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<SEC-DOCUMENT>0000043300-06-000025.txt : 20060509
<SEC-HEADER>0000043300-06-000025.hdr.sgml : 20060509
<ACCEPTANCE-DATETIME>20060509105003
ACCESSION NUMBER: 0000043300-06-000025
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 11
CONFORMED PERIOD OF REPORT: 20060225
FILED AS OF DATE: 20060509
DATE AS OF CHANGE: 20060509
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: GREAT ATLANTIC & PACIFIC TEA CO INC
CENTRAL INDEX KEY: 0000043300
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411]
IRS NUMBER: 131890974
STATE OF INCORPORATION: MD
FISCAL YEAR END: 0225
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-04141
FILM NUMBER: 06819152
BUSINESS ADDRESS:
STREET 1: 2 PARAGON DR
CITY: MONTVALE
STATE: NJ
ZIP: 07645
BUSINESS PHONE: 2015739700
MAIL ADDRESS:
STREET 1: 2 PARAGON DRIVE
CITY: MONTVALE
STATE: NJ
ZIP: 07645
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>f10kfy2005.txt
<DESCRIPTION>FORM 10K FOR FISCAL YEAR ENDED FEBRUARY 25, 2006
<TEXT>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 25, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________ to____________
Commission file number 1-4141
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
----------------------------------------------
(Exact name of registrant as specified in its 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)
Registrant's telephone number, including area code: 201-573-9700
---------------------------------
Securities registered pursuant to Section 12 (b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
<S> <C>
Common Stock - $1 par value New York Stock Exchange
7.75% Notes, due April 15, 2007 New York Stock Exchange
9.125% Senior Notes, due December 15, 2011 New York Stock Exchange
9.375% Notes, due August 1, 2039 New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12 (g) of the Act: None
---------------------------------
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined by Rule 405 of the Securities Act. Yes [X] No [ ]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 of Section 15(d) of the Act. Yes [ ] No [X]
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
<TABLE>
<S> <C> <C> <C>
Large accelerated filer X Accelerated filer Non-accelerated filer
--------- ---------- ---------
</TABLE>
Indicate by check mark whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of the close of business on September 9, 2005, the
registrant's most recently completed second fiscal quarter, was $1,122,677,684.
The number of shares of common stock outstanding as of the close of
business on May 4, 2006 was 41,283,759.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part I, Items 1 and 3, and Part II, Items
5, 6, 7, 7A, 8, 9A and 15 are incorporated by reference from the Registrant's
Fiscal 2005 Annual Report to Stockholders. The information required by Part III,
Items 10, 11, 12, 13, and 14 are incorporated by reference from the Registrant's
Proxy Statement.
1
<PAGE>
PART I
ITEM 1 - BUSINESS
GENERAL
The Great Atlantic & Pacific Tea Company, Inc. ("A&P", "we", "our",
"us" or "our Company") is engaged in the retail food business. We operated 405
stores averaging approximately 40,700 square feet per store as of February 25,
2006.
Operating under the trade names A&P(R), Super Fresh(R),
Sav-A-Center(R), Farmer Jack(R), Waldbaum's(TM), Super Foodmart, Food Basics(R),
and The Food Emporium(R), we sell groceries, meats, fresh produce and other
items commonly offered in supermarkets. In addition, many stores have bakery,
delicatessen, pharmacy, floral, fresh fish and cheese departments and on-site
banking. National, regional and local brands are sold as well as private label
merchandise. In support of our retail operations, we sell other private label
products in our stores under other brand names of our Company which include
without limitation, America's Choice(R), Master Choice(R), Health Pride(R), and
Savings Plus.
Building upon a broad base of A&P supermarkets, our Company has
historically expanded and diversified within the retail food business through
the acquisition of other supermarket chains and the development of several
alternative store types. We now operate our stores with merchandise, pricing and
identities tailored to appeal to different segments of the market, including
buyers seeking gourmet and ethnic foods, a wide variety of premium quality
private label goods and health and beauty aids along with the array of
traditional grocery products.
The Company's Securities and Exchange Commission ("SEC") filings are
promptly posted to its website at www.aptea.com after they are filed with the
SEC and can be accessed free of charge through a link on the "Investors" page.
MODERNIZATION OF FACILITIES
During fiscal 2005, we expended approximately $191 million for capital
projects, which included 3 new supermarkets and 41 major remodels or
enlargements. Our Company has planned capital expenditures of approximately $175
to $200 million in fiscal 2006. These expenditures relate primarily to opening 2
to 5 new supermarkets, converting 5 to 10 stores to new formats, and enlarging
or remodeling 40 - 60 supermarkets. In addition, we plan to continue with at
least similar levels of capital expenditures in fiscal 2007 and several years
thereafter.
SOURCES OF SUPPLY
Our Company currently acquires a significant amount of our saleable
inventory from one supplier, C&S Wholesale Grocers, Inc. Although there are a
limited number of distributors that can supply our stores, we believe that other
suppliers could provide similar product on comparable terms.
2
<PAGE>
EMPLOYEES
As of February 25, 2006, we had approximately 38,000 employees, of
which 66% were employed on a part-time basis. Approximately 87% of our employees
are covered by union contracts.
COMPETITION
The supermarket business is highly competitive throughout the marketing
areas served by our Company and is generally characterized by low profit margins
on sales with earnings primarily dependent upon rapid inventory turnover,
effective cost controls and the ability to achieve high sales volume. We compete
for sales and store locations with a number of national and regional chains, as
well as with many independent and cooperative stores and markets.
SEGMENT INFORMATION
The segment information required is contained under the caption "Note
15 - Operating Segments" in the Fiscal 2005 Annual Report to Stockholders and is
herein incorporated by reference.
FOREIGN OPERATIONS
The information required is contained under the captions "Management's
Discussion and Analysis", "Note 1 - Summary of Significant Accounting Policies",
"Note 2 - Divestiture of our Businesses in Canada and the Midwestern United
States", "Note 6 - Valuation of Goodwill and Long-Lived Assets", "Note 8 - Asset
Disposition Initiatives", "Note 9 - Indebtedness', "Note 12 - Income Taxes",
"Note 13 - Retirement Plans and Benefits", "Note 15 - Operating Segments", "Note
16 - Related Party Transactions", and "Note 17 - Hedge of Net Investment in
Foreign Operations" in the Fiscal 2005 Annual Report to Stockholders and is
herein incorporated by reference.
ITEM 1A - RISK FACTORS
Set forth below is a summary of the material risks to an investment in
our securities.
o Actions of competitors could adversely affect our sales and future profits.
The grocery retailing industry continues to experience fierce competition
from other food retailers, super-centers, mass merchandisers, warehouse
clubs, drug stores, dollar stores and restaurants. Our continued success is
dependent upon our ability to effectively compete in this industry and to
reduce operating expenses, including managing health care and pension costs
contained in our collective bargaining agreements. The competitive
practices and pricing in the food industry generally and particularly in
our principal markets may cause us to reduce our prices in order to gain or
maintain share of sales, thus reducing margins.
o Changes in the general business and economic conditions in our operating
regions, including the rate of inflation, population growth, the rising
prices of oil and gas, the nature and extent of continued consolidation in
the food industry and employment and job growth in the markets in which we
operate, may affect our ability to hire and train qualified employees to
operate our stores. This would negatively affect earnings and sales growth.
General economic changes may also affect the shopping habits and buying
patterns of our customers, which could affect sales and earnings. We have
assumed economic and competitive situations will not worsen in fiscal 2006
and 2007. However, we cannot fully foresee the effects of changes in
economic conditions, inflation, population growth, the rising prices of oil
and gas, customer shopping habits and the consolidation of the food
industry on our business.
3
<PAGE>
o Our capital expenditures could differ from our estimate if we are
unsuccessful in acquiring suitable sites for new stores, or if development
and remodel costs vary from those budgeted.
o Our ability to achieve our profit goals will be affected by (i.) our
success in executing category management and purchasing programs that we
have underway, which are designed to improve our gross margins and reduce
product costs while making our product selection more attractive to
consumers, (ii.) our ability to achieve productivity improvements and
shrink reduction in our stores, (iii.) our success in generating
efficiencies in our supporting activities, and (iv.) our ability to
eliminate or maintain a minimum level of supply and/or quality control
problems with our vendors.
o The vast majority of our employees are members of labor unions. While we
believe that our relationships with union leaderships and our employees are
satisfactory, we operate under collective bargaining agreements which
periodically must be renegotiated. In the coming year, we have several
contracts expiring and under negotiation. In each of these negotiations
rising health care and pension costs will be an important issue, as will
the nature and structure of work rules. We are hopeful, but cannot be
certain, that we can reach satisfactory agreements without work stoppages
in these markets. However, the actual terms of the renegotiated collective
bargaining agreements, our future relationships with our employees and/or a
prolonged work stoppage affecting a substantial number of stores could have
a material effect on our results.
o The amount of contributions made to our pension and multi-employer plans
will be affected by the performance of investments made by the plans and
the extent to which trustees of the plans reduce the costs of future
service benefits.
o Our Company currently acquires a significant amount of our saleable
inventory from one supplier, C&S Wholesale Grocers, Inc. Although there are
a limited number of distributors that can supply our stores, we believe
that other suppliers could provide similar product on comparable terms.
However, a change in suppliers could cause a delay in distribution and a
possible loss of sales, which would affect operating results adversely.
o We have estimated our exposure to claims, administrative proceedings and
litigation and believe we have made adequate provisions for them, where
appropriate. Unexpected outcomes in both the costs and effects of these
matters could result in an adverse effect on our earnings.
Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. Accordingly, actual events and results may vary significantly from
those included in or contemplated or implied by forward-looking statements made
by us or our representatives.
ITEM 1B - UNRESOLVED STAFF COMMENTS
None.
4
<PAGE>
ITEM 2 - PROPERTIES
At February 25, 2006, we owned 37 properties consisting of the
following:
Stores, Not Including Stores in Owned Shopping Centers
Land and building owned 10
Building owned and land leased 16
----
Total stores 26
Shopping Centers
Land and building owned 1
Building owned and land leased 1
----
Total shopping centers 2
Warehouses
Land and building owned 1
Administrative and Other Properties
Land and building owned 3
Building owned and land leased 1
Undeveloped land 4
----
Total other properties 8
----
Total Properties 37
====
At February 25, 2006, we operated 405 retail stores. These stores are
geographically located as follows:
COMPANY STORES:
New England States:
Connecticut 26
----
Total 26
Middle Atlantic States:
District of Columbia 1
Delaware 9
Maryland 30
New Jersey 93
New York 131
Pennsylvania 25
----
Total 289
Midwestern States:
Michigan 67
----
Total 67
Southern States:
Louisiana 21
Mississippi 2
----
Total 23
----
Total Stores 405
====
5
<PAGE>
The total area of all of our operated retail stores is 16.5 million
square feet averaging approximately 40,700 square feet per store. Excluding
liquor and The Food Emporium(R) stores, which are generally smaller in size, the
average store size is approximately 44,200 square feet. The 3 new stores opened
in fiscal 2005 consisted of 3 supermarkets and range in size from 33,600 to
50,900 square feet, with an average size of approximately 44,000 square feet.
The stores built over the past several years and those planned for fiscal 2006
and thereafter, generally range in size from 40,000 to 60,000 square feet. The
selling area of new stores is approximately 75% of the total square footage.
As of the end of fiscal 2005, we operated 2 warehouses to service our
store network located in Michigan. Our store network is also serviced by C&S
Wholesale Grocers, Inc.
ITEM 3 - LEGAL PROCEEDINGS
The information required is contained under the caption "Note 18 -
Commitments and Contingencies" in the Fiscal 2005 Annual Report to Stockholders
and is herein incorporated by reference.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal 2005.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The information required is contained under the captions "Summary of
Quarterly Results", "Five Year Summary of Selected Financial Data", and
"Stockholder Information" in the Fiscal 2005 Annual Report to Stockholders and
is herein incorporated by reference.
Although our Company declared and paid a special one-time dividend to
our shareholders of record on April 17, 2006 equal to $7.25 per share in April
2006, which is subsequent to our fiscal year end of February 25, 2006, our
Company's policy is to not pay dividends. As such, we have not made dividend
payments in the previous three years and do not intend to pay dividends in the
normal course of business in fiscal 2006. However, our Company is permitted,
under the terms of our Revolver, to pay cash dividends on common shares.
