaluate the recoverability of our amortizable
intangible assets for possible impairment, due to lower revenues within our
Price Impact reporting unit and the impairment trigger of goodwill. We evaluated
the expected undiscounted cash flows of the Pathmark reporting unit compared to
the book value of all long-lived assets, including intangible assets other than
goodwill, noting no impairment of our amortizable intangible assets. We believe
that our estimates are appropriate based upon the current assumptions. However,
future impairment charges could be required if our revenues in future periods
differ from our current projections. Amortization expense relating to our
finite-lived intangible assets for the 12 and 40 weeks ended December 5, 2009
was $2.5 million and $8.3 million, respectively. Amortization expense for the 12
and 40 weeks ended November 29, 2008 was $2.1 million and $7.1 million,
respectively.
The following table summarizes the estimated future amortization expense for our
finite-lived intangible assets:
2009 $ 2,475
2010 10,725
2011 10,725
2012 9,670
2013 6,505
Thereafter 49,188
4. Fair Value Measurements
The accounting guidance for fair value measurement defines and establishes a
framework for measuring fair value. Inputs used to measure fair value are
classified based on the following three-tier fair value hierarchy:
Level 1 -- Quoted prices in active markets for identical assets or liabilities.
Our Level 1 assets include cash equivalents that are traded in an active
exchange market.
Level 2 -- Directly or indirectly observable inputs other than Level 1 quoted
prices in active markets. Our Level 2 liabilities include warrants, which are
valued using the Black Scholes pricing model with inputs that are observable or
can be derived from or corroborated by observable market data.
Level 3 -- Unobservable inputs that are supported by little or no market
activity whose value is determined using pricing models, discounted cash flows,
or similar methodologies, as well as instruments for which the determination of
fair value requires significant judgment or estimation. Our Company's Level 3
assets include our restricted marketable securities for which there is limited
market activity.
12
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
A financial asset or liability's classification within the hierarchy is
determined based on the lowest level input that is significant to the fair value
measurement.
The following table provides the assets and liabilities carried at fair value
measured on a recurring basis as of December 5, 2009 and February 28, 2009:
Fair Value Measurements at Dec. 5, 2009 Using
---------------------------------------------
Quoted Prices Significant Other Significant
Total Carrying in Active Observable Unobservable
Value at Markets Inputs Inputs
Dec. 5, 2009 (Level 1) (Level 2) (Level 3)
----------------- ------------- ------------- -------------
Assets:
-------
Cash equivalents $ 186,893 $ 186,893 $ -- $ --
Restricted marketable securities 923 -- -- 923
--------------- ----------- ------------- -------------
Total $ 187,816 $ 186,893 $ -- $ 923
=============== =========== ============= =============
Liabilities:
------------
Series B Warrant $ 29,663 $ -- $ 29,663 $ --
=============== =========== ============= =============
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:
------------
Series B Warrant $ 4,766 $ -- $ 4,766 $ --
=============== =========== ============= =============
Level 3 Financial Assets:
-------------------------
Our 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. These securities were valued with
the assistance of broker pricing models that incorporate transaction details
such as contractual terms, maturity, timing and amount of future cash inflows,
and assumptions about liquidity. As of December 5, 2009 and February 28, 2009,
we had restricted marketable securities of $0.9 million and $4.9 million,
respectively, which 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. 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 and these amounts were categorized as Level 3.
13
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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 December 5, 2009:
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
-------------------------------
Restricted Marketable
Securities
----------
Beginning Balance $ 4,857
Issuances --
Total realized and unrealized (losses) and gains included in:
Realized losses (1) (261)
Other comprehensive income (2) 543
Settlements (4,216)
---------
Ending Balance $ 923
=========
-------------
(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
December 5, 2009, based on the net asset value of the Columbia Fund at
December 5, 2009, primarily as 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 12 and 40 weeks ended December 5, 2009, we received distributions
from the Columbia Fund in the amount of $2.0 million and $4.2 million,
respectively, at an amount less than 100% of the net asset value of the fund,
resulting in realized losses of nil and $0.3 million, respectively. During the
12 and 40 weeks ended November 29, 2008, we received distributions from the
Columbia Fund in the amount of $2.8 million and $9.9 million, respectively, at
an amount less than 100% of the net asset value of the fund, resulting in
realized losses of $0.2 million and $0.4 million, respectively.
For the 12 and 40 weeks ended November 29, 2008, we realized losses of $0.7
million and $0.8 million, respectively, based on the ending net asset value of
the Columbia Fund as the decline in net asset value is considered other than
temporary at November 29, 2008 and will not be recovered in future distributions
from the fund.
Nonfinancial Assets and Liabilities Measured on a Nonrecurring Basis
--------------------------------------------------------------------
Fair value measurements of our nonfinancial assets and nonfinancial liabilities
on a nonrecurring basis using Level 3 inputs are primarily used in the
impairment analyses of our goodwill and other indefinite-lived intangible
assets, our long-lived assets and closed store occupancy costs. We perform our
annual review of goodwill and other intangible assets for impairment in the
fourth quarter of each fiscal year unless an interim triggering event has
occurred indicating the possibility of an impairment. Refer to Note 3 - Goodwill
and Other Intangible Assets for further information relating to the carrying
value of our goodwill and other intangible assets and the goodwill impairment
charge recorded during the 12 weeks ended December 5, 2009. Long-lived assets
and closed store occupancy costs were measured at fair value on a nonrecurring
basis using Level 3 inputs, as unobservable inputs were used to measure their
fair value. Refer to Note 5 - Valuation of Long-Lived Assets, Note 6 -
Discontinued Operations and Note 7 - Asset
14
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Disposition Initiatives for more information relating to the valuation of these
assets and liabilities and the impairment of our long-lived assets. During the
12 weeks ended December 5, 2009, long-lived assets with a carrying amount of
$230.7 million were written down to their fair value of $189.9 million,
resulting in an impairment charge of $40.8 million.
Long-Term Debt and Preferred Stock Liability:
---------------------------------------------
The following table provides the carrying values recorded on our balance sheet
and the estimated fair values of financial instruments as of December 5, 2009
and February 28, 2009:
As of December 5, 2009 As of February 28, 2009
--------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------- ------------- ------------- -------------
Current portion of long-term debt $ 1,373 $ 1,373 $ 5,283 $ 5,283
Long-term debt, net of related discount (1) 986,331 1,001,994 919,364 675,902
Preferred stock liability 117,250 272,255 -- --
(1) The balance our Long-term debt decreased by $23.1 million from the amount
reported in our 2008 Annual Report on Form 10-K as a result of the retrospective
application of the new accounting guidance for convertible debt, which we
adopted during the first quarter of fiscal 2009. Refer to Note 11 - Indebtedness
and Other Financial Liabilities for additional information.
Our long-term debt includes borrowings under our line of credit, credit
agreement, related party promissory note and our debt securities. The fair value
of our debt securities are determined based on quoted market prices for such
notes in non-active markets.
Our Preferred stock liability was recorded in connection with our preferred
stock issuance in August 2009. Due to the high likelihood of these shares
becoming convertible, the fair value of our Preferred stock liability was
determined by valuing the related common share equivalents based on the closing
market price of our Company's common stock on December 4, 2009.
5. Valuation of Long-Lived Assets
We review the carrying values of our long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable.
Impairments due to closure or conversion in the normal course of business
We review assets in stores planned for closure or conversion for impairment upon
determination that such assets will not be used for their intended useful life.
During the 12 and 40 weeks ended December 5, 2009, we recorded impairment losses
on long-lived assets of $1.5 million and $5.2 million, respectively, related to
stores that were closed or converted in the normal course of business, as
compared to $0.9 million and $2.7 million in impairment losses on property
related to stores that were closed or converted in the normal course of business
during the 12 and 40 weeks ended November 29, 2008, respectively. These amounts
were recorded within "Store operating, general and administrative expense" in
our Consolidated Statements of Operations.
15
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Impairments due to unrecoverable assets
During the 12 weeks ended December 5, 2009, as a result of experiencing
increasingly severe operating losses for the past two years within our Price
Impact reporting unit and also within one asset group within our Fresh reporting
unit, we determined that a triggering event occurred for testing the related
asset groups' long-lived assets for potential impairment. We estimated the
future cash flows for these asset groups based on an internal analysis performed
by management. The carrying value of the asset group within our Fresh reporting
unit was determined to be recoverable from its expected undiscounted future cash
flows. For three asset groups within our Price Impact reporting unit, the
carrying value was not recoverable from their undiscounted future cash flows. We
determined the fair value of these assets and as a result, we recorded an
impairment charge for these asset groups' long-lived assets, primarily
consisting of favorable leases and other owned property of $40.8 million, within
"Goodwill, trademark and long-lived asset impairment" in our Consolidated
Statements of Operations for the 12 weeks ended December 5, 2009.
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense. We will continue to monitor our operating results in
future periods to determine whether additional impairment testing is warranted
for any of our asset groups experiencing operating losses. If current operating
levels do not improve, we may have to record impairments of long-lived assets in
the future.
6. 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.
The operating results for these discontinued businesses 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 12 and 40 weeks ended December 5, 2009 and
November 29, 2008, respectively.
Summarized below is a reconciliation of the liabilities related to restructuring
obligations resulting from these activities:
For the 40 Weeks Ended December 5, 2009
---------------------------------------------------------------------------
Balance at Interest Balance at
2/28/2009 Accretion (1) Adjustments(2) Utilization(3) 12/5/2009
--------- ------------- -------------- -------------- ---------
2007 Events
-----------
Occupancy $ 70,583 $ 6,883 $ 48,802 $(21,810) $104,458
Severance 59,239 2,834 37 (4,036) 58,074
-------- -------- -------- -------- --------
2007 events total 129,822 9,717 48,839 (25,846) 162,532
2005 Event
----------
Occupancy 60,327 2,497 5,279 (7,703) 60,400
2003 Events
-----------
Occupancy 18,712 873 5,814 (2,440) 22,959
-------- -------- -------- -------- --------
Total $208,861 $ 13,087 $ 59,932 $(35,989) $245,891
======== ======== ======== ======== ========
16
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
(1) The additions to occupancy and severance represent the interest accretion
on future occupancy costs and future obligations for early withdrawal from
multi-employer union pension plans which were recorded at present value at
the time of the original charge. Interest accretion is recorded as a
component of "Loss from operations of discontinued businesses" on our
Consolidated Statements of Operations.
(2) At each balance sheet date, we assess the adequacy of the balance of the
remaining liability to determine if any adjustments are required as a
result of changes in circumstances and/or estimates. These adjustments are
recorded as a component of "Loss from operations of discontinued
businesses" on our Consolidated Statements of Operations. During the 40
weeks ended December 5, 2009, we recorded adjustments for the 2007, 2005
and 2003 events for additional occupancy related costs of $48.8 million,
$5.3 million and $5.8 million, respectively, due to changes in our
estimation of such future costs due to the continuing deteriorating
economic conditions in the Midwest real estate market including the recent
bankruptcies in the auto industry. We now expect our occupancy costs to be
higher as the current economic conditions affecting the Midwest real estate
market are expected to persist for some time and subleased properties in
the area have been occurring at heavily discounted rates as compared to the
related contractual agreements.
(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 from the time of the original charge
through December 5, 2009 and expected future payments related to these events:
2007 2005 2003
Events Event Events Total
-------- -------- -------- --------
Total severance payments made to date $ 32,188 $ 2,650 $ 22,528 $ 57,366
Expected future severance payments 58,074 -- -- 58,074
-------- -------- -------- --------
Total severance payments expected to be incurred 90,262 2,650 22,528 115,440
-------- -------- -------- --------
Total occupancy payments made to date 73,667 54,354 31,961 159,982
Expected future occupancy payments,
excluding interest accretion 104,458 60,400 22,959 187,817
-------- -------- -------- --------
Total occupancy payments expected to be incurred,
excluding interest accretion 178,125 114,754 54,920 347,799
-------- -------- -------- --------
Total severance and occupancy payments made to date 105,855 57,004 54,489 217,348
Expected future severance and occupancy payments,
excluding interest accretion 162,532 60,400 22,959 245,891
-------- -------- -------- --------
Total severance and occupancy payments
expected to be incurred, excluding interest accretion $268,387 $117,404 $ 77,448 $463,239
======== ======== ======== ========
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.
17
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Summarized below are the amounts included in our balance sheet captions on our
Company's Consolidated Balance Sheets related to these events:
December 5, 2009
-----------------------------------------------------------------
2007 2005 2003
Events Event Events Total
--------------- --------------- --------------- ---------------
Accrued salaries, wages and benefits $ 9 $ -- $ -- $ 9
Other accruals $ 29,753 $ 10,755 $ 3,458 $ 43,966
Other non-current liabilities $ 132,770 $ 49,645 $ 19,501 $ 201,916
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 December 5, 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.
7. Asset Disposition Initiatives
In addition to the events described in Note 6 - 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.
Summarized below is a reconciliation of liabilities relating to restructuring
obligations from these activities:
For the 40 Weeks Ended December 5, 2009
-----------------------------------------------------------------------------------
Balance at Interest Balance at
2005 Event 2/28/2009 Accretion (1) Adjustments(2) Utilization(3) 12/5/2009
---------- --------- ------------- -------------- -------------- ---------
Occupancy - Continuing Operations $ 1,114 $ 11 $(1,120) $ (5) $ --
Severance - Continuing Operations 904 -- 63 (229) 738
------- ------- ------- ------- -------
2005 event total 2,018 11 (1,057) (234) 738
2001 Event
----------
Occupancy - Continuing Operations 7,080 353 284 (680) 7,037
Occupancy - Discontinued Operations 11,307 482 4 (1,492) 10,301
------- ------- ------- ------- -------
2001 event total 18,387 835 288 (2,172) 17,338
1998 Event
----------
Occupancy - Continuing Operations 8,696 195 (1,398) (2,816) 4,677
Severance - Continuing Operations 824 -- -- (120) 704
Occupancy - Discontinued Operations 543 16 -- (465) 94
------- ------- ------- ------- -------
1998 event total 10,063 211 (1,398) (3,401) 5,475
------- ------- ------- ------- -------
Total $30,468 $ 1,057 $(2,167) $(5,807) $23,551
======= ======= ======= ======= =======
18
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
(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.
During the 40 weeks ended December 5, 2009, we recorded a $1.1 million
adjustment to eliminate occupancy related costs due to the termination of
the lease on the one remaining property included in the 2005 event. We
increased occupancy related costs for the 2001 event by $0.3 million due to
changes in our estimation of such future costs. Occupancy related costs for
the 1998 event were reduced by $1.4 million primarily due to entering into
new sublease agreements that were more favorable than our original
estimates.
(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 $ 48,944 $ 28,205 $ 30,760 $107,909
Expected future severance payments 738 -- 704 1,442
-------- -------- -------- --------
Total severance payments expected
to be incurred 49,682 28,205 31,464 109,351
-------- -------- -------- --------
Total occupancy payments made to date 13,856 64,542 118,506 196,904
Expected future occupancy payments,
excluding interest accretion -- 17,338 4,771 22,109
-------- -------- -------- --------
Total occupancy payments expected
to be incurred, excluding interest
accretion 13,856 81,880 123,277 219,013
-------- -------- -------- --------
Total severance and occupancy
payments made to date 62,800 92,747 149,266 304,813
Expected future severance and
occupancy payments, excluding
interest accretion 738 17,338 5,475 23,551
-------- -------- -------- --------
Total severance and occupancy payments
expected to be incurred, excluding
interest accretion $ 63,538 $110,085 $154,741 $328,364
======== ======== ======== ========
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-
19
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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:
December 5, 2009
---------------------------------------------------------------------
2005 2001 1998
Event Event Event Total
--------------- --------------- --------------- ----------------
Other accruals $ 268 $ 2,982 $ 2,617 $ 5,867
Other non-current liabilities $ 470 $ 14,356 $ 2,858 $ 17,684
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 December 5, 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.
8. Other Accruals
Other accruals are comprised of the following:
Dec. 5, 2009 Feb. 28, 2009
------------ -------------
Self-insurance reserves $ 77,249 $ 77,560
Closed store and warehouse reserves 63,085 64,508
Pension withdrawal liabilities 10,461 5,393
GHI contract liability 6,168 5,742
Accrued occupancy related costs for open stores 25,384 27,439
Deferred income 28,919 33,558
Deferred real estate income 2,782 2,558
Accrued audit, legal and other 9,718 11,719
Accrued interest 27,095 9,000
Other postretirement and postemployment benefits 4,153 4,153
Accrued advertising 2,069 1,493
Dividends payable on preferred stock 3,252 -
Other 2,906 3,473
----------- -----------
Total $ 263,241 $ 246,596
=========== ===========
20
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
9. Other Non-Current Liabilities
Other non-current liabilities are comprised of the following:
Dec. 5, 2009 Feb. 28, 2009
------------ -------------
Unrecognized Tax Benefits $ 2,426 $ 156,267
Deferred taxes 22,402 -
Self-insurance Reserves 149,632 153,870
Closed Store and Warehouse Reserves 197,998 140,593
Pension Withdrawal Liabilities 90,452 109,714
GHI Contractual Liability for Employee Benefits 89,982 85,690
Pension Plan Benefits 112,243 89,842
Other Postretirement and Postemployment Benefits 34,761 34,295
Corporate Owned Life Insurance Liability 60,436 59,529
Deferred Rent Liabilities 55,698 54,047
Deferred Income 71,461 83,128
Unfavorable Lease Liabilities 22,425 30,708
Other 14,422 13,726
----------- -----------
Total $ 924,338 $ 1,011,409
=========== ===========
10. Redeemable Preferred Stock
On August 4, 2009, our Company issued 60,000 shares of 8.0% Cumulative
Convertible Preferred Stock, Series A-T, without par value, to affiliates of
Tengelmann Warenhandelsgesellschaft KG ("Tengelmann") and 115,000 shares of 8.0%
Cumulative Convertible Preferred Stock, Series A-Y, without par value, to
affiliates of Yucaipa Companies LLC ("Yucaipa"), together referred to as the
"Preferred Stock," for approximately $162.2 million, after deducting
approximately $12.8 million in closing and issuance costs. Each share of the
Preferred Stock has an initial liquidation preference of one thousand dollars,
subject to adjustment.
The Preferred Stock is convertible into shares of our Company's common stock,
par value $1.00 per share (the "Common Stock"), at an initial conversion price
of $5.00 per share of Common Stock. The Preferred Stock is convertible upon the
one-year anniversary of the issuance of Preferred Stock provided that prior to
receiving shareholder approval, the Preferred Stock will not be exercisable into
greater than 19.99% of the Common Stock outstanding prior to the issuance of the
Preferred Stock. The 57,750 shares that are convertible without shareholder
approval are classified as temporary stockholders' equity since the shares are
(i) redeemable at the option of the holder and (ii) have conditions for
redemption which are not solely within the control of the Company. The 117,250
shares that require shareholder approval in order to become convertible are
classified as a "Preferred stock liability". (Refer to Note 20 - Subsequent
Events for additional information relating to shareholder approval).
Prior to shareholder approval, the holders of Series A Convertible Preferred
Stock have the right to vote on an as-converted basis provided that the
aggregate number of votes entitled to be cast by the Series A Convertible
Preferred Stock does not exceed 19.99% and the Series A-T Convertible Preferred
Stock does not exceed 1% of the voting power of the Common Stock outstanding
immediately prior to the issuance of the Series A Convertible Preferred Stock.
(Refer to Note 20 - Subsequent Events for accounting treatment upon receiving
shareholder approval).
21
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Our Company is required to redeem all of the outstanding Preferred Stock on
August 1, 2016 (the "Maturity Date"), at 100.0% of the liquidation preference,
plus all accrued and unpaid dividends. Subject to the repurchase rights of the
investors, the Preferred Stock is not redeemable prior to the Maturity Date. At
any time after December 3, 2012, in the event of any fundamental change, the
investors may elect to require our Company to repurchase the Preferred Stock in
cash at 101.0% of the liquidation preference amount plus any accrued and unpaid
dividends.
The holders of the Preferred Stock are entitled to an 8.0% dividend, payable
quarterly in arrears in cash or in additional shares of Preferred Stock if our
Company is not able to pay the dividends fully in cash. If our Company makes a
dividend payment in additional shares of Preferred Stock, the Preferred Stock
shall be valued at the liquidation preference of the Preferred Stock and the
dividend rate will be 8.0% plus 1.5%. During the 12 and 40 weeks ended December
5, 2009, we recorded Preferred Stock dividends of $3.2 million and $4.8 million,
respectively, of which $2.1 million and $3.2 million, respectively, has been
recorded within "Interest expense" and the remaining $1.1 million and $1.6
million, respectively, has been recorded within "Additional paid-in capital". In
addition, during the 12 and 40 weeks ended December 5, 2009, we recorded $0.4
million and $0.6 million, respectively, of deferred financing fees amortization,
of which $0.3 million and $0.4 million, respectively, has been recorded within
"Interest expense" and the remaining $0.1 million and $0.2 million,
respectively, has been recorded within "Additional paid-in capital".
The portion of the issuance recorded within "Preferred stock liability" is
recorded at fair value, with the related issuance cost amortization recorded
within "Interest expense".
The shares classified within temporary equity contained an embedded beneficial
conversion feature as the fair value of the Company's common stock on the date
of issuance, $5.67 per share, was in excess of the effective conversion price of
$4.74 per share, which represents the $5.00 per share conversion price reduced
for fees paid to the investors. This embedded beneficial conversion feature
resulted in a discount of $10.8 million, which has been recorded within
"Additional paid-in capital" and will be amortized over a seven-year period from
the date of issuance until the stated redemption date. During the 12 and 40
weeks ended December 5, 2009, we accreted $0.3 million and $0.5 million,
respectively, relating to this beneficial conversion feature through "Additional
paid-in capital".
Certain features of the Preferred Stock constitute derivatives separate from the
Preferred Stock; however, at issuance and the current balance sheet date, those
features had little or no value and are not expected to have significant value
for the foreseeable future.
11. Indebtedness and Other Financial Liabilities
Senior Secured Notes
--------------------
On August 4, 2009, we issued $260.0 million of 11.375% senior secured notes due
2015 (the "Notes") at a price equal to 97.385% of their face value. The Notes
represent second lien secured obligations, guaranteed by all of our Company's
domestic subsidiaries. The Notes bear interest at a fixed rate of 11.375%
payable semi-annually in cash. As of December 5, 2009, the carrying value of the
notes was $253.5 million. The proceeds from this offering and our preferred
stock offering on August 4, 2009 (Refer to Note 10 - Redeemable Preferred Stock)
were used to repay a portion of our existing variable debt.
The Notes were offered only to qualified institutional buyers in reliance on
Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"),
and outside the United States, only to non-U.S. investors
22
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
pursuant to Regulation S. The Notes have not been registered under the
Securities Act or the securities laws of any other jurisdiction and may not be
offered or sold in the United States absent registration or an applicable
exemption from registration requirements. The Notes contain the usual and
customary covenants found in secured notes, including, among other things,
restrictions on the incurrence of additional indebtedness, asset sales, liens
and restricted payments.
Convertible Senior Notes
------------------------
Our $255.0 million 6.750% Convertible Senior Notes that were issued in December
2007 are subject to the new accounting guidance, which we adopted during the 16
weeks ended June 20, 2009 (Refer to Note 1 - Summary of Significant Accounting
Policies) relating to convertible debt instruments with cash settlement
features, as our estimated nonconvertible debt borrowing rate is higher than the
current contractual rate on these notes. We estimate that our effective interest
rate for similar debt without the conversion feature is approximately 12.000%.
As a result, 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. During the 12 weeks ended December 5,
2009 and November 29, 2008, we recognized additional non-cash interest expense
of $1.0 million and $0.8 million, respectively, and during the 40 weeks ended
December 5, 2009 and November 29, 2008, we recognized additional non-cash
interest expense of $3.2 million and $2.5 million, respectively, as a result of
our adoption of this new accounting guidance. Our non-cash interest expense for
fiscal 2009 is expected to increase by approximately $4.2 million and will
increase by approximately $18.3 million in total in subsequent periods during
which our convertible notes remain outstanding. Upon adoption, we also
reclassified $26.4 million of debt and deferred financing costs to "Additional
paid-in capital", net of deferred taxes.