6
<PAGE>
Securities authorized for issuance under equity compensation plans are
summarized below:
<TABLE>
<CAPTION>
As of February 25, 2006
---------------------------------------------------------
Weighted Average
Number of Exercise Price Number of
Securities of Outstanding Securities
to be Issued Options and Available to
Upon Exercises Rights Grant
----------------- ------------------ ------------------
<S> <C> <C> <C>
Plan Category
- -------------
1994 Stock Option Plan for officers and key employees 424,585 $ 19.96 - *
1998 Long Term Incentive and Share Award Plan 1,082,666 18.98 4,662,611**
1994 Stock Option Plan for Board of Directors 27,134 18.53 65,567
----------------- --------------- ------------------
TOTAL OPTIONS OUTSTANDING AS OF FEBRUARY 25, 2006 1,534,385 $ 19.24 4,728,178
================= =============== ==================
</TABLE>
* On March 17, 2004, the plan expired.
** At our Annual Meeting of Stockholders on July 14, 2005, the Board of
Directors voted to increase the number of shares that may be issued
under the 1998 Long Term Incentive and Share Award Plan by 3,000,000
shares.
ITEM 6 - SELECTED FINANCIAL DATA
The information required is contained under the caption "Five Year
Summary of Selected Financial Data" in the Fiscal 2005 Annual Report to
Stockholders and is herein incorporated by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required is contained under the caption "Management's
Discussion and Analysis" in the Fiscal 2005 Annual Report to Stockholders and is
herein incorporated by reference.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required is contained in the section "Market Risk"
under the caption "Management's Discussion and Analysis" in the Fiscal 2005
Annual Report to Stockholders and is herein incorporated by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Financial Statements: The financial statements required to be filed
herein are described in Part IV, Item 15 of this report. Except for
the sections included herein by reference, our Fiscal 2005 Annual
Report to Stockholders is not deemed to be filed as part of this
report.
(b) Supplementary Data: The information required is contained under the
caption "Summary of Quarterly Results" in the Fiscal 2005 Annual
Report to Stockholders and is herein incorporated by reference.
7
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on
accounting and financial disclosure during the fiscal year ended February 25,
2006.
ITEM 9A - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established and maintain disclosure controls and procedures
that are designed to ensure that information required to be disclosed in our
Company's Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to our Company's management,
including our President and Chief Executive Officer and Senior Vice President,
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
We carried out an evaluation, under the supervision and with the
participation of our Company's management, including our Company's President and
Chief Executive Officer along with our Company's Senior Vice President, Chief
Financial Officer, of the effectiveness of the design and operation of our
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15(b). Based upon the foregoing, as of February 25, 2006, our Company's
President and Chief Executive Officer along with our Company's Senior Vice
President, Chief Financial Officer, concluded that our Company's disclosure
controls and procedures were effective as of February 25, 2006.
The Company's management does not expect that its disclosure controls
and procedures or its internal control over financial reporting will prevent all
errors and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and breakdowns
can occur because of simple errors or mistakes. Additionally, controls can be
circumvented by the individual acts of some person or by collusion of two or
more people. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, controls may become inadequate because
of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected. Accordingly, the Company's disclosure controls and procedures
are designed to provide reasonable, not absolute, assurance that the objectives
of our disclosure control system are met and, as set forth above, the Company's
management has concluded, based on their evaluation as of the end of the period,
that our disclosure controls and procedures were sufficiently effective to
provide reasonable assurance that the objectives of our disclosure control
system were met.
8
<PAGE>
Incorporation by reference of Management's Annual Report on Internal Control
over Financial Reporting
Management of The Great Atlantic and Pacific Tea Company, Inc. has
prepared an annual report on internal control over financial reporting.
Management's report, together with the attestation report of the independent
registered public accounting firm, is included in our Company's Fiscal 2005
Annual Report to Stockholders and is herein incorporated by reference in this
Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
Other than discussed below, there has been no change during our
Company's fiscal quarter ended February 25, 2006 in our Company's internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our Company's internal control over financial
reporting.
In the fourth quarter of fiscal 2005, our Company completed the sale of
our U.S. distribution operations and the majority of our warehouse facilities
and related assets to C&S Wholesale Grocers, Inc. In connection with the sale of
these operations, our Company no longer maintains internal controls over
financial reporting relating to these warehouse physical inventories and related
reconciliations. We have evaluated and identified our key controls associated
with the revised process and these key controls have been implemented and
tested.
ITEM 9B - OTHER INFORMATION
None
9
<PAGE>
PART III
ITEMS 10 AND 11 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND
EXECUTIVE COMPENSATION
The executive officers of our Company are as follows:
Name Age Current Position
- ---- --- ----------------
Christian W.E. Haub 41 Executive Chairman
Eric Claus 49 President and Chief Executive Officer
John E. Metzger 51 Executive Vice President
Brenda M. Galgano 37 Senior Vice President and Chief Financial Officer
Jennifer MacLeod 45 Senior Vice President, Marketing and Communications
Allan Richards 42 Senior Vice President, Human Resources, Labor
Relations, Legal Services & Secretary
Stephen Slade 55 Senior Vice President, Merchandising
Paul Wiseman 45 Senior Vice President, Store Operations
William Moss 58 Vice President and Treasurer
Melissa Sungela 40 Vice President and Corporate Controller
The executive officers of our Company are chosen annually and serve
under the direction of the Chief Executive Officer ("CEO") with the consent of
the Board of Directors.
Mr. Haub was appointed Executive Chairman in August 2005. He was
elected a director in December 1991, and is Chair of the Executive Committee.
Mr. Haub previously served as Chairman of the Board and Chief Executive Officer;
and as Chief Operating Officer of our Company from December 1993, becoming
Co-Chief Executive Officer in April 1997, sole CEO in May 1998 and Chairman of
the Board in May 2001. Mr. Haub also served as President of the Company from
December 1993 through February 2002, and from November 2002 through November
2004. Mr. Haub, son of Helga Haub, is a partner and Co-Chief Executive Officer
of Tengelmann Warenhandelsgesellschaft KG, a partnership organized under the
laws of the Federal Republic of Germany ("Tengelmann"). Mr. Haub is on the Board
of Directors of Metro, Inc., the Food Marketing Institute and on the Board of
Trustees of St. Joseph's University in Philadelphia, Pennsylvania.
Mr. Claus was appointed President & Chief Executive Officer in August
2005. Mr. Claus previously served as President & Chief Executive Officer,
Canadian Company from November 2002 to August 2005. Prior to joining our
Company, Mr. Claus served as Chief Executive Officer of Co-Op Atlantic, between
February 1997 and November 2002.
Mr. Metzger was appointed Executive Vice President in September 2005.
Mr. Metzger previously served as Senior Vice President, Chief Information
Officer from February 2002 to September 2005, with the exception of
mid-September, 2004 through mid-November, 2004, when he served as the Company's
Executive Vice President, Fresh Stores. Prior to that, he was Senior Vice
President and Business Process Initiative Business Leader from May 2001 to
February 2002, and Vice President, Supply & Logistics from October 1999 to May
2001. Prior to joining our Company, Mr. Metzger was Senior Vice President of CS
Integrated LLC from January 1998 to October 1999 and before that, Vice
President, Distribution & Procurement for General Mills Restaurants, Inc. from
October 1993 to November 1997. Mr. Metzger is a director of the Institute for
Standards & Collaboration Commerce, Inc.
10
<PAGE>
Ms. Galgano, CPA, was appointed Senior Vice President and Chief
Financial Officer in November 2005. Ms. Galgano served as Senior Vice President
and Corporate Controller, from November 2004 to November 2005; Vice President,
Corporate Controller from February 2002 to November 2004, Assistant Corporate
Controller of our Company from July 2000 to February 2002 and Director of
Corporate Accounting from October 1999 to July 2000. Prior to joining our
Company, Ms. Galgano was with PricewaterhouseCoopers as Senior Manager,
Assurance and Business Advisory Services.
Ms. MacLeod was appointed Senior Vice President, Marketing and
Communications in November 2005. Prior to joining our Company, Ms. MacLeod
served as Vice President of Marketing and Public Relations from 1998 to November
2005 for Co-op Atlantic, an operator based in New Brunswick, Canada.
Mr. Richards was appointed Senior Vice President, Human Resources,
Labor Relations & Legal Services in September 2005 and in October 2005 was
additionally appointed the Company's Secretary. Prior to that Mr. Richards
served as Senior Vice President, Labor Relations & Human Resources from July
2004 to September 2005 and as Senior Vice President, Labor Relations from March
2004 to July 2004. Prior to joining our Company Mr. Richards served as a
consultant with MGS Consulting, Inc. from July 2003 to July 2004; and prior to
that as Director of Labor Relations and Employment Law for Fleming Companies,
Inc. from June 2000 to July 2003.
Mr. Slade was appointed Senior Vice President, Merchandising in
September 2005. Prior to that Mr. Slade served as Executive Vice President,
Operations from November 2004 to September 2005; and as Banner President from
February 2004 to November 2005. Prior to joining our Company, Mr. Slade served
from 1999 to 2004 as a Managing Director of K-Mart, a nationwide retailer.
Mr. Wiseman was appointed Senior Vice President, Store Operations in
September 2005. Prior to that Mr. Wiseman was Senior Vice President, Discount
Operations, A&P Canada from 2004 to September 2005 and prior to that served as
District Manager/Vice President Retail Operations from 1999 to 2004 for Co-op
Atlantic, an operator based in New Brunswick, Canada.
Mr. Moss was appointed Vice President and Treasurer in February 2002.
Prior to that Mr. Moss was Vice President, Treasury Services and Risk Management
from 1992 to February 2002.
Ms. Sungela, CPA, was appointed Vice President and Corporate Controller
in November 2005. Ms. Sungela served as Vice President and Assistant Corporate
Controller from June 2004 to November 2005. Prior to joining our Company, Ms.
Sungela was North American Controller for Amersham Biosciences, a part of GE
Healthcare, from April 2002 to June 2004. Previously, she served as Director of
Accounting Policy for Honeywell, from June 1998 to January 2002.
The information required regarding our directors, executive
compensation and our beneficial ownership reporting compliance is contained
under the captions "Election of Directors", "Executive Compensation" and
"Section 16(a) Beneficial Ownership Reporting Compliance", respectively, in the
Proxy Statement for our 2006 Annual Meeting of Stockholders, to be filed on or
about May 24, 2006 ("Proxy Statement"), and is herein incorporated by reference.
11
<PAGE>
Audit Committee Financial Expert
The Board has determined that each member of the Audit Committee is
independent in accordance with the NYSE listing rules, the Company's Standards
of Independence and Rule 10A-3 of the Exchange Act. In addition, the Board has
determined that each member of the Audit Committee qualifies as an "audit
committee financial expert," as defined by the SEC.
Code of Business Conduct and Ethics
Our Company has adopted a Code of Business Conduct and Ethics
applicable to all employees. This Code is applicable to Senior Financial
Executives including the chief executive officer, chief financial officer and
chief accounting officer of our Company. A&P's Code of Business Conduct and
Ethics is available on the Company's Web site at www.aptea.com under "Corporate
Governance." Our Company intends to post on its web site any amendments to, or
waivers from, its Code of Business Conduct and Ethics applicable to Senior
Financial Executives.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP OF MORE THAN 5% OF THE COMPANY'S COMMON STOCK
The information required is contained in our Proxy Statement under the
heading "Security Ownership of Certain Beneficial Owners and Management", and is
herein incorporated by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required is contained in our Proxy Statement under the
heading "Certain Relationships and Transactions", and is herein incorporated by
reference.
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required is contained in our Proxy Statement under the
heading "Independent Registered Public Accounting Firm", and is herein
incorporated by reference.
12
<PAGE>
PART IV
ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) DOCUMENTS FILED AS PART OF THIS REPORT.
1) Financial Statements: The financial statements required by Item 8 are
included in the Fiscal 2005 Annual Report to Stockholders. The
following required items are herein incorporated by reference:
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity and
Comprehensive (Loss) Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
2) Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not required or do
not apply, or the required information is included elsewhere in the
Consolidated Financial Statements or Notes thereto.