Due to the retrospective application of the new accounting guidance relating to
certain convertible debt instruments, our prior period consolidated financial
statements have been adjusted as follows:
Consolidated Statements of Operations 12 Weeks Ended Nov. 29, 2008 40 Weeks Ended Nov. 29, 2008
----------------------------------- ------------------------------------
As adjusted in As reported in As adjusted in As reported in
this Quarterly Quarterly this Quarterly Quarterly
Report on Report on Report on Report on
Form 10-Q Form 10-Q Form 10-Q Form 10-Q
-------------- -------------- -------------- --------------
Interest expense $ (37,511) $ (36,727) $ (119,117) $ (116,621)
Loss from continuing operations (3,777) (2,993) (5,278) (2,782)
Net loss (14,412) (13,628) (31,249) (28,753)
Per share data
--------------
Net loss per share -- basic:
Continuing operations $ (0.07) $ (0.06) $ (0.10) $ (0.05)
Discontinued operations (0.20) (0.20) (0.52) (0.52)
----------- ----------- ----------- -----------
Net loss per share -- basic $ (0.27) $ (0.26) $ (0.62) $ (0.57)
=========== =========== =========== ===========
Net loss per share -- diluted:
Continuing operations $ (1.62) $ (1.35) $ (2.69) $ (2.33)
Discontinued operations (0.28) (0.26) (0.49) (0.46)
----------- ----------- ----------- -----------
Net loss per share - diluted $ (1.90) $ (1.61) $ (3.18) $ (2.79)
=========== =========== =========== ===========
23
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Consolidated Balance Sheets 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 on Report on Report on Report on
Form 10-Q Form 10-K Form 10-Q Form 10-K
-------------- -------------- -------------- --------------
Assets:
Prepaid expenses 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
(Accumulated deficit)/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
Consolidated Statement of Cash Flows 40 Weeks Ended Nov. 29, 2008
-----------------------------------------------
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 loss $ (31,249) $ (28,753)
Non-cash interest expense 20,120 17,624
Net cash used in operating activities (48,214) (48,214)
The net carrying value of the 6.750% Convertible Senior Notes as of December 5,
2009 and February 28, 2009 was $221.7 million and $215.1 million, respectively,
net of unamortized discount of $33.3 million and $39.9 million, respectively. As
of December 5, 2009, our remaining unamortized discount will be recognized as
follows:
Remainder of 2009 $ 2,113
2010 9,884
2011 11,139
2012 10,140
-----------
$ 33,276
===========
Credit Agreement
----------------
On July 23, 2009, our Company amended the Amended and Restated Credit Agreement
with Banc of America Securities LLC and Bank of America, N.A., as the co-lead
arranger, in connection with the private offering of senior secured notes and
the sale of preferred stock, which expires in December 2012. The amended
agreement increases the applicable margins on credit advances, reduces
commitments by $20.0 million, reduces the collateral advance and provides for
certain other amendments. Subject to borrowing base requirements, the amended
$655.0 million Credit Agreement provides for a five-year term loan of $82.9
million, a five-year term loan of $50.0 million and a five-year revolving credit
facility of $522.1
24
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
million enabling us to borrow funds and issue letters of credit on a revolving
basis. The Credit Agreement also provides for an increase in commitments of up
to an additional $100.0 million, subject to agreement of new and existing
lenders. Our obligations under the Credit Agreement are secured by certain
assets of our Company, including, but not limited to, inventory, certain
accounts receivable, pharmacy scripts, owned real estate and certain Pathmark
leaseholds. The Pathmark leaseholds were removed as eligible collateral
throughout fiscal 2009, which resulted in the total reduction in the borrowing
availability under the revolving credit facility of approximately $73.0 million
as of December 5, 2009. 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 December 5, 2009, there were $132.9 million of loans and $203.8 million in
letters of credit outstanding under this agreement. As of December 5, 2009,
after reducing availability for borrowing base requirements, we had $218.0
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 $187.2 million as of December 5, 2009.
Warrants
--------
Our Series B warrants issued as part of the acquisition of Pathmark on December
3, 2007, are exercisable at $32.40 and expire on June 9, 2015. The Tengelmann
stockholders have the right to approve any issuance of common stock under these
warrants upon exercise (assuming Tengelmann's outstanding interest is at least
25% and subject to liquidity impairments defined within the Tengelmann
Stockholder Agreement). In addition, Tengelmann has the ability to exercise a
"Put Right" whereby it has the ability to require our Company to purchase our
common stock held by Tengelmann to settle these warrants. Based on the rights
provided to Tengelmann, our Company does not have sole discretion to determine
whether the payment upon exercise of these warrants will be settled in cash or
through issuance of an equivalent portion of our shares. Therefore, these
warrants are recorded as liabilities and marked-to-market each reporting period
based on our Company's current stock price.
The value of the Series B warrants as of December 5, 2009 and February 28, 2009
was $29.7 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 used to value the
Series B warrants:
December 5, 2009 February 28, 2009
---------------- -----------------
Expected life 5.51 years 6.28 years
Volatility 66.7% 61.3%
Dividend yield 0% 0%
Risk-free interest rate 2.24% 2.69%
Call Option and Financing
-------------------------
Warrants On or about October 3, 2008, Lehman Brothers OTC Derivatives, Inc. or
"LBOTC," who accounts for 50% of our call option and financing warrant
transactions, filed for bankruptcy protection, which is an event of default
under such transactions. We are carefully monitoring the developments affecting
LBOTC, noting the impact of the LBOTC bankruptcy effectively reduced conversion
prices for 50% of our convertible senior notes to their stated prices of $36.40
for the 5.125% Notes and $37.80 for the 6.750% Notes.
25
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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.
Our "Nonoperating (loss) income" for the 12 and 40 weeks ended December 5, 2009
and November 29, 2008 was comprised of (losses) gains relating to market value
adjustments on the following:
12 Weeks Ended 40 Weeks Ended
-------------------------------- --------------------------------
Dec. 5, 2009 Nov. 29, 2008 Dec. 5, 2009 Nov. 29, 2008
------------ ------------- ------------ -------------
Series A warrants (1) $ -- $ -- $ -- $ (1,197)
Series B warrants (15,944) 22,777 (24,898)
98,742
5.125% convertible senior notes (2) -- -- -- 9,342
6.750% convertible senior notes (2) -- -- -- 5,129
Financing warrants on convertible senior notes (3) -- -- -- 2,253
--------- --------- --------- ---------
Total $ (15,944) $ 22,777 $ (24,898) $ 114,269
========= ========= ========= =========
(1) 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. on May 7, 2008.
(2) The portion of the conversion features relating to our 5.125% and 6.750%
convertible senior notes for which our Company did not have sufficient
authorized shares to provide for all potential issuances of common stock was
recorded as a long-term liability and marked to market until stockholder
approval authorizing the issuance of more shares was obtained on June 26, 2008.
(3) Our Company did not have sufficient authorized shares to provide for all
potential issuances of common stock relating to our financing warrants issued in
conjunction with our convertible senior notes. As such, these financing warrants
were recorded as a liability and marked to market until stockholder approval
authorizing the issuance of more shares was obtained on June 26, 2008.
26
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
12. Interest Expense
Interest expense is comprised of the following:
For the 12 weeks ended For the 40 weeks ended
--------------------------------- ----------------------------------
Dec. 5, 2009 Nov. 29, 2008(1) Dec. 5, 2009 Nov. 29, 2008(1)
------------ ---------------- ------------ ----------------
$675 million Credit Agreement $ 3,028 $ 5,854 $ 12,406 $ 16,155
Related Party Promissory Note, due Aug. 18, 2011 147 140 467 148
11.375% Senior Secured Notes, due Aug. 1, 2015 6,835 -- 10,400 --
9.125% Senior Notes, due December 15, 2011 270 270 900 900
5.125% Convertible Senior Notes,
due June 15, 2011 1,952 1,946 6,505 6,487
6.750% Convertible Senior Notes,
due December 15, 2012 3,972 3,961 13,240 13,204
9.375% Notes, due August 1, 2039 4,280 4,315 14,404 14,383
Capital Lease Obligations and
Real Estate Liabilities 12,019 12,699 40,066 40,753
Dividends on Preferred Stock Liability 2,165 -- 3,247 --
Self Insurance and GHI Interest 3,292 1,913 11,420 6,377
GHI Discount Rate Adjustment and
COLI Non-cash Interest 943 941 15,030 2,753
Amortization of Deferred Financing Fees
and Discounts 6,765 5,226 20,071 17,367
Other 101 246 420 590
-------- -------- -------- --------
Total $ 45,769 $ 37,511 $148,576 $119,117
======== ======== ======== ========
(1) The interest expense associated with the 6.750% convertible senior notes
increased by $0.8 million and $2.5 million, respectively, from the amounts
reported in our Form 10-Q for the 12 and 40 weeks ended November 29, 2008 as a
result of the retrospective application of the new accounting guidance relating
to convertible debt, which we adopted during the first quarter of fiscal 2009.
Refer to Note 11 - Indebtedness and Other Financial Liabilities for additional
information.
13. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing income (loss) available
to common shareholders by the weighted average shares outstanding for the
reporting period. Diluted earnings (loss) per share reflects all potential
dilution, using either the treasury stock method or the "if-converted" method,
and assumes that the convertible debt, stock options, restricted stock,
performance restricted stock, warrants, preferred stock, and other potentially
dilutive financial instruments were converted into common stock on the first day
of the period. If the conversion of a potentially dilutive security yields an
antidilutive result, such potential dilutive security is excluded from the
diluted earnings per share calculation.
27
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
The following table contains common share equivalents, which were not included
in the loss per share calculations as their effect would be antidilutive:
12 Weeks Ended 40 Weeks Ended
-------------------------------- --------------------------------
Dec. 5, 2009 Nov. 29, 2008 Dec. 5, 2009 Nov. 29, 2008
------------ ------------- ------------ -------------
Stock options 2,416,848 1,749,675 2,480,445 1,738,053
Warrants 686,277 686,277 686,277 686,277
Performance restricted stock units 295,213 524,843 548,608
524,843
Restricted stock units 1,315,132 -- 1,132,044 --
Financing warrant 11,278,988 11,278,988 11,278,988 11,278,988
Preferred stock 11,590,600 -- 11,590,600 --
Convertible debt 11,278,988 3,553,806 11,278,988 3,553,806
The portion of our August 2009 preferred stock issuance recorded within
"Preferred stock liability" is not included in our Company's earnings (loss) per
share calculation or the above table due to the fact that the related shares are
not legally convertible without prior shareholder approval.
The following table sets forth the calculation of basic and diluted earnings per
share:
12 Weeks Ended 40 Weeks Ended
----------------------------------- -----------------------------------
Dec. 5, 2009 Nov. 29, 2008 Dec. 5, 2009 Nov. 29, 2008
------------ ------------- ------------ -------------
Loss from continuing operations $ (502,438) $ (3,777) $ (622,901) $ (5,278)
Preferred stock dividends (1,066) -- (1,599) --
Beneficial conversion feature amortization (355) -- (533) --
------------ ------------ ------------ ------------
Loss from continuing operations -- basic (503,859) (3,777) (625,033) (5,278)
Adjustments for convertible debt (1) -- (34,951) -- (37,504)
Adjustments on Other financial liabilities (2) 15,943 (22,777) 24,898 (98,741)
------------ ------------ ------------ ------------
Loss from continuing operations -- diluted $ (487,916) $ (61,505) $ (600,135) $ (141,523)
============ ============ ============ ============
Weighted average common shares outstanding 58,193,430 57,663,398 58,021,355 57,638,111
Share lending agreement (3) (4,773,182) (5,271,450) (4,881,515) (7,275,236)
------------ ------------ ------------ ------------
Common shares outstanding -- basic 53,420,248 52,391,948 53,139,840 50,362,875
Effect of dilutive securities:
Convertible debt (1) -- 7,725,182 -- 7,725,182
Convertible financial liabilities (2) (15,427,036) (22,208,241) (26,295,645) (5,451,204)
------------ ------------ ------------ ------------
Common shares outstanding -- diluted 37,993,212 37,908,889 26,844,195 52,636,853
============ ============ ============ ============
(1) We have debt instruments with a bifurcated conversion feature that were
recorded at a significant discount. (Refer to Note 11 - Indebtedness and
Other Financial Liabilities). For purposes of determining if an application
of the "if-converted method" to these convertible instruments produces a
dilutive result, we consider the combined impact of the numerator and
denominator adjustments, including a numerator adjustment for gains and
losses, which would have been incurred had the instruments been converted
on the first day of the period presented.
(2) Our Series B Warrants are classified as a liability because a third party
has the right to determine their cash or share settlement. (Refer to Note
11 - 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 produces a dilutive result, we assume proceeds
are used to repurchase common stock and we adjust the numerator similar to
the adjustments required under the "if-converted" method. We consider the
combined impact of the numerator and denominator adjustments, including a
denominator adjustment to reduce shares, even when the average market price
of our common stock for the period is below the warrant's strike price.
28
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
(3) As of December 5, 2009 and February 28, 2009, we had 7,134,002 and
8,134,002, respectively, of loaned shares under our share lending
agreements, which were considered issued and outstanding. The obligation of
the financial institutions to return the borrowed shares has been accounted
for as prepaid forward contract and, accordingly, shares underlying this
contract are removed from the computation of basic and diluted earnings per
share, unless the borrower defaults on returning the related shares. On
September 15, 2008, Lehman Europe, who is a party to a 3,206,058 share
lending agreement with our Company filed under Chapter 11 of the U.S.
Bankruptcy Code with the United States Bankruptcy Court and/or commenced
equivalent proceedings in jurisdictions outside of the United States
(collectively, the "Lehman Bankruptcy"). As such, we have included these
loaned shares as issued and outstanding effective September 15, 2008 for
purposes of computing our basic and diluted weighted average shares and
(loss) income per share. On November 23, 2009, Bank of America, N.A., who
is a party to our share lending agreement, returned 1,000,000 shares,
eliminating our obligation to lend additional shares to them in the future.