3) Exhibits:
The following are filed as Exhibits to this Report:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2.1 Stock Purchase Agreement, dated as of July 19, 2005, by and among the Company, A&P
Luxembourg S.a.r.l., Metro Inc. and 4296711 Canada Inc. (incorporated herein by
reference to Exhibit 2.1 to Form 8-K filed on July 22, 2005)
3.1 Articles of Incorporation of The Great Atlantic & Pacific Tea Company, Inc., as
amended through July 1987 (incorporated herein by reference to Exhibit 3(a) to
Form 10-K filed on May 27, 1988)
3.2 By-Laws of The Great Atlantic & Pacific Tea Company, Inc., as amended and restated
through October 6, 2005 (incorporated herein by reference to Exhibit 3.1 to Form
8-K filed on October 11, 2005)
4.1 Indenture, dated as of January 1, 1991 between the Company and JPMorgan Chase Bank
(formerly The Chase Manhattan Bank as successor by merger to Manufacturers Hanover
Trust Company), as trustee (the "Indenture") (incorporated herein by reference to
Exhibit 4.1 to Form 8-K)
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
4.2 First Supplemental Indenture, dated as of December 4, 2001, to the Indenture,
dated as of January 1, 1991 between our Company and JPMorgan Chase Bank, relating
to the 7.70% Senior Notes due 2004 (incorporated herein by reference to Exhibit
4.1 to Form 8-K filed on December 4, 2001)
4.3 Second Supplemental Indenture, dated as of December 20, 2001, to the Indenture
between our Company and JPMorgan Chase Bank, relating to the 9 1/8% Senior Notes
due 2011 (incorporated herein by reference to Exhibit 4.1 to Form 8-K filed on
December 20, 2001)
4.4 Successor Bond Trustee (incorporated herein by reference to Exhibit 4.4 to Form
10-K filed on May 9, 2003)
4.5 Third Supplemental Indenture, dated as of August 23, 2005, to the Indenture
between the Company and Wilmington Trust Company (as successor to JPMorgan Chase
Bank) (incorporated herein by reference to Exhibit 4.1 to Form 8-K filed on August
23, 2005)
4.6 Fourth Supplemental Indenture, dated as of August 23, 2005, to the Indenture
between the Company and Wilmington Trust Company (as successor to JPMorgan Chase
Bank). (incorporated herein by reference to Exhibit 4.2 to Form 8-K filed on
August 23, 2005)
4.7 Credit Agreement dated as of November 15, 2005 between the Company and Bank of
America, N.A. as Administrative Agent and Collateral Agent, JPMorgan Chase Bank,
N.A. as Syndication Agent, Wachovia Bank, National Association as Documentation
Agent and Banc of America Securities LLC as Lead Arranger (incorporated herein by
reference to Exhibit 4.1 to Form 8-K filed on November 18, 2005 and Item 8.01 to
Form 8-K filed April 10, 2006)
10.1* Executive Employment Agreement, made and entered into as of the 15th day of
August, 2005, by and between the Company and Mr. Eric Claus (incorporated herein
by reference to Exhibit 10.1 to Form 8-K filed on September 9, 2005) and a technical
amendment as filed herein
10.2 Employment Agreement, made and entered into as of the 1st day of November, 2000,
by and between the Company and William P. Costantini (incorporated herein by
reference to Exhibit 10 to Form 10-Q filed on January 16, 2001) ("Costantini
Agreement")
10.3 Amendment to Costantini Agreement dated April 30, 2002 (incorporated herein by
reference to Exhibit 10.7 to Form 10-K filed on July 5, 2002)
10.4 Confidential Separation and Release Agreement by and between William P. Costantini
and The Great Atlantic & Pacific Tea Company, Inc. dated November 4, 2004
(incorporated herein by reference to Exhibit 10.4 to Form 10-Q filed on January 7,
2005)
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
10.5 Employment Agreement, made and entered into as of the 16th day of June, 2003, by
and between our Company and Brenda Galgano (incorporated herein by reference to
Exhibit 10.9 to Form 10-Q filed on October 17, 2003)
10.6 Employment Agreement, made and entered into as of the 24th day of February, 2002,
by and between our Company and Mitchell P. Goldstein (incorporated herein by
reference to Exhibit 10.8 to Form 10-K filed on July 5, 2002)
10.7 Letter Agreement dated September 6, 2005, between Mitchell P. Goldstein and our
Company (incorporated herein by reference to Exhibit 10.2 to Form 8-K filed on
September 9, 2005)
10.8 Employment Agreement, made and entered into as of the 2nd day of October, 2002, by
and between our Company and Peter Jueptner (incorporated herein by reference to
Exhibit 10.26 to Form 10-Q filed on October 22, 2002) ("Jueptner Agreement")
10.9 Amendment to Jueptner Agreement dated November 10, 2004 (incorporated herein by
reference to Exhibit 10.8 to Form 10-K filed on May 10, 2005)
10.10 Offer Letter dated the 18th day of September 2002, by and between our Company and
Peter Jueptner (incorporated herein by reference to Exhibit 10.10 to Form 10-Q
filed on January 10, 2003)
10.11 Employment Agreement, made and entered into as of the 14th day of May, 2001, by
and between our Company and John E. Metzger, as amended February 14, 2002
(incorporated herein by reference to Exhibit 10.13 to Form 10-K filed on July 5,
2002) ("Metzger Agreement")
10.12 Amendment to John E. Metzger Agreement dated October 25, 2004 (incorporated
herein by reference to Exhibit 10.12 to Form 10-K filed on May 10, 2005)
10.13* Employment Agreement, made and entered into as of the 25th day of January, 2006,
by and between our Company and Jennifer MacLeod, as filed herein
10.14 Employment Agreement, made and entered into as of the 1st day of March 2005, by
and between our Company and William J. Moss (incorporated herein by reference to
Exhibit 10.13 to Form 10-K filed on May 10, 2005)
10.15 Employment Agreement, made and entered into as of the 28th day of October, 2002,
by and between our Company and Brian Piwek, and Offer Letter dated the 23rd day of
October, 2002 (incorporated herein by reference to Exhibit 10.14 to Form 10-Q
filed on January 10, 2003) ("Piwek Agreement")
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
10.16 Amendment to Brian Piwek Agreement dated February 4, 2005 (incorporated herein by
reference to Exhibit 10.15 to Form 10-K filed on May 10, 2005)
10.17 Employment Agreement, made and entered into as of the 4th of January 2006, by and
between our Company and Melissa E. Sungela, (incorporated herein by reference to
Exhibit 10.17 to Form 10-Q filed on January 6, 2006)
10.18 Employment Agreement, made and entered into as of the 12th of September 2005, by
and between our Company and Paul Wiseman (incorporated herein by reference to
Exhibit 10.17 to Form 10-Q filed on October 18, 2005)
10.19 Employment Agreement, made and entered into as of the 2nd of December 2004, by and
between our Company and Allan Richards (incorporated herein by reference to
Exhibit 10.18 to Form 10-Q filed on October 18, 2005)
10.20 Employment Agreement, made and entered into as of the 2nd of December 2004, by and
between our Company and Stephen Slade (incorporated herein by reference to Exhibit
10.19 to Form 10-Q filed on October 18, 2005)
10.21 Supplemental Executive Retirement Plan effective as of September 1, 1997
(incorporated herein by reference to Exhibit 10.B to Form 10-K filed on May 27,
1998)
10.22 Supplemental Retirement and Benefit Restoration Plan effective as of January 1,
2001 (incorporated herein by reference to Exhibit 10(j) to Form 10-K filed on May
23, 2001)
10.23 1994 Stock Option Plan (incorporated herein by reference to Exhibit 10(e) to Form
10-K filed on May 24, 1995)
10.24 1998 Long Term Incentive and Share Award Plan (incorporated herein by reference to
Exhibit 10(k) to Form 10-K filed on May 19, 1999 and to Appendix B to the Proxy
Statement dated May 27, 2005)
10.25 Form of Stock Option Grant (incorporated herein by reference to Exhibit 10.20 to
Form 10-K filed on May 10, 2005)
10.26 Description of 2005 Turnaround Incentive Compensation Program (incorporated herein
by reference to Exhibit 10.21 to Form 10-K filed on May 10, 2005)
10.27 Form of Restricted Share Unit Award Agreement (incorporated herein by reference to
Exhibit 10.22 to Form 10-K filed on May 10, 2005)
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
10.28 1994 Stock Option Plan for Non-Employee Directors (incorporated herein by
reference to Exhibit 10(f) to Form 10-K filed on May 24, 1995)
10.29 2004 Non-Employee Director Compensation effective as of July 14, 2004
(incorporated herein by reference to Exhibit 10.15 to Form 10-Q filed on July 29,
2004)
10.30* Description of Management Incentive Plan (incorporated herein by reference to
Exhibit 10.26 to Form 10-K filed on May 10, 2005) and as filed herein
10.31 Asset Purchase Agreement, dated as of June 27, 2005, by and between the Company,
Ocean Logistics LLC and C&S Wholesale Grocers, Inc. (incorporated herein by
reference to Exhibit 10.38 to Form 10-Q filed on October 18, 2005)
10.32 Supply Agreement, dated as of June 27, 2005, by and between the Company and C&S
Wholesale Grocers, Inc. (incorporated herein by reference to Exhibit 10.39 to Form
10-Q filed on October 18, 2005)
10.33 Information Technology Transition Services Agreement by and between The Great
Atlantic and Pacific Tea Company, Limited ("A&P Canada") and Metro, Inc. entered
into on August 15, 2005 (incorporated herein by reference to Exhibit 10.40 to Form
10-Q filed on October 18, 2005)
10.34 Investor Agreement by and between A&P Luxembourg S.a.r.l., a wholly owned
subsidiary of the Company, and Metro, Inc. entered into on August 15, 2005
(incorporated herein by reference to Exhibit 10.41 to Form 10-Q filed on October
18, 2005)
10.35 Letter of Credit Agreement, dated as of October 14, 2005 between the Company and
Bank of America, N.A., as Issuing Bank, (incorporated herein by reference to
Exhibit 10.42 to Form 10-Q filed on October 18, 2005)
13* Fiscal 2005 Annual Report to Stockholders
14* Code of Business Conduct and Ethics
16 Letter on Change in Certifying Accountant (incorporated herein by reference to
Forms 8-K filed on September 18, 2002 and September 24, 2002, and Form 8-K/A filed
on September 24, 2002)
18 Preferability Letter Issued by PricewaterhouseCoopers LLP (incorporated herein by
reference to Exhibit 18 to Form 10-Q filed on July 29, 2004)
21* Subsidiaries of Registrant
23* Consent of Independent Registered Public Accounting Firm
</TABLE>
17
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
* Filed with this 10-K
18
<PAGE>
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedule
To the Stockholders and Board of Directors
of The Great Atlantic & Pacific Tea Company, Inc.:
Our audits of the consolidated financial statements, of management's
assessment of the effectiveness of internal control over financial reporting
and of the effectiveness of internal control over financial reporting referred
to in our report dated May 9, 2006 appearing in the Fiscal 2005 Annual Report
to Stockholders of The Great Atlantic & Pacific Tea Company, Inc. (which
report, consolidated financial statements and assessment are incorporated by
reference in this Annual Report on Form 10-K) also included an audit of the
financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
New York, New York
May 9, 2006
19
<PAGE>
SCHEDULE II
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED FEBRUARY 28, 2004, FEBRUARY 26, 2005, AND FEBRUARY 25, 2006
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions Additions
Allowance for Impact of Charged to Charged to
Bad Debts for Beginning Adoption of Costs & Other Foreign Ending
Year Ended Balance FIN 46-R Expenses Accounts Deductions (1) Adjustments (2) Exchange Balance
- -------------- ------------- ------------- ------------- ------------- -------------- --------------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Feb. 28, 2004 9,799 (4,200) 5,225 - (4,554) - 46 6,316
Feb. 26, 2005 6,316 - (1,745) - 1,072 - 70 5,713
Feb. 25, 2006 5,713 - 3,913 - (159) (2,461) 36 7,042
</TABLE>
<TABLE>
<CAPTION>
Additions Additions
Stock Loss Impact of Charged to Charged to
Reserve for Beginning Adoption of Costs & Other Foreign Ending
Year Ended Balance FIN 46-R Expenses Accounts Deductions Adjustments (2) Exchange Balance
- -------------- ------------- ------------- ------------- ------------- ------------ --------------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Feb. 28, 2004 8,081 - (1,147) - (251) - 109 6,792
Feb. 26, 2005 6,792 - 3,016 - - - 81 9,889
Feb. 25, 2006 9,889 - 5,437 - - (1,441) 48 13,933
</TABLE>
<TABLE>
<CAPTION>
Deferred Tax Additions Additions
Valuation Impact of Charged to Charged to
Allowance for Beginning Adoption of Costs & Other Foreign Ending
Year Ended Balance FIN 46-R Expenses Accounts Deductions (3) Exchange Balance
- -------------- ------------- ------------- ------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Feb. 28, 2004 161,495 - 67,682 - - - 229,177
Feb. 26, 2005 229,177 - 89,632 - - - 318,809
Feb. 25, 2006 318,809 - 18,652 - (260,441) - 77,020
</TABLE>
(1) Deductions to Allowance for Bad Debts represent write-offs of accounts
receivable balances.