The returned shares were immediately retired, reducing our issued and
outstanding shares. For the 12 and 40 weeks ended December 5, 2009,
weighted average common shares relating to share lending agreement of
4,773,182 and 4,881,515, respectively, were excluded from the computation
of earnings per share. For the 12 and 40 weeks ended November 29, 2008,
weighted average common shares of 5,271,450 and 7,275,236, respectively,
were excluded from the computation of earnings per share. Refer to Note 20
- Subsequent Events.
14. Retirement Plans and Benefits
Defined Benefit Plans
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, pursuant
to which our Company 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 were already accrued in our Consolidated Financial
Statements. The remainder of our mass withdrawal liability was settled by
transferring the existing pension benefit liabilities relating to our employees
and retirees from UFCW to the A&P Pension Plan. On July 29, 2009, the A&P
Pension Plan has been amended for the transfer of the UFCW pension benefit
obligation effective July 1, 2009.
During the 12 weeks ended December 5, 2009, we recorded a $2.0 million loss
based on the terms of an expected settlement agreement with one of the
participants in our non-qualified pension plan. In addition, during the 12 weeks
ended December 5, 2009, we recognized a $0.1 million curtailment loss to
immediately recognize the unrecognized prior service cost for years of service
no longer expected to be rendered by former employees covered by our
non-qualified Supplemental Executive Retirement Plan.
29
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
The components of net pension cost were as follows:
For the 12 Weeks Ended For the 40 Weeks Ended
---------------------------- ---------------------------
Dec. 5, Nov. 29, Dec. 5, Nov. 29,
2009 2008 2009 2008
-------- -------- -------- --------
Service cost $ 1,572 $ 1,861 $ 5,140 $ 5,355
Interest cost 6,837 5,944 22,475 19,813
Expected return on plan assets (5,708) (7,097) (19,027) (23,659)
Curtailment loss 72 -- 72 --
Amortization of:
Net prior service cost 68 65 227 202
Actuarial loss 1,092 27 3,617 90
Pension asset loss 2,034 -- 2,034 --
Special termination benefits 300 300 950 300
-------- -------- -------- --------
Net pension cost $ 6,267 $ 1,100 $ 15,488 $ 2,101
======== ======== ======== ========
Contributions
As of December 5, 2009, we contributed approximately $5.2 million to our defined
benefit plans. We plan to contribute approximately $1.8 million to our plans
during the remainder of fiscal 2009.
Postretirement Plans
The components of net postretirement benefits cost (income) were as follows:
For the 12 Weeks Ended For the 40 Weeks Ended
---------------------------- ---------------------------
Dec. 5, Nov. 29, Dec. 5, Nov. 29,
2009 2008 2009 2008
-------- -------- -------- --------
Service cost $ 117 $ 234 $ 390 $ 780
Interest cost 449 529 1,497 1,763
Amortization of:
Prior service credit (311) (311) (1,036) (1,036)
Actuarial gain (189) -- (630) --
------- ------- ------- -------
Net postretirement benefits cost $ 66 $ 452 $ 221 $ 1,507
======= ======= ======= =======
GHI Contractual Obligation
As of December 5, 2009 and February 28, 2009, the fair value of our contractual
obligation to Grocery Hauler Inc.'s (GHI's) employees was $96.2 million and
$91.4 million, respectively, using discount rates of 5.750% and 7.000%,
respectively, which were derived from the published zero-coupon AA corporate
bond yields. Our contractual obligation relates to pension benefits for GHI's
employees and is included within "Other accruals" and "Other non-current
liabilities" in our Consolidated Balance Sheets. Additions to our GHI
contractual obligation for current service costs and actuarial gains and losses
are recorded within "Cost of merchandise sold" in our Consolidated Statements of
Operations at their current value. Accretion of the obligation to present value
is recorded within "Interest expense" in our Consolidated Statements of
Operations. During the 12 and 40 weeks ended December 5, 2009, we recognized
service costs of $0.2 million and $0.6 million, respectively, and interest
expense of $1.2 million and $16.6 million, respectively, representing interest
accretion on this obligation, as well as 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 for the year-to-date period. During the 40
weeks ended December 5, 2009, benefit payments of $12.5 million were made by the
Pathmark Pension Plan.
30
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
15. Stock-Based Compensation
At December 5, 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.
The components of our compensation expense related to stock-based incentive
plans were as follows:
For the 12 Weeks Ended For the 40 Weeks Ended
---------------------------- ---------------------------
Dec. 5, Nov. 29, Dec. 5, Nov. 29,
2009 2008 2009 2008
-------- -------- -------- --------
Stock options $ 441 $ 232 $ 1,256 $ 1,051
Restricted stock units 340 -- 791 --
Performance restricted stock units (328) (3,679) 2,082 2,106
Common stock granted to Directors 187 145 554 485
------- ------- ------- -------
Total stock-based compensation $ 640 $(3,302) $ 4,683 $ 3,642
======= ======= ======= =======
A summary of stock-based compensation related grants for the 12 and 40 weeks
ended December 5, 2009 is as follows:
For the 12 Weeks Ended For the 40 Weeks Ended
------------------------------- -------------------------------
Weighted-Avg. Weighted-Avg.
Underlying Grant Date Underlying Grant Date
Shares Fair Value Shares Fair Value
------------- --------------- ------------- ---------------
Stock options -- $ -- 1,010,319 $ 4.01
Restricted stock units 4,676 6.35 1,445,715 4.02
Performance restricted stock units 2,158 6.35 1,440,968 4.01
During the 40 weeks ended December 5, 2009, we also granted common stock to each
member of our Board of Directors valued at $90 thousand. The price of $4.33 was
based upon the closing price of stock on the day of the grant following the
Annual Meeting of Stockholders.
Stock Options
-------------
Options granted during fiscal 2009 vest 33% during each of the fiscal years
2009, 2010 and 2011. As of December 5, 2009, approximately $3.3 million, after
tax, of total unrecognized compensation expense related to unvested stock option
awards will be recognized over a weighted average period of 2.23 years.
The following weighted-average assumptions were used in the Black-Scholes
pricing model for option grants that occurred during the 40 weeks ended December
5, 2009 and November 29, 2008:
40 Weeks 40 Weeks
Ended Ended
Dec. 5, 2009 Nov. 29, 2008
------------ -------------
Expected life 7 years 7 years
Volatility 126% 52%
Risk-free interest rate 0.05% 2.96%
31
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Restricted Stock
----------------
For restricted stock units granted in 2009, one-fourth of the awards will vest
at the end of fiscal 2009 and three-fourths will vest at the end of fiscal 2011,
subject to the recipients of such restricted stock units meeting the appropriate
eligibility and service conditions. As of December 5, 2009, approximately $3.7
million, net of tax, of total unrecognized compensation expense relating to
these restricted stock units is expected to be recognized through fiscal 2012.
Performance Restricted Stock
----------------------------
The 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 are scheduled to vest at the end of fiscal 2009 and
two-thirds at the end of fiscal 2010, subject to meeting the appropriate
eligibility and service conditions. During the second quarter of fiscal 2009, we
determined that the related performance conditions will not be achieved based on
the changes in our forecast for fiscal 2009. Once this determination was made,
our Company reversed the associated stock compensation expense recorded during
the first quarter of fiscal 2009 and will no longer record future compensation
expense for the 2009 grant. During the third quarter of fiscal 2009, increased
forfeitures associated with the departure of certain high level employees
resulted in a reversal of a portion of the previously recognized stock
compensation expense.
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. In connection with this decision, we reversed $0.4 million of
previously recognized expense for the ancillary shares. As a result of the
foregoing modification and Board determination, our Company will incur an
additional incremental compensation cost of $1.5 million, of which $0.1 million
and $0.6 million has been recorded during the 12 and 40 weeks ended December 5,
2009, respectively, and is being recognized over the remainder of the new
vesting period.
Performance restricted stock units granted during fiscal 2006, 2007 and 2008
were based on our Company achieving certain operating targets in fiscal 2008,
2009 and 2010, respectively. During fiscal 2008, based on changes in the fiscal
2008 forecast and the three year strategic plan, our Company determined that the
targets described under the terms of the 2006, 2007 and 2008 would probably not
be met. As a result, during the 12 and 40 weeks ended November 29, 2008, we
recorded a reversal of $5.2 million included in "Store operating, general and
administrative expense" in our Consolidated Statements of Operations for
compensation expense related to performance restricted stock that had been
previously recognized. Of this amount, approximately $4.0 million should have
been recorded in fiscal 2007 as our performance targets were no longer probable
due to dispositions in advance of our acquisition of Pathmark. Had our Company
recorded this reversal during fiscal 2007, the reversal for not meeting
performance targets during the 12 weeks ended November 29, 2008 would have been
approximately $3.0 million.
32
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
The total fair value of performance restricted stock units that vested during
the 40 weeks ended December 5, 2009 and 40 weeks ended November 29, 2008 was
$3.0 million and $12.1 million, respectively.
As of December 5, 2009, approximately $3.2 million of unrecognized fair value
compensation expense relating to performance restricted stock units is expected
to be recognized through fiscal 2011, based on estimates of attaining vesting
criteria.
16. Income Taxes
For the 12 and 40 weeks ended December 5, 2009, our valuation allowance
increased by $236.5 million and $258.2 million, respectively, to reflect
generation of additional operating losses, remeasurement of our uncertain tax
positions and impairment of indefinite lived intangible assets, partially offset
by an adjustment to the valuation allowance that was released in connection with
the original purchase price allocation for Pathmark. 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 December 5, 2009, with a few
exceptions, we remain subject to examination by federal, state and local tax
authorities for tax years 2004 through 2008. At December 5, 2009 and February
28, 2009, we had unrecognized tax benefits of $8.9 million and $162.8 million,
respectively. The remeasurement of our uncertain tax positions resulted in an
increase in the valuation allowance on our net deferred tax asset and did not
impact our effective tax rate. We do not expect that the amount of our gross
unrecognized tax positions will change significantly in the next 12 months. For
the 12 and 40 weeks ended December 5, 2009 and November 29, 2008, we did not
record any interest or penalties within "Provision for income taxes" in our
Consolidated Statements of Operations.
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 (AMT)
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 $1.7 million for the 40 weeks ended December 5, 2009,
for a total refund of $4.7 million to date.
The effective tax rate on continuing operations of 2.4% and 37.9% for the 12
weeks ended December 5, 2009 and November 29, 2008, respectively, and 2.2% and
190.3% for the 40 weeks ended December 5, 2009 and November 29, 2008,
respectively, varied from the statutory rate of 35%, primarily due to the
recording of state and local income taxes, the recording of a deferred tax
benefit related to the impairment of indefinite lived intangible assets, the
recording of additional valuation allowance and the impact of the Pathmark
financing.
As of December 5, 2009, we had $591.4 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
33
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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 $5.6 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 December 5, 2009 and February 28, 2009, we had a net current deferred tax
asset that is included in "Prepaid expenses and other current assets" on our
Consolidated Balance Sheets of $6.2 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 nil and $65.9 million, respectively, a net
non-current deferred tax liability which is included in "Other non-current
liabilities" of $22.4 million and nil, respectively, and a non-current tax
liability for uncertain tax positions which is included in "Other noncurrent
liabilities" of $8.9 million and $162.8 million as of December 5, 2009 and
February 28, 2009, respectively.
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 Executive
Chairman 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 6
- 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
our Fiscal 2008 Annual Report on Form 10-K.