(2) As discussed in Note 2 of our Consolidated Financial Statements for the
year ended February 25, 2006, we sold our Canadian operations on August 13,
2005 and as a result, the Canadian balances are no longer consolidated in
our Consolidated Balance Sheet at February 25, 2006.
(3) Deductions to the Deferred Tax Valuation Allowance represent utilization of
net operating loss carryforwards as a result of the sale of our Canadian
operations.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
(registrant)
Date: May 9, 2006 By: /s/ Brenda M. Galgano
------------------------------------------------
Brenda M. Galgano, Senior Vice President,
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and as of the date indicated.
/s/ Christian W.E. Haub Executive Chairman
- ------------------------------------
Christian W.E. Haub
/s/ John D. Barline Director
- ------------------------------------
John D. Barline
/s/ Jens-Jurgen Bockel Director
- ------------------------------------
Jens-Jurgen Bockel
/s/ Bobbie A. Gaunt Director
- ------------------------------------
Bobbie Gaunt
/s/ Helga Haub Director
- ------------------------------------
Helga Haub
/s/ Dan P. Kourkoumelis Director
- ------------------------------------
Dan P. Kourkoumelis
/s/ Edward Lewis Director
- ------------------------------------
Edward Lewis
/s/ Richard L. Nolan Director
- ------------------------------------
Richard L. Nolan
/s/ Maureen B. Tart-Bezer Director
- ------------------------------------
Maureen B. Tart-Bezer
The above-named persons signed this report on behalf of the registrant on May 9,
2006.
/s/ Melissa E. Sungela Vice President, Corporate Controller
- ------------------------------------
Melissa E. Sungela May 9, 2006
21
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>2
<FILENAME>ex31claus.txt
<DESCRIPTION>EXHIBIT 31.1 ERIC CLAUS CERTIFICATION
<TEXT>
<PAGE>
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
SECTION 302 CERTIFICATION
I, Eric Claus, certify that:
1. I have reviewed this annual report on Form 10-K of The Great Atlantic &
Pacific Tea Company, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this annual report our conclusion about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this annual report based on such evaluation; and
d) disclosed in this annual report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Eric Claus Date: May 9, 2006
- --------------
Eric Claus
President and
Chief Executive Officer
22
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>3
<FILENAME>ex31galgano.txt
<DESCRIPTION>EXHIBIT 31.2 BRENDA GALGANO CERTIFICATION
<TEXT>
<PAGE>
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
SECTION 302 CERTIFICATION
I, Brenda M. Galgano, certify that:
1. I have reviewed this annual report on Form 10-K of The Great Atlantic &
Pacific Tea Company, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this annual report our conclusion about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this annual report based on such evaluation; and
d) disclosed in this annual report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Brenda M. Galgano Date: May 9, 2006
- ---------------------
Brenda M. Galgano
Senior Vice President,
Chief Financial Officer
23
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>4
<FILENAME>ex32.txt
<DESCRIPTION>EXHIBIT 32 CERTIFICATION
<TEXT>
<PAGE>
Exhibit 32
CERTIFICATION ACCOMPANYING PERIODIC REPORT
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SS. 1350)
The undersigned, Eric Claus, President and Chief Executive Officer of The Great
Atlantic & Pacific Tea Company, Inc. ("Company"), and Brenda M. Galgano, Senior
Vice President, Chief Financial Officer of the Company, each hereby certifies
that (1) the Annual Report of the Company on Form 10-K for the period ended
February 25, 2006 fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934 and (2) the information contained in the
Report fairly presents, in all material respects, the financial condition and
the results of operations of the Company.
Dated: May 9, 2006 /s/ Eric Claus
--------------
Eric Claus
President
and
Chief Executive Officer
Dated: May 9, 2006 /s/ Brenda M. Galgano
---------------------
Brenda M. Galgano
Senior Vice President,
Chief Financial Officer
24
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>5
<FILENAME>ex13annualreport.txt
<DESCRIPTION>ANNUAL REPORT TO STOCKHOLDERS FOR FISCAL 2005
<TEXT>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
FISCAL 2005
ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
TABLE OF CONTENTS
Executive Chairman Letter to Stockholders................................... 3
President and Chief Executive Officer Letter to Stockholders................ 5
Management's Discussion and Analysis........................................ 8
Consolidated Statements of Operations....................................... 52
Consolidated Statements of Stockholders' Equity
and Comprehensive (Loss) Income...................................... 53
Consolidated Balance Sheets................................................. 54
Consolidated Statements of Cash Flows....................................... 55
Notes to Consolidated Financial Statements.................................. 56
Management's Annual Report on Internal Control over Financial Reporting..... 122
Report of Independent Registered Public Accounting Firm..................... 123
Five Year Summary of Selected Financial Data................................ 125
Executive Officers.......................................................... 127
Board of Directors.......................................................... 127
Stockholder Information..................................................... 128
COMPANY PROFILE
- ---------------
The Great Atlantic & Pacific Tea Company, Inc. ("We," "Our," "Us" or "our
Company"), based in Montvale, New Jersey, operates conventional supermarkets,
combination food and drug stores, and limited assortment food stores in 9 U.S.
states and the District of Columbia under the A&P(R), Waldbaum's(TM), The Food
Emporium(R), Super Foodmart, Super Fresh(R), Farmer Jack(R), Sav-A-Center(R) and
Food Basics(R) trade names.
2
<PAGE>
EXECUTIVE CHAIRMAN LETTER TO STOCKHOLDERS
- -----------------------------------------
To Our Stockholders:
Fiscal 2005 was a year of momentous and positive change for A&P, as we
took decisive actions to strengthen our financial position, reduce operating
costs, and launch dynamic retail strategies to restore profitability and
stimulate growth.
o Through the successful divestiture of our Canadian operations completed in
August to Metro, Inc., we realized the substantial value of that business,
built over the past decade. In addition to the cash proceeds that
transformed our balance sheet, we gained a significant investment position
in the new combined entity, giving A&P a meaningful stake in one of the
most profitable and growth-oriented retail enterprises in North America.
o We moved to upgrade the quality and lower the cost of logistical support of
our U.S. store network, by extending our business relationship with C&S
Wholesale Grocers, Inc. to encompass virtually all distribution activity
and large scale volume purchasing of goods.
o We reviewed our organization and administration, producing substantial
reductions that aligned our cost structure to the revenue base of the new
A&P, following the Canadian sale and the strategic closure of
underperforming U.S. stores during the year.
The sale of A&P Canada also fostered a positive change in our
leadership structure. Effective August 15, 2005, I became Executive Chairman of
the Board, fully assuming long-range strategic leadership of the Company; and
former A&P Canada CEO Eric Claus became President and Chief Executive Officer,
with full responsibility for the day to day operation of A&P.
Operating through his new Executive Management Team, Eric completed the
administrative reductions initiated earlier in the year; centralized direction
of the business at the headquarters level, and took immediate steps to upgrade
operations and merchandising, and improve our every-day pricing and promotional
appeal.
The combined impact of these cost reduction, reorganization and
operating measures turned the tide of our results during the second half of
Fiscal 2005, as we posted our best identical stores sales increases in many
quarters, and a corresponding improvement in profit from store operations.
In December 2005, our Board of Directors endorsed a comprehensive
strategic operating plan submitted by the new Executive Management Team.
That plan combines dynamic retail strategies with strict cost
management, to return A&P to sustainable profitability by Fiscal 2007, steadily
grow our consumer franchise and market share, and position the business to take
advantage of suitable growth opportunities going forward. Specific elements of
the strategic plan, our ongoing results and future goals for the Company will be
addressed by Eric Claus in the accompanying letter that follows.
3
<PAGE>
Early in Fiscal 2006, our Board of Directors approved the payment of a
special dividend in the amount of $300 million which was distributed to all our
stockholders in April. This sharing of proceeds from the Canadian divestiture
with investors reflected both our appreciation of their ongoing support, and
growing confidence in our turnaround and growth prospects.
By virtue of our decisive actions in the past year, our new leadership
and our exciting retail strategies, it is my belief that we are better
positioned than ever to embrace the developing sea changes in both the nature
and structure of our industry, and convert them to profitable opportunities for
A&P in North America.
Finally, I want to pay special tribute to our Sav-A-Center management
team and associates in New Orleans. As the result of their commitment and
fortitude in the wake of Hurricane Katrina's terrible devastation last fall, we
now have 23 stores open and serving grateful customers who remained in their
hard-hit communities, and those returning to them. I cannot overstate our
admiration for this intrepid team, whose amazing accomplishment has truly
inspired us all.
In closing, my thanks to all of our key stakeholders - our customers,
employees, suppliers and stockholders - for their ongoing support through
challenging times of change, as we work to realize both our immediate objectives
and the long-range success of the New A&P. I also want to express my thanks to
our Board of Directors for their diligent participation and strong support
throughout the planning and execution of our strategic restructuring.
Sincerely,
CHRISTIAN HAUB,
Executive Chairman
4
<PAGE>
PRESIDENT AND CHIEF EXECUTIVE OFFICER LETTER TO STOCKHOLDERS
- ------------------------------------------------------------
To Our Stockholders:
This is my first year-end address as Chief Executive Officer of A&P,
and I'm honored to be entrusted with leadership at such an exciting time for our
Company.
Many difficult decisions and much hard work created the opportunity we
have at A&P today, and my thanks go to Christian Haub and our Board of Directors
for their courageous and determined actions, and for their vote of confidence in
our new Executive Management Team.
I commend our new team and all of our associates, who despite
significant organizational changes following our midyear transition, remained
focused on the business and revitalized our key operating results in the second
half. This was a tall order for our people, and they responded admirably.
In those months, we rapidly enforced fundamental operating, purchasing
and merchandising disciplines, and curtailed activities and attached costs that
had no direct bearing on the retail business.
THE ROAD AHEAD
- --------------
Our Strategic Plan is designed to significantly improve our results to
meet stockholders' expectations through Fiscal 2007. We are focused on growth
and expansion - rooted in three overarching objectives - build sales profitably,
reduce costs, and by Fiscal 2008, improve at least 75% of our store base to
prototype standards in three retail formats: Fresh, Discount and Gourmet.
BUILD SALES PROFITABLY
o Our new senior management team understands and is committed to its
accountability for top and bottom line results.
o We are negotiating more vigorously with product vendors, both directly and
through C&S Wholesale Grocers, to significantly lower our cost of goods
across the board. Our goal is to increase sales and direct product
profitability, by serving as the most efficient purchasing agent for our
customers. The lower cost of goods will also support more aggressive
pricing and sharper ad specials on popular items without suppressing
margins - to build profitable sales.
o We will support those efforts on the Operations side by stressing the
fundamental best practices - clean, well organized stores, courteous and
professional associates, and store managers visible to employees and
customers on the sales floor.
o Comprehensive training will be delivered to the majority of our store
associates in Fiscal 2006, as we roll out our "Make It Personal" customer
service program across the Company.