34
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Interim information on segments is as follows:
Sales by Category
-------------------------------------------------------------------------
For the 12 weeks ended For the 40 weeks ended
--------------------------------- ---------------------------------
Dec. 5, 2009 Nov. 29, 2008 Dec. 5, 2009 Nov. 29, 2008
------------ ------------- ------------ -------------
Grocery (1) $1,386,701 $1,506,284 $4,755,462 $5,045,012
Meat (2) 362,779 388,577 1,281,427 1,357,820
Produce (3) 213,212 226,093 781,107 823,423
---------- ---------- ---------- ----------
Total $1,962,692 $2,120,954 $6,817,996 $7,226,255
========== ========== ========== ==========
(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 12 weeks ended For the 40 weeks ended
---------------------------------- ----------------------------------
Dec. 5, 2009 Nov. 29, 2008 Dec. 5, 2009 Nov. 29, 2008
------------ ------------- ------------ -------------
Sales
Fresh $ 973,556 $ 1,068,736 $ 3,403,009 $ 3,649,363
Price Impact* 857,316 927,005 2,995,194 3,176,986
Gourmet 65,484 67,145 206,875 208,890
Other 66,336 58,068 212,918 191,016
----------- ----------- ----------- -----------
Total sales $ 1,962,692 $ 2,120,954 $ 6,817,996 $ 7,226,255
=========== =========== =========== ===========
Segment income (loss)
Fresh 13,313 36,389 87,322 101,211
Price Impact* (16,501) (2,236) (33,589) 14,978
Gourmet 6,804 6,735 18,234 16,610
Other (116) 548 1,541 1,825
----------- ----------- ----------- -----------
Total segment income 3,500 41,436 73,508 134,624
Corporate (23,573) (24,013) (85,324) (94,741)
Reconciling items** (433,078) (5,514) (451,737) (37,406)
----------- ----------- ----------- -----------
(Loss) income from continuing operations (453,151) 11,909 (463,553) 2,477
Nonoperating (loss) income (15,944) 22,777 (24,898) 114,269
Interest expense *** (45,769) (37,511) (148,576) (119,117)
Interest and dividend income 51 86 143 553
----------- ----------- ----------- -----------
Loss from continuing operations
before income taxes $ (514,813) $ (2,739) $ (636,884) $ (1,818)
=========== =========== =========== ===========
35
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
The following table presents our segment depreciation and amortization:
For the 12 weeks ended For the 40 weeks ended
------------------------------ ------------------------------
Dec. 5, 2009 Nov. 29, 2008 Dec. 5, 2009 Nov. 29, 2008
------------ ------------- ------------ -------------
Segment depreciation and amortization
Fresh $ 18,997 $ 20,912 $ 64,443 $ 70,681
Price Impact* 21,279 23,047 74,762 76,615
Gourmet 2,160 2,303 7,209 7,873
Other 1,126 866 3,361 2,847
-------- -------- -------- --------
Total segment depreciation and
amortization - continuing operations 43,562 47,128 149,775 158,016
Corporate 12,251 13,410 41,610 43,346
Total company depreciation and
-------- -------- -------- --------
amortization $ 55,813 $ 60,538 $191,385 $201,362
======== ======== ======== ========
* Includes results from Fresh stores that have been subsequently converted to
Price Impact stores.
** Reconciling items for the 12 and 40 weeks ended December 5, 2009, which are
not included in segment income include: (i) goodwill, trademark and other
long-lived asset impairment charges of ($412.6) million in both periods,
(ii) losses on real estate activity of ($20.6) million and ($29.8) million,
respectively, (iii) net restructuring and other of $(0.9) million and
($5.7) million, respectively, (iv) pension withdrawal costs of nil and
($2.4) million, respectively, and (v) LIFO reserve adjustments of $1.0
million and ($1.2) million, respectively. Reconciling items for the 12 and
40 weeks ended November 29, 2008 include: (i) Pathmark integration and
other restructuring costs of ($2.5) million and ($25.1) million,
respectively, (ii) LIFO reserve adjustments of ($1.3) million and ($4.2)
million, respectively and (iii) real estate related activity of ($1.7)
million and ($8.1) million, respectively.
*** The interest expense associated with the 6.750% Convertible Senior Notes
increased by $0.8 million and $2.5 million, respectively, from the amounts
reported in our Form 10-Q for the 12 and 40 weeks ended November 29, 2008
as a result of the retrospective application of the new accounting guidance
relating to convertible debt, which we adopted during the first quarter of
fiscal 2009. Refer to Note 11 - Indebtedness and Other Financial
Liabilities for additional information.
18. Related Party Transactions
On August 4, 2009, the Company issued 60,000 shares of 8.0% Cumulative
Convertible Preferred Stock, Series A-T, without par value, to affiliates of
Tengelmann and 115,000 shares of 8.0% Cumulative Convertible Preferred Stock,
Series A-Y, without par value, to affiliates of Yucaipa for net proceeds of
approximately $162.2 million. Concurrently with the issuance of the Preferred
Stock, the Company entered into an amended and restated stockholder agreement
with Tengelmann (the "Amended and Restated Tengelmann Stockholder Agreement")
and an amended and restated stockholder agreement with Yucaipa (the "Amended and
Restated Yucaipa Stockholder Agreement" and, together with the Amended and
Restated Tengelmann Stockholder Agreement, the "Stockholder Agreements"),
amended its By-laws and filed Articles Supplementary with respect to the
Preferred Stock, appointed two additional Yucaipa directors to the Company's
Board and reelected four existing Tengelmann directors to the Company's Board.
Without Tengelmann and Yucaipa's approval, the Company may not consummate
certain business combinations, issue additional equity securities, amend the
Company's charter or by-laws, make amendments to Board committee charters which
would circumvent the Stockholder Agreements, take actions which would dilute
their ownership, take actions to amend certain of the Company's existing
indebtedness or limit the Company's ability to pay cash dividends on the
Preferred Stock. In addition, depending upon specified ownership thresholds
maintained by Tengelmann and Yucaipa, without the approval of a majority of
Tengelmann-appointed directors and at least one Yucaipa-appointed director, the
Company may not enter into certain acquisitions or dispositions of assets, offer
or repurchase equity securities, incur debt above specified levels or declare
dividends on the Company's common stock. Based upon certain ownership
thresholds, without Tengelmann's approval, the Company may not adopt certain
36
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
anti-takeover measures or enter into affiliates transactions and the approval of
a majority of Tengelmann directors may be required in order to adopt or amend
any long-term strategic plan, adopt or amend any operating plan or budget or
make capital expenditures over a certain threshold or appoint a chief executive
officer.
The Company granted certain registration rights, preemptive rights and rights to
nominate directors to the Company's Board to Tengelmann and Yucaipa and certain
tag-along rights to Yucaipa. In addition, Yucaipa granted the Company a right of
first offer under certain circumstances on the transfer of voting power, which
if exercised by the Company would then provide Tengelmann the right to purchase
any such securities, pursuant to an agreement between the Company and
Tengelmann.
Until August 4, 2014, or earlier if certain conditions occur, Yucaipa is subject
to a standstill provision which prevents Yucaipa, without the approval of the
majority of the Board of Directors (excluding the directors designated by
Yucaipa), from acquiring beneficial ownership of securities above a 35.5% common
stock threshold. Prior to December 4, 2010, subject to limited exceptions,
Yucaipa may not transfer its Preferred Stock and is prohibited from transferring
any securities to certain designated persons.
19. Commitments and Contingencies
Supply Agreement
On March 7, 2008, we entered into a definitive agreement with C&S Wholesale
Grocers, Inc. ("C&S") whereby C&S will provide warehousing, logistics,
procurement and purchasing services (the "Services") in support of our Company's
entire supply chain. This agreement expires on September 29, 2018. The 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.
Lease Related
Lease Assignment
----------------
On August 14, 2007, Pathmark entered into a leasehold assignment contract for
the sale of its leasehold interests in one of its stores to CPS Operating
Company LLC, a Delaware limited liability company ("CPS"). Pursuant to the terms
of the agreement, Pathmark was to receive $87.0 million for assigning and
transferring to CPS all of Pathmark's interest in the lease and CPS was to have
assumed all of the duties and obligations of Pathmark under the lease. CPS
deposited $6.0 million in escrow as a deposit against the purchase price for the
lease, which is non-refundable to CPS, except as otherwise expressly provided in
the agreement. The assignment of the lease was scheduled to close on December
28, 2007. On December 27, 2007, CPS issued a notice terminating the agreement
for reason of a purported breach of the agreement, which, if proven, would
require the return of the escrow. We are disputing the validity of CPS's notice
of termination as we believe CPS's position is without merit. Because we are
challenging the validity of
37
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
CPS's December 27, 2007 notice of termination, we issued our own notice to CPS
on December 31, 2007, asserting CPS's breach of the agreement as a result of
their failure to close on December 28, 2007. CPS's breach, if proven, would
entitle us to keep the escrow. Both parties have taken legal action to obtain
the $6.0 million deposit held in escrow.
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 December 5, 2009, 187 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 $586.8 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 the third quarter of fiscal 2009, we recorded an
additional pre-tax recovery of $2.1 million as a credit to "Store operating,
general and administrative expense." We are continuing 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. Our Company intends
to move to decertify the class once certain discovery has been completed.
38
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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.
20. Subsequent Events
Our Company has evaluated and disclosed any significant subsequent events below
that have occurred from December 5, 2009 through January 12, 2009. We were not
required to recognize in our financial statements the effect of our subsequent
event, which is described below, as it arose after our balance sheet date.
On December 15, 2009, we obtained shareholder approval authorizing the
convertibility of 117,250 shares of our Series A Convertible Preferred Stock
that was classified as a "Preferred stock liability" as of December 5, 2009 into
common stock. Upon receiving shareholder approval, we will reclassify $109.1
million in the fourth quarter of fiscal 2009, representing the book value of the
liability at the date of the shareholder approval net of the related debt
issuance costs, to temporary stockholders' equity. The shares that will be
reclassified to temporary stockholders' equity contain an embedded beneficial
conversion feature as the fair value of the Company's common stock on August 4,
2009, $5.67 per share, was in excess of the effective conversion price of $4.74
per share, which represents the $5.00 per share conversion price reduced for
fees paid to the investors. This embedded beneficial conversion feature will
result in a discount of $21.8 million, which will be recorded within "Additional
paid-in capital" and will be amortized from December 15, 2009 through the stated
redemption date.
On January 6, 2010, Bank of America, N.A. returned 1,500,000 common shares that
were previously borrowed under our December 2007 share lending agreement. The
returned shares were immediately retired, reducing the number of shares issued
and outstanding. The return of these shares will have no impact on the
computations of our basic and diluted earnings per share, since the shares
underlying the share lending agreement are removed from these computations,
unless the borrower defaults on returning them.
39
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
INTRODUCTION
------------
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations is intended to help the reader understand the financial
position, operating results, and cash flows of The Great Atlantic & Pacific Tea
Company, Inc. It should be read in conjunction with our consolidated financial
statements and the accompanying notes ("Notes"). It discusses matters that
Management considers relevant to understanding the business environment,
financial position, results of operations and our Company's liquidity and
capital resources. These items are presented as follows:
o Overview - a general description of our business and segment structure.
o Operating Results - a discussion of the value drivers of our business;
measurements; opportunities; challenges and risks; and initiatives.
o Outlook - a discussion of certain trends or business initiatives for the
remainder of fiscal 2009 to assist in understanding the business.
o Results of Operations and Liquidity and Capital Resources - a discussion of
results for the 12 weeks ended December 5, 2009 compared to the 12 weeks
ended November 29, 2008; results for the 40 weeks ended December 5, 2009
compared to the 40 weeks ended November 29, 2008; current and expected
future liquidity; and the impact of various market risks on our Company.
o Critical Accounting Estimates - a discussion of significant accounting
estimates made by Management.
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 433
stores as of December 5, 2009.
During the 40 weeks ended December 5, 2009, we operated in four reportable
segments: Fresh, Price Impact, Gourmet and Other. The Other segment includes our
Food Basics and Liquor businesses. The Midwest and Greater New Orleans area
operations have been classified as discontinued in our Consolidated Statements
of Operations for all periods presented.
OPERATING RESULTS
-----------------
This quarter has been especially challenging for our Company due to the
difficult economic environment. Unemployment, deflation and the resulting price
competition combined with consumers' drastic change in spending behavior has
severely impacted our business. Further, the grocery retail industry has been
affected by the heavy entrance of wholesale clubs and supercenters which has
significantly reduced overall market share of conventional supermarkets. As a
result, our comparable store sales, which include stores that have been in
operation for at least one full fiscal year and replacement stores, declined by
5.8% this quarter.
Our operating results for the four formats in which our business operates to
enable us to service customers in every market we serve were as follows:
40
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
Fresh
(A&P, Waldbaum's and SuperFresh)
This quarter, our Fresh format was negatively affected by the poor economic
environment. Deflation has accelerated more in the third quarter than we have
experienced in prior quarters resulting in an industry-wide decrease in sales.
Rising deflation caused sales dollars to decline across our industry resulting
in high promotional spending given the volatile price competition. We are
developing strategies to address the challenging economic environment and to
improve performance in the future, primarily focused on pricing and promotional
initiatives to meet the needs of our consumers.
Price Impact
(Pathmark and Pathmark Sav-A-Center)
Our original Price Impact format stores experienced a significant year-over-year
decline primarily resulting from continued higher promotional spending and
reduction in prices to stay competitive. Our stores that have been converted
from legacy A&P banners continue to perform well, benefiting from their more
favorable A&P legacy cost structure combined with the higher sales per square
foot generated by our Pathmark locations. As with our Fresh format, we are
currently implementing a number of performance initiatives.
This quarter, as a result of the continued and dramatic decline in the results
of this business, we impaired our long-lived assets by $40.8 million, our
Pathmark Trademark by $49.9 million and goodwill by $321.8 million. Continued
declining operational results may lead to additional impairments in the future.