5
<PAGE>
REDUCE COSTS
o We lowered overheads by approximately $50 million in Fiscal 2005 through
the reduction of administrative and certain operating positions and other
expenses.
o In addition to the vigorous actions we are taking with vendors to continue
to lower our costs on behalf of our customers, we will likewise continue in
fiscal year 2006 to be dedicated to lowering our store operating, general
and administrative overheads.
BRING STORE BASE TO STANDARD
o Our Board of Directors has approved a three-year capital development plan
providing the funds necessary to develop our Fresh, Discount and Gourmet
store formats in appropriate locations.
o Our innovative FRESH STORE prototype - which sets our new standards for
natural, organic, prepared and specialty foods along with everyday grocery,
general merchandise and pharmacy offerings - combines the best elements of
our former profitable Canadian format with those of our initial U.S.
examples. It was launched in March in Midland Park, N.J. to a very positive
customer and media response, and has maintained a consistent double-digit
year-over-year sales increase. We will convert a significant number of
stores to this format from Fiscal 2006 through Fiscal 2008.
o We have totally revamped the look, product assortment and merchandising of
our DISCOUNT FOOD BASICS format. We are convinced of the ability of this
attractive, well-maintained, rewarding-to-shop discount supermarket to
succeed in many U.S. markets as our original Food Basics operation did in
Canada. We recently opened our totally new Food Basics prototype in
Glassboro, N.J., and the shopper response and sales performance have borne
out our confidence in the concept. As with our Fresh concept, we will
convert the appropriate number of stores to this prototype Discount format
from Fiscal 2006 through Fiscal 2008.
o Later this year, we will begin elevating our FOOD EMPORIUM business to
world class levels in New York City by taking our menu, services and store
design to an entirely new level. Our vision is to distinguish this
venerable gourmet brand as the premier destination for fine foods.
o At this writing, we are in the process of unveiling an aggressive,
value-oriented marketing initiative for our FARMER JACK operations in
Michigan, underlining our renewed commitment to that marketplace. Recalling
prior tradition and success as Detroit's Home Town Grocer, our "Jack is
Back" launch will rekindle the "Farmer Jack Savings Time" aura that still
resonates with the area's quality-and-value-conscious shoppers. We have
already seen financial improvement at Farmer Jack, due in part to the cost
benefits of our amended labor agreement there. We thank our union
associates for demonstrating their commitment in that way, and are joining
with them to usher in a great new era for customers and workers alike.
The fresh thinking now transforming our business also includes exciting
marketing developments that we are applying across A&P formats and store
banners.
6
<PAGE>
In New York City, its outer boroughs and on Long Island, customers of
THE FOOD EMPORIUM, and more recently our WALDBAUM'S stores, are now enjoying the
added convenience of ONLINE SHOPPING. This is a popular and growing element of
our customer service offer that we intend to expand across operations over time.
These, and the additional improvements and innovations to come, are
aimed at recreating the unshakeable bond with consumers that John and George
Hartford forged so many decades ago, along the way to building in A&P the
greatest retail enterprise of their era. Our go-to-market strategies, and the
backstage efforts supporting them, are aligned behind that traditional yet
ever-timely principle.
Despite the many challenges ahead of us, I am confident about what's in
store for A&P and proud to be part of it. Our assets include a strong balance
sheet, improving results, irreplaceable locations, talented and committed
leadership, dedicated associates, and targeted retail formats appealing to
specific and profitable customer segments.
Our plan is simple yet strategically sound. It has been communicated
throughout the Company, as has our determination to see it through. Our ultimate
vision is to restore The Great A&P to its rightful position as a leader - where
"FRESH THINKING SINCE 1859" not only defines an illustrious past, but ensures a
promising future.
With the essential ingredients for success in place, it's all up to us,
and I look forward to working with my team, and all of our associates, in
achieving it.
Sincerely,
ERIC CLAUS
President and Chief Executive Officer
7
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
- ------------
The following Management's Discussion and Analysis is intended to help
the reader understand the financial position, operating results, and cash flows
of The Great Atlantic and Pacific Tea Company, Inc. It should be read in
conjunction with our financial statements and the accompanying notes ("Notes").
It discusses matters that Management considers relevant to understanding the
business environment, financial position, results of operations and our
Company's liquidity and capital resources. These items are presented as follows:
o Basis of Presentation - a discussion of our Company's fiscal year-end.
o Overview -- a general description of our business; the value drivers of
our business; measurements; opportunities; challenges and risks; and
initiatives.
o 2006 Outlook -- a discussion of certain trends or business initiatives
for the upcoming year that Management wishes to share with the reader
to assist in understanding the business.
o Review of Continuing Operations and Liquidity and Capital Resources - a
discussion of results for fiscal 2005 and 2004, significant business
initiatives, current and expected future liquidity and the impact of
various market risks on our Company.
o Market Risk - a discussion of the impact of market changes on our
consolidated financial statements.
o Critical Accounting Estimates - a discussion of significant estimates
made by Management.
o Impact of New Accounting Pronouncements - a discussion of authoritative
pronouncements that have been or will be adopted by our Company.
BASIS OF PRESENTATION
- ---------------------
Our fiscal year ends on the last Saturday in February. Fiscal 2005
ended February 25, 2006, fiscal 2004 ended February 26, 2005, and fiscal 2003
ended February 28, 2004. Fiscal 2005 and fiscal 2004 were each comprised of 52
weeks, and fiscal 2003 was comprised of 53 weeks. Except where noted, all
amounts are presented in millions, and all net income (loss) per share data
presented is both basic and diluted.
8
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
OVERVIEW
- --------
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., based in Montvale, New
Jersey, operates conventional supermarkets, combination food and drug stores and
discount food stores in 9 U.S. states and the District of Columbia. Our
Company's business consists strictly of our retail operations, which totaled 405
stores as of February 25, 2006.
Commencing in the second half of fiscal 2005, our UNITED STATES retail
operations are now organized in three regions: North Region, operating A&P
supermarkets in New York and Northern New Jersey, The Food Emporium in
Westchester County, N.Y, A&P/Super Foodmart stores in Connecticut, and all Food
Basics discount stores; Central Region, operating all Waldbaum's supermarkets,
The Food Emporium in Manhattan, and the Farmer Jack supermarkets in Michigan;
and South Region, operating Super Fresh supermarkets in Baltimore and
Philadelphia, A&P supermarkets in Central New Jersey and Sav-A-Center
supermarkets in the greater New Orleans market.
Focused operating and merchandising improvements combined with the
continued reduction of operating costs resulted in further progress for A&P.
Alongside these systemic improvements that remain under way, our
Company launched outstanding examples of our future fresh stores to enthusiastic
customer responses in New Jersey and Baltimore as well as in New Orleans, where
we, at the end of March 2006, have 23 stores fully operative and thriving as
they serve that recovering marketplace.
Perhaps most notable as an indicator of our retail future was the
unveiling in February of our new-generation fresh store, in Midland Park, New
Jersey. Combining the best Fresh product and service elements previously
introduced in the U.S. with those applied so successfully in our former Canadian
operations, this formula has produced spectacular sales gains at that location,
while generating considerable word-of-mouth and media attention in the market.
The success of our newest Fresh remodels validates the prototype
Midland Park design as the general baseline for our future Fresh store rollout,
which combined with our gourmet and discount strategies, will result in a
comprehensive and profitable three-tier marketing thrust to be rolled out over
the next three years. We are on track with an aggressive capital development
program that is consistent with our three-year strategic plan.
Across the business, we continued driving intensive improvements - in
merchandising, we upgraded, re-priced and fine-tuned product assortments to
combine customer appeal with greater efficiency; while in operations, we
continued to standardize best practices and improve our service levels.
We are making significant progress in improving our price and value
image with consumers, through more aggressive and strategic weekly ad features;
and the steady improvement of pricing levels, through our Temporary Price
Reduction ("TPR") program.
The careful balance of operating and merchandising improvements,
expense control measures and retail pricing adjustments is monitored closely by
senior management, to ensure both steadily improving results, and a more
appealing and satisfying shopping experience for customers.
9
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
We are aggressively reducing our cost of goods through auctioning,
strategic purchasing changes with our vendors and volume buying with our supply
and logistics provider, C&S Wholesale Grocers.
On the administrative side, the personnel reduction and reorganization
initiative begun earlier in the year was essentially completed in the fourth
quarter, as we further consolidated management and administration, and completed
the conversion of our field operations from the previous banner orientation to a
more centralized framework.
This action dovetailed with the consolidation of our headquarters
management and support personnel in Montvale, New Jersey. In addition to the
significant cost savings generated, our business will now realize the clear
benefit of a cohesive team under one roof.
2006 OUTLOOK
- ------------
The ongoing improvement of our results, via the key actions described
in our strategic plan, remains management's principal focus and objective for
the first half of Fiscal 2006 and beyond.
The resolution of previous organizational and logistical issues has
positioned the company to sustain sales and earnings improvement, with full
emphasis on executing our marketing and retail development plans, augmented by
ongoing cost control disciplines throughout the company.
Key elements are as follows:
o Move forward with the conversion of appropriate locations to the Fresh
format prototype successfully launched in Midland Park, New Jersey in the
fourth quarter;
o Launch the first example of our upgraded discount Food Basics concept;
o Complete development of our new generation Gourmet concept, for
introduction later in the year under our Food Emporium Gourmet banner in
New York City;
o Successfully complete the introduction of our new merchandising strategy
for Farmer Jack in Michigan, reiterating our commitment to the market, and
a new freshness and value proposition for area food shoppers.
o Continue to improve our every-day grocery pricing and value image, through
more efficient buying and distribution practices, promotional programs, and
the expansion of our TPR program.
Supporting those development efforts is ongoing adherence to cost
control, and further reduction wherever possible without compromising the growth
and quality of our business. We will continue to seek additional means of
improving labor productivity in cooperation with our people and their labor
unions, and by seeking all reasonable opportunities to lower administrative,
advertising, occupancy and other operating expenses.
10
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
In summary, we are encouraged by the progress we have generated over
the past two quarters. More importantly, we are confident that the strategies we
are executing provide ample potential for continued and hopefully accelerated
improvement.
We fully believe that our improving operations, merchandising and store
development will enable us to continue elevating our competitive profile and
operating performance in Fiscal 2006 and beyond.
Various factors could cause us to fail to achieve these goals. These
include, among others, the following:
o Actions of competitors could adversely affect our sales and future profits.
The grocery retailing industry continues to experience fierce competition
from other food retailers, super-centers, mass merchandisers, warehouse
clubs, drug stores, dollar stores and restaurants. Our continued success is
dependent upon our ability to effectively compete in this industry and to
reduce operating expenses, including managing health care and pension costs
contained in our collective bargaining agreements. The competitive
practices and pricing in the food industry generally and particularly in
our principal markets may cause us to reduce our prices in order to gain or
maintain share of sales, thus reducing margins.
o Changes in the general business and economic conditions in our operating
regions, including the rate of inflation, population growth, the rising
prices of oil and gas, the nature and extent of continued consolidation in
the food industry and employment and job growth in the markets in which we
operate, may affect our ability to hire and train qualified employees to
operate our stores. This would negatively affect earnings and sales growth.
General economic changes may also affect the shopping habits and buying
patterns of our customers, which could affect sales and earnings. We have
assumed economic and competitive situations will not worsen in fiscal 2006
and 2007. However, we cannot fully foresee the effects of changes in
economic conditions, inflation, population growth, the rising prices of oil
and gas, customer shopping habits and the consolidation of the food
industry on our business.
o Our capital expenditures could differ from our estimate if we are
unsuccessful in acquiring suitable sites for new stores, or if development
and remodel costs vary from those budgeted.
o Our ability to achieve our profit goals will be affected by (i.) our
success in executing category management and purchasing programs that we
have underway, which are designed to improve our gross margins and reduce
product costs while making our product selection more attractive to
consumers, (ii.) our ability to achieve productivity improvements and
shrink reduction in our stores, (iii.) our success in generating
efficiencies in our supporting activities, and (iv.) our ability to
eliminate or maintain a minimum level of supply and/or quality control
problems with our vendors.
11
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
o The vast majority of our employees are members of labor unions. While we
believe that our relationships with union leaderships and our employees are
satisfactory, we operate under collective bargaining agreements which
periodically must be renegotiated. In the coming year, we have several
contracts expiring and under negotiation. In each of these negotiations
rising health care and pension costs will be an important issue, as will
the nature and structure of work rules. We are hopeful, but cannot be
certain, that we can reach satisfactory agreements without work stoppages
in these markets. However, the actual terms of the renegotiated collective
bargaining agreements, our future relationships with our employees and/or a
prolonged work stoppage affecting a substantial number of stores could have
a material effect on our results.
o The amount of contributions made to our pension and multi-employer plans
will be affected by the performance of investments made by the plans and
the extent to which trustees of the plans reduce the costs of future
service benefits.
o Our Company currently acquires a significant amount of our saleable
inventory from one supplier, C&S Wholesale Grocers, Inc. Although there are
a limited number of distributors that can supply our stores, we believe
that other suppliers could provide similar product on comparable terms.
However, a change in suppliers could cause a delay in distribution and a
possible loss of sales, which would affect operating results adversely.
o We have estimated our exposure to claims, administrative proceedings and
litigation and believe we have made adequate provisions for them, where
appropriate. Unexpected outcomes in both the costs and effects of these
matters could result in an adverse effect on our earnings.
Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. Accordingly, actual events and results may vary significantly from
those included in or contemplated or implied by forward-looking statements made
by us or our representatives.
REVIEW OF CONTINUING OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------------------------------------------
Our consolidated financial information presents the results related to
our operations of discontinued businesses separate from the results of our
continuing operations. Both the discussion and analysis that follows focus on
continuing operations.
As further discussed in Note 2- Divestiture of Our Business in Canada
and Stores in the Midwest, we sold our Canadian operations to Metro, Inc. at the
close of business on August 13, 2005. Therefore, comparative information
relating to our Canadian business that follows was comprised of 24 weeks and 52
weeks during fiscal years 2005 and 2004, respectively.
12
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
FISCAL 2005 COMPARED WITH FISCAL 2004
Sales for fiscal 2005 were $8.7 billion, compared with $10.9 billion
for fiscal 2004; comparable store sales, which includes stores that have been in
operation for two full fiscal years and replacement stores, increased 0.5%. Loss
from continuing operations reversed from $184.0 million for fiscal 2004 to
income from continuing operations of $390.4 million for fiscal 2005 primarily
due to the gain on sale of our Canadian operations of $912.1 million. Net income
per share - basic and diluted for fiscal 2005 was $9.74 and $9.64, respectively,
compared to a net loss per share - basic and diluted of $4.88 for fiscal 2004.
<TABLE>
<CAPTION>
Favorable /
Fiscal 2005 Fiscal 2004 (Unfavorable) % Change
----------- ------------ ------------- --------
<S> <C> <C> <C> <C>
Sales $ 8,740.3 $ 10,854.9 $ (2,114.6) (19.5%)
Increase in comparable store sales 0.5% 0.1% NA NA
Gain on sale of Canadian operations 912.1 - 912.1 100.0
Income (loss) from continuing
operations 390.4 (184.0) 574.4 >100.0
Income (loss) from discontinued
operations 2.2 (4.1) 6.3 >100.0
Net income (loss) 392.6 (188.1) 580.7 >100.0
Net income (loss) per share - basic 9.74 (4.88) 14.62 >100.0
Net income (loss) per share - diluted 9.64 (4.88) 14.52 >100.0
</TABLE>
SALES
Sales for fiscal 2005 of $8,740.3 million decreased $2,114.6 million or
19.5% from sales of $10,854.9 million for fiscal 2004. The lower sales were due
to a decrease in U.S. sales of $301.2 million and a decrease in Canadian sales
of $1,813.4 million. The following table presents sales for each of our
reportable operating segments for fiscal 2005 and fiscal 2004:
Fiscal 2005 Fiscal 2004 Decrease % Change
----------- ----------- ---------- --------
United States $ 7,016.4 $ 7,317.6 $ (301.2) (4.1%)
Canada 1,723.9 3,537.3 (1,813.4) (51.3)
---------- ----------- ---------- -----
Total $ 8,740.3 $ 10,854.9 $ (2,114.6) (19.5%)
========== =========== ========== =====
The following details the dollar impact of several items affecting the
decrease in sales by reportable operating segment from fiscal 2004 to fiscal
2005:
<TABLE>
<CAPTION>
Impact of Impact of Foreign Comparable Impact of
New Closed Exchange Store Hurricane
Stores Stores Rate Sales Katrina Other Total
--------- --------- --------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
United States $ 25.2 $ (330.0) $ - $ 30.7 $ (36.3) $ 9.2 $ (301.2)
Canada 47.6 (65.1) 162.0 1.6 - (1,959.5) (1,813.4)
------- -------- ------ ------ ------- ---------- ----------
Total $ 72.8 $ (395.1) $162.0 $ 32.3 $ (36.3) $ (1,950.3) $ (2,114.6)
======= ======== ====== ====== ======= ========== ==========
</TABLE>
The decrease in U.S. sales was primarily attributable to the closing of
67 stores since the beginning of fiscal 2004, of which 49 were closed in fiscal
2005 primarily in the Midwest, decreasing sales by $330.0 million, and the
decrease in sales caused by the overall impact of Hurricane Katrina of $36.3
million. These decreases were partially offset by the opening or re-opening of
18 new stores since the beginning of fiscal 2004, of which 2 were opened or
re-opened in fiscal 2005, increasing sales by $25.2 million, the increase in
comparable store sales for fiscal 2005 of $30.7 million or 0.5% as compared with
fiscal 2004, and the increase in sales relating to an information technology
services agreement with Metro, Inc. of $9.2 million.
13
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
The decrease in Canadian sales was primarily attributable to the sale
of our Canadian operations that resulted in the inclusion of 24 weeks of sales
during fiscal 2005 as compared to 52 weeks during fiscal 2004, decreasing sales
by $1,959.5 million, and the closure of 14 stores since the beginning of fiscal
2004, of which 1 was closed in fiscal 2005, decreasing sales by $65.1 million.
These decreases were partially offset by the opening or re-opening of 9 stores
since the beginning of fiscal 2004, of which 1 was opened or re-opened in fiscal
2005, increasing sales by $47.6 million, the favorable effect of the Canadian
exchange rate, which increased sales by $162.0 million, and the increase in
comparable store sales for fiscal 2005 of $1.6 million or 0.1% for
Company-operated stores and franchised stores combined, as compared to fiscal
2004.
Average weekly sales per supermarket for the U.S. were approximately
$330,000 for fiscal 2005 versus $323,100 for the corresponding period of the
prior year, an increase of 2.1% primarily due to the impact of closing smaller
stores and positive comparable store sales. Average weekly sales
per supermarket for Canada were approximately $298,600 for fiscal 2005 versus
$285,900 for the corresponding period of the prior year, an increase of 4.4%.
This increase was primarily due to the increase in the Canadian exchange rate
and higher comparable store sales.
GROSS MARGIN
- ------------
The following table presents gross margin dollar results and gross
margin as a percentage of sales by reportable operating segment for fiscal 2005
as compared to fiscal 2004. Gross margin as a percentage of sales increased 65
basis points to 28.67% for fiscal 2005 from 28.02% for fiscal 2004 primarily
caused by the sale of our Canadian operations which had a lower gross margin
rate. We believe the impact on margin for changes in costs and special
reductions was not significant.
<TABLE>
<CAPTION>
Fiscal 2005 Fiscal 2004
------------------------------------ ------------------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
United States $ 2,084.4 29.71% $ 2,177.9 29.76%
Canada 420.7 24.40 863.2 24.40
---------- ----- ---------- ------
Total $ 2,505.1 28.67% $ 3,041.1 28.02%
========== ===== ========== ======
</TABLE>
The following table details the dollar impact of several items
affecting the gross margin dollar decrease from fiscal 2004 to fiscal 2005:
Gross Margin
Sales Volume Rate Exchange Rate Other Total
------------ ------ ------------- ------- ---------
United States $ (89.6) $ (3.9) $ - $ - $ (93.5)
Canada (58.8) 4.5 32.9 (421.1) (442.5)
-------- ------ ----- -------- -------
Total $ (148.4) $ 0.6 $32.9 $(421.1) $(536.0)
======== ====== ===== ======== =======
14
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
- ---------------------------------------------------
The following table presents store operating, general and
administrative expense ("SG&A") by reportable operating segment, in dollars and
as a percentage of sales for fiscal 2005 compared with fiscal 2004. SG&A expense
was $2,825.7 million or 32.33% for fiscal 2005 as compared to $3,114.1 million
or 28.69% for fiscal 2004.
Fiscal 2005 Fiscal 2004
--------------------------- ---------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
---------- -------------- ---------- --------------
United States $ 2,462.2 35.09% $ 2,307.2 31.53%
Canada 363.5 21.09 806.9 22.81
---------- ----- ---------- -----
Total $ 2,825.7 32.33% $ 3,114.1 28.69%
========== ===== ========== =====
Included in SG&A in the U.S. for fiscal 2005 were certain charges as follows:
o costs relating to the closing of our owned warehouses in Edison, New Jersey
and Bronx, New York of $83.2 million (119 basis points) that will not be
sold as part of the sale of our U.S. distribution operations and some
warehouse facilities and related assets to C&S Wholesale Grocers as
discussed in Note 3 - Sale of Our U.S. Distribution Operations and
Warehouses;
o costs relating to the closure of stores in the Midwest as discussed in Note
8 - Asset Disposition Initiatives of $114.0 million (163 basis points);
o costs relating to future occupancy costs for four stores closed in
connection with Hurricane Katrina, the write-off of an asset for a
favorable lease that was recorded for one of these stores that is now
closed, our insurance deductible, and other related hurricane costs as
discussed in Note 4 - Hurricane Katrina and Impact on U.S. Business of
$19.0 million (27 basis points);
o costs relating to the impairment of unrecoverable assets of $17.7 million
(25 basis points) as discussed in Note 6 - Valuation of Long-Lived Assets;
o costs relating to an administrative reorganization during fiscal 2005 of
$17.6 million (25 basis points);
o costs relating to the consolidation of our operating offices in line with
our smaller operations in the U.S. of $14.8 million (21 basis points);
o costs relating to the cash tender offer completed during fiscal 2005 as
discussed in Note 9 - Indebtedness of $33.0 million (47 basis points);
o costs relating to the settlement of our net investment hedge as discussed
in Note 17 - Hedge of Net Investment in Foreign Operations of $15.4 million
(22 basis points); and
o costs relating to workers compensation state assessment charges as
discussed in Note 1 - Summary of Significant Accounting Policies of $9.7
million (14 basis points).
Partially offset by:
o recoveries from our VISA/Mastercard antitrust class action litigation as
discussed in Note 18 - Commitments and Contingencies of $1.5 million (2
basis points).
o net gains on real estate activity of $14.9 million (21 basis points) during
fiscal 2005.
15
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
SG&A in the U.S. for fiscal 2004 also included certain charges as follows:
o costs relating to the impairment of unrecoverable assets of $34.7 million
(47 basis points);
o costs relating to severance and other charges of $10.7 million (15 basis
points) relating to an administrative reorganization; and
o costs relating to an increase in our workers' compensation and general
liability reserves of $27.2 million (37 basis points) in response to both
adverse development of prior years' costs and other developments including
a continuing trend of rising costs.
Partially offset by:
o a reduction in the vacation accrual of $8.6 million (12 basis points) due
to a change in the vacation entitlement practice. Prior to the change in
the vacation operating policy, non-union employees were fully vested on the
first day of the calendar year. As such under SFAS No. 43, "Compensated
Absences", our Company accrued vacation as it was earned by non-union
employees (earned in the calendar year immediately preceeding the January 1
vesting date). Under the new vacation operating policy, non-union employees
vest over the year that vacation is earned, and accordingly, our Company
recorded a one-time adjustment to reduce the liability.
o net gains on real estate activity of $22.5 million (31 basis points) during
fiscal 2005.
Excluding the items listed above, SG&A within our core U.S. operations
as a percentage of sales decreased by 26 basis points during fiscal 2005 as
compared to fiscal 2004 primarily due to a reduction in administrative expenses
of $49.5 million, a reduction in advertising costs of $9.9 million, and a
reduction in depreciation expense of $9.9 million partially offset by an
increase in utilities expense of $15.9 million due to rising costs of oil and
gas.