Gourmet
(The Food Emporium)
Our Gourmet stores located in Manhattan continue to generate segment income
growth despite the economic crisis, primarily due to an increased gross margin
rate. We attribute this growth to the premium locations of our Gourmet stores
and product offering selective to the neighborhood.
Other
(Food Basics, Best Cellars and A&P Liquors)
Our Best Cellars and Liquor businesses continued to perform well with a
year-over-year increase in segment income due to positive comparable store sales
and improved gross margin rate. Our Best Cellars business has been recently
recognized by the Wine Enthusiasts Magazine as the "Wine Retailer of the Year".
Our Food Basics format has experienced negative segment income this quarter as
the increase in sales and gross margin was more than offset by the
year-over-year increase in operating costs, primarily relating to labor and
occupancy.
41
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
OUTLOOK
-------
Many of the top analysts predict that the economic environment will continue to
be difficult, especially as it pertains to our industry. The decline in consumer
credit availability, combined with the increase in the rate of savings and the
high rate of unemployment, which is expected to continue through 2011, make for
a challenging economic environment. These factors are having an increasingly
negative impact on our operations.
In October 2009, we announced that Mr. Eric Claus, our former President and
Chief Executive Officer has left the Company effective immediately. We have
commenced our search for the new CEO and hope to have the new CEO in place by
the beginning of our new fiscal year. In the interim our Executive Chairman, Mr.
Christian Haub, has assumed the CEO responsibilities, a position he previously
held from 1998 until 2005. In the meanwhile, we are engaged with Yucaipa, one of
our significant investors, who has been working with our senior management team
to develop strategies to drive sustainable success in the future by developing a
number of activities and initiatives to combat these influences and improve the
performance of the Company. While these initiatives have been designed to
improve the performance of our operations, they are based on our management's
assumptions in light of the currently available information and cannot guarantee
future performance. Our future performance is subject to uncertainties and other
risk factors that could have a negative impact on our business and cause actual
results to differ materially from our expectations. Refer to Part II. - Item 1A
for a description of our Risk Factors.
RESULTS OF 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. Unless otherwise indicated, all amounts are in millions,
except share and per share amounts.
12 WEEKS ENDED DECEMBER 5, 2009 COMPARED TO THE 12 WEEKS ENDED NOVEMBER 29, 2008
--------------------------------------------------------------------------------
The following table summarizes our results of operations for the 12 weeks ended
December 5, 2009 compared to the 12 weeks ended November 29, 2008:
12 Weeks Ended 12 Weeks Ended Favorable
Dec. 5, 2009 Nov. 29, 2008 (Unfavorable) % Change
-------------- -------------- ------------- ---------
(in millions, except percentages and per share data)
Sales $ 1,962.7 $ 2,121.0 $ (158.3) (7.5%)
(Decrease) increase in comparable
store sales (5.8)% 1.9% NA NA
Loss from continuing operations $ (502.4) $ (3.8) $ (498.6) >(100%)
Loss from discontinued operations $ (57.2) $ (10.6) $ (46.6) >(100%)
Net loss $ (559.6) $ (14.4) $ (545.2) >(100%)
Net loss per share - basic $ (10.50) $ (0.27) $ (10.23) >(100%)
Net loss per share - diluted $ (14.35) $ (1.90) $ (12.45) >(100%)
42
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
Average weekly sales per supermarket were approximately $398,400 for the third
quarter of fiscal 2009 versus $417,800 for the corresponding period of the prior
year, a decrease of 4.6%, 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 12 weeks ended
---------------------------------
Dec. 5, 2009 Nov. 29, 2008
------------ -------------
(in thousands)
Fresh $ 973,556 $1,068,736
Price Impact* 857,316 927,005
Gourmet 65,484 67,145
Other 66,336 58,068
---------- ----------
Total sales $1,962,692 $2,120,954
========== ==========
-----------
* Includes sales from Fresh stores that have been subsequently converted to
Price Impact stores.
Sales decreased from $2,121.0 million for the 12 weeks ended November 29, 2008
to $1,962.7 million for the 12 weeks ended December 5, 2009, primarily due to a
decrease in comparable stores sales, reflecting the impact of accelerated cost
deflation and retail price deflation resulting from increased promotional
spending. Sales also decreased due to the absence of sales resulting from store
closures, partially offset by sales from new stores. The decrease in sales in
our Fresh segment of $95.2 million was primarily related to the decline in the
comparable store sales of $74.5 million and the absence of sales resulting from
store closures of $20.7 million. The decrease in sales in our Price Impact
segment of $69.7 million was primarily due to a decline in comparable store
sales of $56.1 million and the absence of sales resulting from store closures of
$27.0 million, partially offset by an increase in sales from new stores of $13.4
million. Sales generated by our Gourmet segment decreased by $1.7 million,
primarily due to a decline in comparable store sales. The sales increase of $8.3
million, or 14.2%, in our Other segment, representing Discount and Liquor, was
primarily driven by sales generated by three new Discount stores of $7.4
million.
GROSS MARGIN
------------
Gross margin of $590.6 million decreased 105 basis points as a percentage of
sales to 30.09% for the 12 weeks ended December 5, 2009 from gross margin of
$660.4 million or 31.14% for the 12 weeks ended November 29, 2008, primarily due
to lower margins from our Price Impact and Fresh segments, reflecting the impact
of accelerated deflation and increased promotions during the 12 weeks ended
December 5, 2009. Partially offsetting the overall gross margin decline were
improved margins from our Gourmet segment.
The following table details the dollar impact of items affecting the gross
margin dollar decrease from the third quarter of fiscal 2008 to the third
quarter of fiscal 2009 (in millions):
Sales Volume Gross Margin Rate Total
------------ ----------------- ------------
Total Company $ (48.8) $ (21.0) $ (69.8)
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
---------------------------------------------------
Our Store operating, general and administrative ("SG&A") expense was $631.2
million or 32.16% as a percentage of sales for the third quarter of fiscal 2009,
as compared to $648.5 million or 30.57% as a percentage of sales for the third
quarter of fiscal 2008.
43
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
Included in SG&A for the 12 weeks ended December 5, 2009 were the following
costs: (i) net real estate related costs of $20.6 million, or 105 basis points,
and (ii) net restructuring and other charges of $0.9 million, or 5 basis points.
SG&A for the third quarter of fiscal 2008 included (i) Pathmark integration and
other restructuring related costs of $2.0 million, or 10 basis points, (ii)
costs relating to a voluntary labor buyout program of $3.0 million, or 14 basis
points, (iii) costs relating to our withdrawal of the Grocery Haulers, Inc.
employees servicing Pathmark Stores from the Local 863 Union Multiemployer
Pension Plan to our Company of $2.7 million, or 13 basis points, and (iv) net
losses on real estate activity of $1.7 million, or 8 basis points. These costs
were partially offset by a reversal of $5.2 million, or 25 basis points, for
compensation expense related to restricted stock that had been previously
recognized for performance targets that are no longer probable of being met, as
discussed in Note 15 to our Consolidated Financial Statements - Stock Based
Compensation.
Excluding the items listed above, SG&A as a percentage of sales increased by 69
basis points during the third quarter of fiscal 2009 as compared to the third
quarter of fiscal 2008, primarily due to lower sales leverage on fixed costs,
including increased labor costs of 71 basis points, advertising related costs of
22 basis points and occupancy related costs of 11 basis points, partially offset
by a decrease in corporate and banner administrative expenses of 36 basis
points.
During the 12 weeks ended December 5, 2009 and November 29, 2008, we recorded
impairment losses on long-lived assets due to closure or conversion of stores in
the normal course of business of $1.3 million and $0.9 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.
GOODWILL, TRADEMARK AND LONG-LIVED ASSET IMPAIRMENT
---------------------------------------------------
During the 12 weeks ended December 5, 2009, we performed interim impairment
testing of our long-lived asset groupings that have experienced increasingly
severe operating losses during the last two years. As a result, we recorded an
impairment charge of $40.8 million for three asset groups' long-lived assets
within our Price Impact reporting unit, primarily relating to favorable leases
and other long-lived assets. Refer to Note 5 to our Consolidated Financial
Statements - Valuation of Long-Lived Assets for additional information.
Due to the severity and duration of operating losses within the Price Impact
reporting unit, changes in our management's long-term forecasts relating to the
Price Impact reporting unit, and the significant impairment of long-lived assets
within the Price Impact reporting unit, we concluded that an interim triggering
event had occurred for purposes of determining whether any portion of the $321.8
million goodwill balance and $127.3 million trademark recorded within our Price
Impact segment has been impaired. As a result of our impairment testing, we
impaired the entire $321.8 million goodwill balance and $49.9 million of the
trademark balance within our Price Impact reporting unit. Refer to Note 3 to our
Consolidated Financial Statements - Goodwill and Other Intangible Assets for
additional information.
44
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
We believe our estimates used to perform the interim impairment analysis of our
goodwill, trademark and long-lived assets are appropriate given the current
market conditions; however, future impairment charges could be required due to
changes in the market conditions or other factors relating to our performance.
SEGMENT INCOME (LOSS)
---------------------
For the 12 weeks ended
-------------------------------
Dec. 5, 2009 Nov. 29, 2008
------------ -------------
(in thousands)
Fresh $ 13,313 $ 36,389
Price Impact* (16,501) (2,236)
Gourmet 6,804 6,735
Other (116) 548
-------- --------
Total segment income $ 3,500 $ 41,436
======== ========
-----------------
* Includes results from Fresh stores that have been subsequently converted to
Price Impact stores.
Segment income decreased $37.9 million from $41.4 million for the 12 weeks ended
November 29, 2008 to $3.5 million for the 12 weeks ended December 5, 2009. The
decrease in segment income of $23.1 million from our Fresh segment was primarily
driven by the decline in sales and the reduced gross margin, partially offset by
negotiated cost reductions and reduced labor and occupancy costs. Our Price
Impact segment experienced a decline in segment income of $14.3 million, which
was attributable to lower sales and gross margins, primarily resulting from
reductions in everyday prices to stay competitive and higher promotional
spending for this segment, partially offset by reduced productive labor,
transportation costs and occupancy expenses. Segment income from our Gourmet
business increased by $0.1 million, primarily as a result of an improved gross
margin rate, partially offset by a reduction in sales. The decrease in segment
income of $0.7 million from our Other segment, representing Discount and Liquor,
was primarily driven by increased productive labor and occupancy expenses,
partially offset by increased sales. Refer to Note 17 - Operating Segments for
further discussion of our reportable operating segments.
NONOPERATING INCOME (LOSS)
--------------------------
During the third quarter of fiscal 2009 and 2008, we recorded unfavorable fair
value adjustments of $15.9 million and favorable fair value adjustments of $22.8
million, respectively, relating to our Series B warrants acquired in connection
with our purchase of Pathmark. These adjustments are a function of fluctuations
in the market price of our Company's common stock.
INTEREST EXPENSE
----------------
Interest expense of $45.8 million for the third quarter of fiscal 2009 increased
from the prior year expense of $37.5 million, primarily due to (i) $7.0 million
of interest expense relating to our $260 million offering of 11.375% senior
secured notes due 2015 that were issued in August 2009, (ii) $2.4 million of
interest expense relating to dividends and issuance cost amortization on the
portion of our preferred stock issued in August 2009 that was classified as a
liability, and (iii) $1.2 million of interest expense recorded during the third
quarter of fiscal 2009, to reflect interest accretion relating to our GHI
contractual obligation, partially offset by $3.1 million of reduced interest
expense relating to our bank borrowings resulting from our repayments of a
portion of our variable debt using proceeds from our senior notes and preferred
stock offerings.
During the third quarter of fiscal 2009 and 2008, we recorded additional
non-cash interest expense of $1.0 million and $0.8 million, respectively,
relating to our $255.0 million aggregate principal amount of the
45
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
6.750% Convertible Senior Notes that were issued in December 2007, as a result
of our adoption of FSP APB Opinion No. 14-1, "Accounting for Convertible Debt
Instruments that May be Settled in Cash Upon Conversion" during the first
quarter of fiscal 2009.
INCOME TAXES
------------
The benefit from income taxes from continuing operations for the third quarter
of fiscal 2009 was $12.4 million, compared to the provision for income taxes of
$1.0 million for the third quarter of fiscal 2008. Consistent with prior fiscal
year, we continue to record a valuation allowance against our net deferred tax
assets.
The effective tax rates on continuing operations of 2.4% and 37.9% for the 12
weeks ended December 5, 2009 and November 29, 2008, respectively, varied from
the statutory rate of 35%, primarily due to the recording of state and local
income taxes, the recording of a deferred tax benefit related to the impairment
of indefinite lived intangible assets, 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 third
quarter of fiscal 2009 of $57.2 million increased from a loss from operations of
discontinued businesses, net of tax, of $12.5 million for the third quarter of
fiscal 2008, primarily due to higher occupancy related expenses recorded during
the third quarter of fiscal 2009 due to changes in our estimation of such future
costs due to the continuing deteriorating economic conditions in the Midwest
real estate market, including the recent bankruptcies in the auto industry. We
now expect our occupancy costs to be higher as the current economic conditions
affecting the Midwest real estate market are expected to persist for some time
and subleased properties in the area have been occurring at heavily discounted
rates as compared to the related contractual agreements. The gain on disposal of
discontinued operations of $1.8 million for the third quarter of fiscal 2008
related to the sale of land in the Greater New Orleans area.
40 WEEKS ENDED DECEMBER 5, 2009 COMPARED TO THE 40 WEEKS ENDED NOVEMBER 29, 2008
--------------------------------------------------------------------------------
The following table summarizes our results of operations for the 40 weeks ended
December 5, 2009 compared to the 40 weeks ended November 29, 2008:
40 Weeks Ended 40 Weeks Ended Favorable
Dec. 5, 2009 Nov. 29 2008 (Unfavorable) % Change
-------------- ------------ ------------- --------
(in millions, except percentages and per share data)
Sales $ 6,818.0 $ 7,226.3 $ (408.3) (5.7)%
(Decrease) increase in comparable
store sales (4.2)% 2.7% NA NA
Loss from continuing operations $ (622.9) $ (5.3) $ (617.6) >(100%)
Loss from discontinued operations $ (82.2) $ (26.0) $ (56.2) >(100%)
Net loss $ (705.1) $ (31.3) $ (673.8) >(100%)
Net loss per share - basic $ (13.31) $ (0.62) $ (12.69) >(100%)
Net loss per share - diluted $ (25.42) $ (3.18) $ (22.24) >(100%)
Average weekly sales per supermarket were approximately $412,900 for the 40
weeks ended December 5, 2009 versus $425,700 for the corresponding period of the
prior year, a decrease of 3.0%, 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.
46
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
SALES
-----
For the 40 weeks ended
---------------------------------
Dec. 5, 2009 Nov. 29, 2008
------------ -------------
(in thousands)
Fresh $3,403,009 $3,649,363
Price Impact* 2,995,194 3,176,986
Gourmet 206,875 208,890
Other 212,918 191,016
---------- ----------
Total sales $6,817,996 $7,226,255
========== ==========
* Includes sales from Fresh stores that have been subsequently converted to
Price Impact stores.
Sales decreased from $7,226.3 million for the 40 weeks ended November 29, 2008
to $6,818.0 million for the 40 weeks ended December 5, 2009, primarily due to a
decrease in comparable store sales and the absence of sales resulting from store
closures, partially offset by sales from new stores. The decrease in sales in
our Fresh segment of $246.4 million was primarily related to a decline in the
comparable store sales of $174.7 million and the absence of sales resulting from
store closures of $71.7 million. The decrease in sales in our Price Impact
segment of $181.8 million was primarily due to a decline in comparable store
sales of $135.0 million and the absence of sales resulting from store closures
of $77.0 million, partially offset by an increase in sales from new stores of
$30.2 million. Sales generated by our Gourmet segment decreased by $2.0 million,
primarily due to a decline in comparable store sales. The sales increase of
$21.9 million, or 11.5%, in our Other segment, representing Discount and Liquor,
was primarily driven by increased sales generated by our Discount business,
primarily due to sales from three new stores of $15.3 million and increased
comparable store sales of $6.3 million.
GROSS MARGIN
------------
Gross margin of $2,058.8 million decreased 18 basis points as a percentage of
sales to 30.20% for the 40 weeks ended December 5, 2009 from gross margin of
$2,195.5 million or 30.38% for the 40 weeks ended November 29, 2008, reflecting
lower margins from our Price Impact segment, partially offset by improved
margins from our Fresh and Gourmet segments.
The following table details the dollar impact of items affecting the gross
margin dollar decrease from the 40 weeks ended November 29, 2008 to the 40 weeks
ended December 5, 2009 (in millions):
Sales Volume Gross Margin Rate Total
------------ ----------------- ---------
Total Company $ (124.0) $ (12.7) $ (136.7)
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
---------------------------------------------------
Our SG&A expense was $2,109.8 million or 30.94% as a percentage of sales for the
40 weeks ended December 5, 2009, as compared to $2,193.0 million or 30.35% as a
percentage of sales for the 40 weeks ended November 29, 2008.
Included in SG&A for the 40 weeks ended December 5, 2009 are: (i) net real
estate related costs of $29.8 million, or 44 basis points, (ii) net
restructuring and other costs of $5.7 million, or 8 basis points, and (iii)
pension withdrawal costs of $2.4 million, or 4 basis points.
47
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
SG&A for the 40 weeks ended November 29, 2008 included (i) Pathmark integration
and other restructuring related costs of $27.1 million, or 38 basis points, (ii)
net losses on real estate activity of $8.1 million, or 11 basis points, (iii)
costs relating to a voluntary labor buyout program of $3.0 million, or 4 basis
points and (iv) costs relating to our withdrawal of the Grocery Haulers, Inc.
employees servicing Pathmark Stores from the Local 863 Union Multiemployer
Pension Plan to our Company of $2.7 million, or 4 basis points. These costs were
partially offset by a reversal of $5.2 million, or 7 basis points, for
compensation expense related to restricted stock that had been previously
recognized for performance targets that are no longer probable of being met, as
discussed in Note 15 - Stock Based Compensation.
Excluding the items listed above, SG&A as a percentage of sales increased by 53
basis points during the 40 weeks ended December 5, 2009 as compared to the 40
weeks ended November 29, 2008, primarily due to lower sales leverage on fixed
costs, including increased labor costs of 54 basis points and increased
advertising related costs of 11 basis points, partially offset by a decrease in
corporate and banner administrative expenses of 20 basis points.
During the 40 weeks ended December 5, 2009 and November 29, 2008, we recorded
impairment losses on long-lived assets due to closure or conversion of stores in
the normal course of business of $5.0 million and $2.7 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.
GOODWILL, TRADEMARK AND LONG-LIVED ASSET IMPAIRMENT
---------------------------------------------------
During the 40 weeks ended December 5, 2009, we impaired the entire $321.8
million balance of goodwill and $49.9 million of the $127.3 million trademark
balance recorded within our Price Impact reporting unit. We also recorded a
long-lived asset impairment charge of $40.8 million primarily relating to
certain favorable leases and other long-lived assets within our Price Impact
reporting unit. Refer to Goodwill and Long-Lived Asset Impairment within Results
of Operations for the 12 Weeks ended December 5, 2009 compared to the 12 Weeks
ended November 29, 2008 above for additional information relating to these
charges.
SEGMENT INCOME (LOSS)
---------------------
For the 40 weeks ended
-------------------------------
Dec. 5, 2009 Nov. 29, 2008
------------ -------------
(in thousands)
Fresh $ 87,322 $101,211
Price Impact* (33,589) 14,978
Gourmet 18,234 16,610
Other 1,541 1,825
-------- --------
Total segment income $ 73,508 $134,624
======== ========
* Includes results from Fresh stores that have been subsequently converted to
Price Impact stores.
Segment income decreased $61.1 million from $134.6 million for the 40 weeks
ended November 29, 2008 to $73.5 million for the 40 weeks ended December 5,
2009. The decrease in segment income of $13.9 million from our Fresh segment was
primarily driven by the decline in sales and the reduced gross margin,
48
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
partially offset by negotiated cost reductions and reduced labor and occupancy
costs. Our Price Impact segment experienced a decline in segment income of $48.6
million, which was attributable to lower sales and gross margins, primarily
resulting from higher promotional spending and reductions in everyday prices for
this segment, partially offset by reduced productive labor, supply and
logistics, and occupancy costs. Segment income from our Gourmet business
improved by $1.6 million, primarily as a result of an improved gross margin
rate, partially offset by a reduction in sales. The decrease in segment income
of $0.3 million in our Other segment, representing Discount and Liquor, was
primarily driven by increased productive labor and occupancy expenses, partially
offset by increased sales. Refer to Note 17 - Operating Segments for further
discussion of our reportable operating segments.
NONOPERATING INCOME (LOSS)
--------------------------
During the 40 weeks ended December 5, 2009 and November 29, 2008, we recorded
unfavorable fair value adjustments of $24.9 million and favorable fair value
adjustments of $114.3 million, respectively, relating to our 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. These adjustments are a function of fluctuations in the market
price of our Company's common stock.
INTEREST EXPENSE
----------------
Interest expense of $148.6 million for the 40 weeks ended December 5, 2009
increased from the prior year expense of $119.1 million, primarily due to $16.6
million of interest expense recorded during the 40 weeks ended December 5, 2009,
to reflect the impact of the lower discount rate used to revalue our GHI
contractual obligation at December 5, 2009 than at February 28, 2009, which is
derived each period from published zero-coupon AA corporate bond yields, as well
as interest accretion relating to this obligation. During the 40 weeks ended
December 5, 2009, we also recorded $10.7 million of interest expense relating to
our $260 million 11.375% senior secured notes due 2015 that were issued in
August 2009 and $3.6 million of interest expense relating to dividends and
issuance cost amortization on the portion of our preferred stock issued in
August 2009 that was classified as a liability due to the fact that it cannot be
converted to common stock without shareholder approval. These increases in
interest expense were partially offset by $4.5 million of reduced interest
expense relating to bank borrowings resulting from our repayments of a portion
of our variable debt using proceeds from the August 2009 offerings of senior
notes and preferred stock.
During the 40 weeks ended December 5, 2009 and November 29, 2008, we recorded
additional non-cash interest expense of $3.2 million and $2.5 million,
respectively, relating to our $255 million aggregate principle amount of the
6.750% Convertible Senior Notes that were issued in December 2007, as a result
of our adoption of the new accounting guidance relating to convertible debt
instruments with cash settlement features during the first quarter of fiscal
2009.
INCOME TAXES
------------
The benefit from income taxes from continuing operations for the 40 weeks ended
December 5, 2009 was $14.0 million, compared to the provision for income taxes
of $3.5 million for 40 weeks ended November 29, 2008. Consistent with prior
fiscal year, we continue to record a valuation allowance against our net
deferred tax assets.
49
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
The effective tax rates on continuing operations of 2.2% and 190.3% for the 40
weeks ended December 5, 2009 and November 29, 2008, respectively, varied from
the statutory rate of 35%, primarily due to the recording of state and local
income taxes, the recording of a deferred tax benefit related to the impairment
of indefinite lived intangible assets, 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 40
weeks ended December 5, 2009 of $82.2 million increased from a loss from
operations of discontinued businesses, net of tax, of $30.6 million for the 40
weeks ended November 29, 2008, primarily due to higher occupancy related
expenses recorded during the 40 weeks ended December 5, 2009 due to changes in
our estimation of such costs due to continuing deteriorating conditions in the
Midwest real estate market. The gain on disposal of discontinued operations of
$4.7 million, net of tax, recorded during the 40 weeks ended November 29, 2008,
primarily related to the sale of our Eight O'Clock Coffee business in fiscal
2003 due to the settlement of a contingent note whose 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,
as well as a $1.8 million gain on sale of land in the Greater New Orleans area.
CASH FLOWS
----------
The following table presents excerpts from our Consolidated Statement of Cash
Flows (in thousands):
40 weeks ended
-------------------------------
Dec. 5, 2009 Nov. 29, 2008
------------- -------------
Net cash used in operating activities $ (51,896) $ (48,214)
------------- ------------
Net cash used in investing activities $ (58,296) $ (56,999)
------------- ------------
Net cash provided by financing activities $ 216,659 $ 165,427
------------- ------------
Net cash used in operating activities increased by $3.7 million for the 40 weeks
ended December 5, 2009 as compared to 40 weeks ended November 29, 2008, which
primarily reflected our net loss adjusted by our net non-cash charges and
changes in our operating working capital. Refer to Working Capital below for a
discussion of changes in working capital items for the 40 weeks ended December
5, 2009.
Net cash used in investing activities increased by $1.3 million for the 40 weeks
ended December 5, 2009 as compared to the 40 weeks ended November 29, 2008,
primarily due to a decline of $14.4 million in proceeds received from disposals
of property, partially offset by reduced property expenditures of $13.8 million.
Property expenditures totaled $71.9 million for the 40 weeks ended December 5,
2009, reflecting 5 additions, 6 remodels and 4 conversions, as compared to $85.7
million for same prior year period, which included 4 new stores, 10 remodels, 13
major remodels, 1 major enlargement and 2 conversions. For the remainder of
2009, we plan to focus our capital expenditures on building a new store and one
store enlargement that are expected to be completed in 2010.