The decrease in SG&A in Canada of $443.4 million (172 basis points) is
primarily due to the inclusion of 24 weeks of costs during fiscal 2005 as
compared to 52 weeks of costs during fiscal 2004, in addition to (i.) lower
depreciation expense of $21.6 million as the Canadian assets were sold during
fiscal 2005 as discussed in Note 2 - Divestiture of Our Business in Canada and
Stores in the Midwest, and (ii.) the absence of costs relating to the settlement
of the Canadian lawsuit of $24.9 million which were included in fiscal 2004.
16
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
During fiscal 2005 and fiscal 2004, we recorded impairment losses on
long-lived assets as follows:
<TABLE>
<CAPTION>
Fiscal 2005 Fiscal 2004
----------------------------- -----------------------------
U.S. Canada Total U.S. Canada Total
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Impairments due to closure or conversion in the
normal course of business $ 9,851 $ 506 $10,357 $ 6,000 $ 709 $ 6,709
Impairments due to unrecoverable assets 17,728 - 17,728 34,688 - 34,688
Impairments due to closure of stores impacted by
Hurricane Katrina (1) 6,090 - 6,090 - - -
Impairments related to the closure of stores in the
Midwest (2) 6,873 - 6,873 - - -
Impairments related to the sale of U.S. distribution
operations and warehouses (3) 8,590 - 8,590 - - -
Impairments related to property held as part of the 2001
Asset Disposition (2) - - - 2,659 - 2,659
Impairments related to the Farmer Jack restructuring (2) - - - 90 - 90
------- ------- ------- ------- ------- -------
Total impairments $49,132 $ 506 $49,638 $43,437 $ 709 $44,146
======= ======= ======= ======= ======= =======
</TABLE>
(1) Refer to Note 4 - Hurricane Katrina and Impact on U.S. Business
(2) Refer to Note 8 - Asset Disposition Initiatives
(3) Refer to Note 3 - Sale of our U.S. Distribution Operations and Warehouses
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 additional
future impairments on long-lived assets, including the potential for impairment
of assets that are held and used.
GAIN ON SALE OF CANADIAN OPERATIONS
- -----------------------------------
As further discussed in Note 2 - Divestiture of Our Business in Canada
and Stores in the Midwest, we sold our Canadian operations to Metro, Inc. at the
close of business on August 13, 2005. As a result of this sale, we recorded a
pretax gain of $912.1 million (gain of $805.3 million after tax) during fiscal
2005.
INTEREST EXPENSE
- ----------------
Interest expense of $92.2 million for fiscal 2005 decreased from the
prior year amount of $114.1 million due primarily to (i.) the repurchase of the
majority of our 7.75% Notes due April 15, 2007 and our 9.125% Senior Notes due
December 15, 2011 resulting in a reduction in interest expense of $15.8 million,
(ii.) a decrease in capitalized interest expense of $1.0 million due to mainly a
reduction in new store builds, and (iii.) lower interest expense of $8.8 million
relating to our Canadian operations due to the inclusion of its operating
results for 24 weeks for fiscal 2005 as compared to 52 weeks for fiscal 2004 as
a result of its sale, partially offset by higher interest expense resulting from
our on-balance sheet long-term real estate liabilities, which includes sale
leaseback of Company-owned properties entered into in the fourth quarter of
fiscal 2003, of approximately $1.4 million and sale leaseback of locations for
which we received landlord allowances of $0.5 million.
17
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
INCOME TAXES
- ------------
The provision for income taxes from continuing operations for fiscal
2005 was $128.9 million (a $110.4 million provision for our U.S. operations and
a $18.5 million provision for our Canadian operations) compared to a provision
for income taxes from continuing operations for fiscal 2004 of $0.5 million (a
$4.5 million provision for our U.S. operations and a $4.0 million benefit for
our Canadian operations). Consistent with prior year, we continue to record a
valuation allowance against our U.S. net deferred tax assets.
For fiscal 2005, our effective income tax rate of 24.8% changed from
the effective income tax rate of 0.3% for fiscal 2004 as follows:
Fiscal 2005 Fiscal 2004
--------------------------- ----------------------------
Effective Effective
Tax Provision Tax Rate Tax Provision Tax Rate
------------- --------- ------------- ---------
United States $(110,388) 21.3% $ (4,500) 2.5%
Canada (18,539) 3.5% 3,972 (2.2%)
--------- ---- --------- ---
$(128,927) 24.8% $ (528) 0.3%
========= ==== ========= ===
The change in our effective tax rate was primarily due to the tax
provisions we recorded in the U.S. in connection with (i.) our Company's
Domestic Reinvestment Plan as discussed in Note 12 - Income Taxes and (ii.) the
sale of our Canadian operations that occurred during fiscal 2005.
DISCONTINUED OPERATIONS
- -----------------------
Beginning in the fourth quarter of fiscal year 2002 and in the early
part of the first quarter of fiscal 2003, we decided to sell our operations
located in Northern New England and Wisconsin, as well as our Eight O'Clock
Coffee business. These asset sales are now complete.
Although the Canadian operations have been sold as of February 25,
2006, the criteria necessary to classify the Canadian operations as discontinued
have not been satisfied as our Company has retained significant continuing
involvement in the operations of this business upon its sale.
18
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
The income from operations of discontinued businesses, net of tax, for
fiscal 2005 was $1.6 million as compared to a loss from operations of
discontinued businesses, net of tax, of $1.4 million for fiscal 2004 and is
detailed by business as follows:
<TABLE>
<CAPTION>
Fiscal 2005
---------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
----------- ------- --------- -------
<S> <C> <C> <C> <C>
(LOSS) INCOME FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses (58) 3,049 (187) 2,804
------- ------- ------- -------
(Loss) income from operations of
discontinued businesses, before
tax (58) 3,049 (187) 2,804
Tax benefit (provision) 24 (1,281) 79 (1,178)
------- ------- ------- -------
(Loss) income from operations of
discontinued businesses, net
of tax $ (34) $ 1,768 $ (108) $ 1,626
======= ======= ======= =======
Disposal related costs included in operating expenses above:
Non-accruable closing costs $ (58) $ (62) $ (187) $ (307)
Reversal of previously accrued
occupancy related costs - 3,717 - 3,717
Interest accretion on present value
of future occupancy and
severance costs - (606) - (606)
------- ------- ------- -------
Total disposal related costs $ (58) $ 3,049 $ (187) $ 2,804
------- ------- ------- -------
</TABLE>
19
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
<TABLE>
<CAPTION>
Fiscal 2004
------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
----------- ------- --------- -------
<S> <C> <C> <C> <C>
INCOME (LOSS) FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses 292 (981) (698) (1,387)
------- ------- ------- -------
Income (loss) from operations of
discontinued businesses, before
tax 292 (981) (698) (1,387)
Tax provision - - - -
------- ------- ------- -------
Income (loss) from operations of
discontinued businesses, net of
tax $ 292 $ (981) $ (698) $(1,387)
======= ======= ======= =======
Disposal related costs included in operating expenses above:
Severance and benefits $ (326) $ - $ - $ (326)
Reversal of previously accrued
occupancy related costs - 354 - 354
Non-accruable closing costs 626 (595) (698) (667)
Interest accretion on present value
of future occupancy and
severance costs (8) (740) - (748)
------- ------- ------- -------
Total disposal related costs $ 292 $ (981) $ (698) $(1,387)
------- ------- ------- -------
</TABLE>
The gain on disposal of discontinued operations, net of tax, was $0.6
million for fiscal 2005 as compared to a loss on disposal of discontinued
operations, net of tax, of $2.7 million for fiscal 2004 and is detailed by
business as follows:
<TABLE>
<CAPTION>
Fiscal 2005
---------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
----------- ------- --------- -------
<S> <C> <C> <C> <C>
GAIN ON DISPOSAL OF DISCONTINUED
BUSINESSES
Gain on sale of property $ - $ 1,002 $ - $ 1,002
------ ------- -------- -------
Gain on disposal of discontinued
businesses, before tax - 1,002 - 1,002
Tax provision - (421) - (421)
------ ------- -------- -------
Gain on disposal of discontinued
businesses, net of tax $ - $ 581 $ - $ 581
====== ======= ======== =======
</TABLE>
20
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
<TABLE>
<CAPTION>
Fiscal 2004
---------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
----------- ------ --------- --------
<S> <C> <C> <C> <C>
LOSS ON DISPOSAL OF DISCONTINUED
BUSINESSES
Property impairments $ - $ (602) $ - $ (602)
Loss on sale of business - (2,100) (2,100)
---- ------- ------- -------
Loss on disposal of discontinued
businesses, before tax - (602) (2,100) (2,702)
Tax provision - - - -
---- ------- ------- -------
Loss on disposal of discontinued
businesses, net of tax $ - $ (602) $(2,100) $(2,702)
==== ======= ======= =======
</TABLE>
FISCAL 2004 COMPARED WITH FISCAL 2003
Sales for fiscal 2004 were $10.9 billion compared with $10.9 billion
for fiscal 2003, which was a 53-week year; comparable store sales, which
includes stores that have been in operation for two full fiscal years and
replacement stores, increased 0.1%. Loss from continuing operations decreased
from $213.2 million in fiscal 2003 to $184.0 million in fiscal 2004. Net loss
per share - basic and diluted for fiscal 2004 was $4.88 compared to $4.08 for
fiscal 2003, an increase of $0.80 per share.
<TABLE>
<CAPTION>
Favorable /
Fiscal 2004 Fiscal 2003 (Unfavorable) % Change
----------- ----------- ------------- --------
<S> <C> <C> <C> <C>
Sales $ 10,854.9 $ 10,899.3 $ (44.4) (0.4%)
Increase in comparable store sales
for Company-operated stores 0.1% 0.9% NA NA
Loss from continuing operations (184.0) (213.2) 29.2 13.7
(Loss) income from discontinued
operations (4.1) 64.3 (68.4) (106.4)
Cumulative effect of a change in
accounting principle - FIN 46-R - (8.0) 8.0 100.0
Net loss (188.1) (156.9) (31.2) (19.9)
Net loss per share (4.88) (4.08) (0.80) (19.6)
</TABLE>
SALES
Sales for fiscal 2004 of $10,854.9 million decreased $44.4 million or
- -0.4% from sales of $10,899.3 million for fiscal 2003. The lower sales were due
to a decrease in U.S. sales of $213.3 million partially offset by an increase in
Canadian sales of $168.9 million. The increase in Canadian sales was primarily
due to the favorable impact of the Canadian exchange rate. The following table
presents sales for each of our operating segments for fiscal 2004 and fiscal
2003:
21
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
(Decrease)
Fiscal 2004 Fiscal 2003 Increase % Change
----------- ----------- ----------- --------
United States $ 7,317.6 $ 7,530.9 $ (213.3) (2.8%)
Canada 3,537.3 3,368.4 168.9 5.0
----------- ----------- -------- ----
Total $ 10,854.9 $ 10,899.3 $ (44.4) (0.4%)
=========== =========== ======== ====
The following details the dollar impact of several items affecting the
(decrease) increase in sales by operating segment from fiscal 2003 to fiscal
2004:
<TABLE>
<CAPTION>
Impact of Impact of Foreign Comparable Impact of
New Closed Exchange Store 53rd
Stores Stores Rate Sales Week Total
------------- ------------- -------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
United States $ 252.5 $ (286.1) $ - $ (47.1) $ (132.6) $ (213.3)
Canada 315.7 (330.7) 215.0 33.6 (64.7) 168.9
---------- ----------- ----------- ----------- ----------- -----------
Total $ 568.2 $ (616.8) $ 215.0 $ (13.5) $ (197.3) $ (44.4)
========== =========== =========== =========== =========== ===========
</TABLE>
The decrease in U.S. sales was attributable to the closing of 35 stores
since the beginning of fiscal 2003, of which 18 were closed in fiscal 2004,
decreasing sales by $286.1 million, the decrease in comparable store sales for
fiscal 2004 of $47.1 million or -0.6% as compared with fiscal 2003, and the
unfavorable impact of the 53rd week included in fiscal 2003 which decreased
sales by $132.6 million. These decreases were partially offset by the opening or
re-opening of 26 new stores since the beginning of fiscal 2003, of which 16 were
opened or re-opened in fiscal 2004, increasing sales by $252.5 million. Included
in the 35 stores closed since the beginning of fiscal 2003 were 6 stores closed
as part of the asset disposition initiative as discussed in Note 8 of our
Consolidated Financial Statements.