Net cash provided by financing activities increased by $51.2 million for the 40
weeks ended December 5, 2009 as compared to the 40 weeks ended November 29,
2008, primarily due to $253.2 million in proceeds from issuance of long-term
debt and $175.0 million from issuance of preferred stock during the 40 weeks
ended December 5, 2009, as well the absence of the prior year payment of $45.7
million upon our
50
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
settlement of the Series A warrants. These increases in cash provided by
financing activities were partially offset by an increase of $390.8 million in
the net principal payments on our revolving lines of credit and increased
deferred financing fees of $28.5 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. We believe that
our present cash resources, including additional liquidity provided by the
proceeds from the August 2009 preferred stock investment and the Senior Secured
Notes Financing, 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.
However, there is no assurance that we will be successful in generating such
resources.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Working Capital
As of December 5, 2009, we had cash and cash equivalents of approximately $281.8
million and working capital of $248.7 million, as compared to cash equivalents
of 175.4 million and working capital of $172.0 million as of February 28, 2009.
The increase in our working capital was primarily attributable to the following:
o An increase in cash and cash equivalents primarily due to our
issuances of Redeemable Preferred Stock and Senior Secured Notes in
August 2009, partially offset by repayments of a portion of our
variable debt;
o A decline in accrued salaries, wages and benefits, primarily
attributable to a reduction in the incentive compensation accrued for
our executive and non-executive employees for fiscal 2009, based on
our operating results; and
o An increase in inventories primarily due to seasonality.
Partially offset by the following:
o An increase in accounts payable, net of book overdrafts due to an
increase in inventories and the timing of payments; and
o A decline in accounts receivable, primarily related to timing.
Redeemable Preferred Stock
On August 4, 2009, we issued 60,000 shares of 8.0% Cumulative Convertible
Preferred Stock, Series A-T, without par value, to affiliates of Tengelmann
Warenhandelsgesellschaft KG ("Tengelmann") and 115,000 shares of 8.0% Cumulative
Convertible Preferred Stock, Series A-Y, without par value, to affiliates of
Yucaipa Companies LLC ("Yucaipa"), together referred to as the "Preferred
Stock," for approximately $162.2 million, after deducting approximately $12.8
million in closing and issuance costs. Each share of the Preferred Stock has an
initial liquidation preference of one thousand dollars, subject to adjustment.
51
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
The Preferred Stock is convertible into shares of our Company's common stock,
par value $1.00 per share (the "Common Stock"), at an initial conversion price
of $5.00 per share of Common Stock. The Preferred Stock is convertible upon the
one-year anniversary of the issuance of Preferred Stock provided that prior to
receiving shareholder approval, the Preferred Stock will not be exercisable into
greater than 19.99% of the Common Stock outstanding prior to the issuance of the
Preferred Stock. The 57,750 shares that are convertible without shareholder
approval are classified as temporary stockholders' equity since the shares are
(i) redeemable at the option of the holder and (ii) have conditions for
redemption which are not solely within the control of the Company. The shares
requiring shareholder approval to become convertible are classified as a
"Preferred stock liability".
Our Company is required to redeem all of the outstanding Preferred Stock on
August 1, 2016 (the "Maturity Date"), at 100.0% of the liquidation preference,
plus all accrued and unpaid dividends. Subject to the repurchase rights of the
investors, the Preferred Stock is not redeemable prior to the Maturity Date.
The holders of the Preferred Stock are entitled to an 8.0% dividend, payable
quarterly in arrears in cash or in additional shares of Preferred Stock if our
Company is not able to pay the dividends fully in cash. If our Company makes a
dividend payment in additional shares of Preferred Stock, the Preferred Stock
shall be valued at the liquidation preference of the Preferred Stock and the
dividend rate will be 8.0% plus 1.5%. During the 12 and 40 weeks ended December
5, 2009, we accrued Preferred Stock dividends of $3.2 million and $4.8 million,
respectively, of which $2.1 million and $3.2 million, respectively, has been
recorded within "Interest expense" and the remaining $1.1 million and $1.6
million, respectively, has been recorded within "Additional paid-in capital".
Line of Credit
Our Company has a secured line of credit agreement with Blue Ridge Investments,
L.L.C, which expires on December 31, 2009. 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 0.3% and 3.0% during
the third quarter of fiscal 2009 and 2008, respectively. At December 5, 2009 and
February 28, 2009, we had borrowings outstanding under this line of credit
agreement of $1.2 million and $5.0 million, respectively. These loans are
collateralized by a first priority perfected security interest in our ownership
interest in the Columbia Fund. Refer to Note 4 to our Consolidated Financial
Statements - Fair Value Measurements, for further discussion of the Columbia
Fund.
Credit Agreement
On July 23, 2009, our Company amended the Amended and Restated Credit Agreement
with Banc of America Securities LLC and Bank of America, N.A., as the co-lead
arranger, in connection with the private offering of senior secured notes and
the sale of preferred stock, which expires in December 2012. The amended
agreement increases the applicable margins on credit advances, reduces
commitments by $20.0 million, reduces the collateral advance and provides for
certain other amendments. Subject to borrowing base requirements, the amended
$655.0 million Credit Agreement provides for a five-year term loan of $82.9
million, a five-year term loan of $50.0 million and a five-year revolving credit
facility of $522.1 million enabling us to borrow funds and issue letters of
credit on a revolving basis. The Credit Agreement also provides for an increase
in commitments of up to an additional $100.0 million, subject to agreement of
new and existing lenders. Our obligations under the Credit Agreement are secured
by certain assets of our Company, including, but not limited to, inventory,
certain accounts receivable, pharmacy scripts, owned
52
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
real estate and certain Pathmark leaseholds. The Pathmark leaseholds were
removed as eligible collateral throughout fiscal 2009, which resulted in total
reduced borrowing availability of approximately $73.0 million as of December 5,
2009. 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 December 5, 2009, there were $132.9 million of loans and $203.8 million in
letters of credit outstanding under this agreement. As of December 5, 2009,
after reducing availability for borrowing base requirements, we had $218.0
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 $187.2 million as of December 5, 2009.
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
We have a $10 million three-year 6% unsecured promissory note due on August 18,
2011 that was issued to Erivan Karl Haub, who is the father of Christian W. E.
Haub, our Executive Chairman and Chief Executive Officer, and is a limited
partner of Tengelmann which owns an interest in our Company's stock. The
interest is payable in twelve equal quarterly payments of $0.15 million over the
term of the note.
Public Debt Obligations
As of December 5, 2009, we had outstanding notes of $588.1 million, which
consisted of $12.8 million of 9.125% Senior Notes due December 15, 2011, $153.6
million of 5.125% Convertible Senior Notes due June 15, 2011, $221.7 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. Our notes are not
guaranteed by any of our subsidiaries.
The 5.125% Convertible Senior Notes are not redeemable at our option at any
time. The 6.750% Convertible Senior 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. Refer to Note 11 to our Consolidated
Financial Statements - Indebtedness and Other Financial Liabilities, for
additional information relating to these notes.
Senior Secured Notes
On August 4, 2009, we issued $260.0 million of 11.375% senior secured notes due
2015 (the "Notes") at a price equal to 97.385% of their face value. The Notes
represent second lien secured obligations, guaranteed by all of our Company's
domestic subsidiaries. The Notes bear interest at a fixed rate of 11.375%
payable
53
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
semi-annually in cash. The proceeds from this offering and our preferred stock
offering on August 4, 2009, which is discussed above, were used to repay a
portion of our existing variable debt.
The Notes were offered only to qualified institutional buyers in reliance on
Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"),
and outside the United States, only to non-U.S. investors pursuant to Regulation
S. The Notes have not been registered under the Securities Act or the securities
laws of any other jurisdiction and may not be offered or sold in the United
States absent registration or an applicable exemption from registration
requirements. The Notes contain the usual and customary covenants found in
secured notes, including, among other things, restrictions on the incurrence of
additional indebtedness, asset sales, liens and restricted payments.
Share Lending Agreements
We have share lending agreements with certain financial institutions, under
which we agreed to loan shares of our common stock (subject to certain
adjustments set forth in the share lending agreements). 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 to facilitate
hedging transactions relating to the issuance of our 5.125% and 6.750% Senior
Convertible Notes. 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 do not have rights pursuant to the share
lending agreements.
The 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 share 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 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.
On November 23, 2009, Bank of America, N.A., who is a party to our share lending
agreement, returned 1,000,000 shares, eliminating our obligation to lend
additional shares to them in the future. On January 6, 2010, Bank of America,
N.A. returned additional 1,500,000 shares. All of the returned shares were
immediately retired, reducing the number of our common shares issued and
outstanding. The return of these shares has no impact on the computations of our
basic and diluted earnings per share, as the shares underlying the share lending
agreement are removed from these computations unless the borrower defaults on
returning them. We currently have 5,634,002 of loaned shares outstanding under
the share lending agreements.
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 December 5, 2009, 187 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
54
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
Leases to be approximately $586.8 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, our senior
secured notes are rated B3 and our liquidity rating is SGL-3.
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. Our senior secured notes are rated B-, with a
recovery rating of 4, indicating that lenders can expect an average recovery
(30%-50%) in the event of a payment default. Our preferred stock rating is CCC-.
Future rating changes could affect the availability and cost of financing to our
Company.
We believe that our present cash resources and the available borrowings from our
$655.0 million Amended 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 $655.0 million Amended 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.
CRITICAL ACCOUNTING ESTIMATES
-----------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. A summary of
our critical accounting policies may be found in the Management Discussion and
Analysis included in our Annual Report on Form 10-K for the year ended February
28, 2009. There have been no significant changes in these policies during the 40
weeks ended December 5, 2009.
We have noted that assumptions of our revenue and cash flow projections for the
Price Impact reporting unit have significantly declined resulting in an
impairment triggering event that resulted in the impairment of $40.8 million of
our long-lived assets and the entire amount of goodwill of $321.8 million
allocated to the Price Impact reporting unit. In addition we changed our assumed
market royalty rates that could be payable if we did not own our trademarks due
to current general economic conditions as well as our near term profitability
projections, which combined with the decline in projected revenues and cash
flows resulted in impairment of the Pathmark Trademark of $49.9 million during
the third quarter.
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
55
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
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.
56
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
-----------
Market risk represents the risk of loss from adverse market changes that may
impact our consolidated financial position, results of operations or cash flows.
Among other possible market risks, we are exposed to 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 December 5, 2009, we do not have cash flow exposure
due to rate changes on any of our debt securities with an aggregate book value
of $853.6 million, because they are at fixed interest rates ranging from 2.0% to
11.375%. However, we do have cash flow exposure on our committed and uncommitted
lines of credit of $134.1 million due to our variable floating rate pricing.
Accordingly, during the 12 weeks and 40 weeks ended December 5, 2009, a presumed
1% change in the variable floating rate would have impacted interest expense by
$0.3 million and $1.8 million, respectively. A presumed 1% change in the
variable floating rate during the 12 and 40 weeks ended November 29, 2008 would
have impacted interest expense by $0.8 million and $2.1 million, respectively.
Foreign Exchange Risk
---------------------
As of December 5, 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
Executive Chairman 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 Executive Chairman 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 Executive Chairman 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 December 5,
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.
57
PART II. OTHER INFORMATION
ITEM 1 - Legal Proceedings
Refer to Note 19 - Commitments and Contingencies - Legal Proceedings in our
Notes to Consolidated Financial Statements for a discussion of our legal
proceedings.
ITEM 1A - Risk Factors
There have been no material changes from the risk factors described in our
Annual Report on Form 10-K for the year ended February 28, 2009, except for 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.
58
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
59
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.
60
Our renovation and expansion plans may not be successful, and though we plan to
convert the remaining conventional stores to one of our other three 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 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 further increased upon 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 our 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 convertible preferred stock issuance, Yucaipa became a
significant holder of our common stock on a fully diluted basis. According to
the stockholder's agreement with Yucaipa, as long as Yucaipa retains sufficient
ownership of our Company's voting power, Yucaipa 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. 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,
61
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
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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.
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 46,200 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 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 three labor agreements covering
approximately 1,200 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.
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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.
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.
With approval of our lenders, 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 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:
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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 December 5, 2009, we had $134.1 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.
ITEM 2 -- Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3 -- Defaults Upon Senior Securities
None
ITEM 4 -- Submission of Matters to a Vote of Security Holders
None
ITEM 5 -- Other Information
None
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ITEM 6 - Exhibits
(a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT NO. DESCRIPTION
----------- -----------
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
66
The Great Atlantic & Pacific Tea Company, Inc.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
Date: January 12, 2010 By: /s/ Melissa E. Sungela
------------------------------------------------
Melissa E. Sungela, Vice President,
Corporate Controller
(Chief Accounting Officer and Duly Authorized Officer)
67