The increase in Canadian sales was attributable to the opening or
re-opening of 17 stores since the beginning of fiscal 2003, of which 8 were
opened or re-opened in fiscal 2004, increasing sales by $315.7 million, the
favorable effect of the Canadian exchange rate, which increased sales by $215.0
million, and the increase in comparable store sales for fiscal 2004 of $33.6
million or 1.0% for Company-operated stores and franchised stores combined, as
compared to fiscal 2003. These increases were partially offset by the closure of
23 stores since the beginning of 2003, of which 13 were closed in fiscal 2004,
decreasing sales by $330.7 million and the unfavorable impact of the 53rd week
included in fiscal 2003 which decreased sales by $64.7 million.
Average weekly sales per supermarket for the U.S. were approximately
$323,100 for fiscal 2004 versus $310,000 for the corresponding period of the
prior year, an increase of 4.2% primarily due to the impact of openings and
closings with net higher average weekly sales. Average weekly sales per
supermarket for Canada were approximately $285,900 for fiscal 2004 versus
$258,000 for the corresponding period of the prior year, an increase of 10.8%.
This increase was primarily due to the increase in the Canadian exchange rate
and higher comparable store sales.
22
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
GROSS MARGIN
- ------------
The following table presents gross margin dollar results and gross
margin as a percentage of sales by operating segment for fiscal 2004 as compared
to fiscal 2003. Gross margin as a percentage of sales decreased 17 basis points
to 28.02% for fiscal 2004 from 28.19% for fiscal 2003. This 17 basis point
decrease was caused by the increase in Canadian sales (which has a lower gross
margin rate than the U.S. business) as a percentage of our total (approximately
10 basis points) and from the increase in U.S. Food Basics (which has the lowest
gross margin rate of all our banners) as a percentage of sales (approximately 7
basis points). We believe the impact on margin for changes in costs and special
reductions was not significant.
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003
----------------------------------- -----------------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
United States $ 2,177.9 29.76% $ 2,256.1 29.96%
Canada 863.2 24.40 816.0 24.23
---------- ----- ---------- -----
Total $ 3,041.1 28.02% $ 3,072.1 28.19%
========== ===== ========== =====
</TABLE>
The following table details the dollar impact of several items
affecting the gross margin dollar increase (decrease) from fiscal 2003 to fiscal
2004:
Sales Volume Gross Margin Rate Exchange Rate Total
------------ ----------------- ------------- -------
United States $ (63.9) $ (14.3) $ - $ (78.2)
Canada (8.8) 5.4 50.6 47.2
------- ------- ----- -------
Total $ (72.7) $ (8.9) $ 50.6 $ (31.0)
======= ======= ===== =======
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
The following table presents SG&A by operating segment, in dollars and
as a percentage of sales for fiscal 2004 compared to fiscal 2003. SG&A expense
was $3,114.1 million or 28.69% for fiscal 2004 as compared to $3,214.9 million
or 29.50% for fiscal 2003.
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003
----------------------------- ----------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
United States $ 2,307.2 31.53% $ 2,464.0 32.72%
Canada 806.9 22.81 750.9 22.29
---------- ----- ---------- -----
Total $ 3,114.1 28.69% $ 3,214.9 29.50%
========== ===== ========== =====
</TABLE>
The U.S. had overall favorability of 119 basis points. Part of the
improvement in the U.S. is due to gains on the sale of certain of our assets of
$29.3 million, the absence of the Midwest goodwill impairment charge of $27.0
million and a reduction in the vacation accrual of $8.6 million due to a change
in the vacation entitlement practice. Prior to the change in the vacation
operating policy, non-union employees were fully vested on the first day of the
calendar year. As such under SFAS No. 43, "Compensated Absences", our Company
accrued vacation as it was earned by non-union employees (earned in the calendar
year immediately preceeding the January 1 vesting date). Under the new vacation
operating policy, non-union employees vest over the year that vacation is
earned, and accordingly, our Company recorded a one-time adjustment to reduce
the liability. Most of the favorability in the U.S. is due to very tight cost
controls. Categories in which the U.S. experienced cost reductions include
advertising due to less spend ($26.4 million) and labor ($36.2 million). The
favorability in the U.S. was partially offset by $8.9 million of severance and
other charges relating to the previously noted administrative reorganization and
a $27.2 million increase in our workers' compensation and general liability
reserves in response to both adverse development of prior year's costs and other
developments including a continuing trend of rising costs.
23
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
The increase in SG&A in Canada of $56.0 million is primarily due to the
increase in the Canadian exchange rate of $35.3 million, an increase in labor of
$28.5 million due mainly to increased sales, and an increase in occupancy of
$17.9 million as a result of the opening of new stores partially offset by a
decrease in advertising costs of $13.1 million due to less spend.
During fiscal 2004 and fiscal 2003, we recorded property impairment
losses in SG&A in our Consolidated Statements of Operations of $44.1 million and
$43.8 million as follows:
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003
----------------------------------- -----------------------------------
U.S. Canada Total U.S. Canada Total
-------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Impairments due to
closure or conversion
in the normal course
of business (1) (2) $ 6,000 $ 709 $ 6,709 $ 4,439 $ 1,670 $ 6,109
Impairments due to
unrecoverable assets (2) 34,688 - 34,688 33,102 - 33,102
Impairments related to
the 2001 Asset
Disposition (2) (3) 2,659 - 2,659 422 - 422
Impairments related to
the Farmer Jack
restructuring (2) (3) 90 - 90 4,129 - 4,129
------- ------- ------- ------- ------- -------
Total impairments $43,437 $ 709 $44,146 $42,092 $ 1,670 $43,762
======= ======= ======= ======= ======= =======
</TABLE>
(1) Consists primarily of amounts that were impaired as a result of stores that
were or will be closed, converted or remodeled in the normal course of
business.
(2) Refer to Note 6 - Valuation of Goodwill and Long-Lived Assets.
(3) Refer to Note 8 - Asset Disposition Initiatives.
The effects of changes in estimates of useful lives were not material
to ongoing depreciation expense.
INTEREST EXPENSE
- ----------------
Interest expense of $114.1 million for fiscal 2004 increased from the
prior year amount of $103.1 million due primarily to higher interest expense
resulting from our on-balance sheet long-term real estate liabilities, which
includes sale leaseback of Company-owned properties entered into in the fourth
quarter of fiscal 2003 of approximately $15.6 million and sale leaseback of
locations for which we received landlord allowances of $3.6 million. This impact
was partially offset by lower interest from lower borrowings of approximately
$6.5 million.
24
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
INCOME TAXES
- ------------
The provision for income taxes from continuing operations for fiscal
2004 was $0.5 million (a $4.5 million provision for our U.S. operations and a
$4.0 million benefit from our Canadian operations) compared to a $30.6 million
benefit from income taxes from continuing operations for fiscal 2003 (a $42.3
million benefit from our U.S. operations and a $11.7 million provision for our
Canadian operations). Our U.S. tax benefit from continuing operations for fiscal
2003 was offset by a tax provision provided on discontinued operations of $46.6
million in accordance with Statement of Financial Accounting Standards 109,
"Accounting for Income Taxes". Consistent with prior year, we continue to record
a valuation allowance in an amount that would reduce our U.S. deferred tax asset
to the amount that is more likely than not to be realized.
For fiscal 2004, our effective income tax rate of 0.3% changed from the
effective income tax rate of (12.5%) for fiscal 2003 as follows:
Fiscal 2004 Fiscal 2003
-------------------------------- ---------------------------
Tax (Provision) Effective Tax Benefit Effective
Benefit Tax Rate (Provision) Tax Rate
-------------- --------- ----------- ---------
United States (4,500) 2.5% $ 42,339 (17.3%)
Canada 3,972 (2.2%) (11,765) 4.8%
------ ---- --------- -----
(528) 0.3% $ 30,574 (12.5%)
====== === ========= =====
The change in our effective tax rate was primarily due to the absence
of a tax benefit recorded on losses from continuing operations that was limited
to the tax provision recorded on income from discontinued operations in
accordance with SFAS 109. As discussed above, $46.6 million of benefit was
recognized for fiscal 2003 as compared to fiscal 2004, where no benefit was
recognized. The remaining provisions recorded in the U.S. of $4.5 million and
$4.3 million for fiscal 2004 and fiscal 2003, respectively, represent state and
local taxes. In addition, the change in our effective tax rate was partially
offset by the impact of the lower mix of Canadian income from continuing
operations as a percentage of our Company's loss from continuing operations for
fiscal 2004 as compared to fiscal 2003. Information regarding items included in
the reconciliation of the effective rate with the federal statutory rate is
disclosed in Note 12 to the consolidated financial statements.
DISCONTINUED OPERATIONS
- -----------------------
Beginning in the fourth quarter of fiscal year 2002 and in the early
part of the first quarter of fiscal 2003, we decided to sell our operations
located in Northern New England and Wisconsin, as well as our Eight O'Clock
Coffee business. These asset sales are now complete.
25
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
The loss from operations of discontinued businesses, net of tax, for
fiscal 2004 was $1.4 million as compared to a loss from operations of
discontinued businesses, net of tax, of $32.7 million for fiscal 2003 and is
detailed by business as follows:
<TABLE>
<CAPTION>
Fiscal 2004
---------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
INCOME (LOSS) FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses 292 (981) (698) (1,387)
------------- --------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, before
tax 292 (981) (698) (1,387)
Tax provision - - - -
--------------- ---------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, net of
tax $ 292 $ (981) $ (698) $ (1,387)
=============== ================ =============== =============
Disposal related costs included in operating expenses above:
Severance and benefits $ (326) $ - $ - $ (326)
Reversal of previously accrued
occupancy related costs - 354 - 354
Non-accruable closing costs 626 (595) (698) (667)
Interest accretion on present value
of future occupancy costs (8) (740) - (748)
--------------- ---------------- --------------- -------------
Total disposal related costs $ 292 $ (981) $ (698) $ (1,387)
--------------- ---------------- --------------- -------------
</TABLE>
26
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
<TABLE>
<CAPTION>
Fiscal 2003
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
(LOSS) INCOME FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ 32,726 $ 123,229 $ 65,265 $ 221,220
Operating expenses (42,536) (174,890) (60,179) (277,605)
------------- ------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, before
tax (9,810) (51,661) 5,086 (56,385)
Tax benefit (provision) 4,120 21,698 (2,136) 23,682
--------------- ---------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, net of
tax $ (5,690) $ (29,963) $ 2,950 $ (32,703)
=============== ================ =============== ==============
Disposal related costs included in operating expenses above:
Pension withdrawal liability $ - $ (6,500) $ - $ (6,500)
Occupancy related costs (3,993) (28,387) - (32,380)
Reversal of previously accrued
occupancy related costs - 4,458 - 4,458
Non-accruable inventory costs (175) (2,511) - (2,686)
Non-accruable closing costs (2,555) (2,890) (12,275) (17,720)
Gain on sale of inventory 1,645 - - 1,645
Severance and benefits (2,670) (6,562) - (9,232)
Interest accretion on present value
of future occupancy costs (6) (353) - (359)
--------------- ---------------- --------------- --------------
Total disposal related costs $ (7,754) $ (42,745) $ (12,275) $ (62,774)
--------------- ---------------- --------------- --------------
</TABLE>
The loss on disposal of discontinued operations, net of tax, was $2.7
million for fiscal 2004 as compared to gain on disposal of discontinued
operations, net of tax, of $97.0 million for fiscal 2003 and is detailed by
business as follows:
<TABLE>
<CAPTION>
Fiscal 2004
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
LOSS ON DISPOSAL OF DISCONTINUED
BUSINESSES
Property impairments $ - $ (602) $ - $ (602)
Loss on sale of business - - (2,100) (2,100)
--------------- ---------------- --------------- --------------
Loss on disposal of discontinued
businesses, before tax - (602) (2,100) (2,702)
Tax provision - - - -
--------------- ---------------- --------------- -------------
Loss on disposal of discontinued
businesses, net of tax $ - $ (602) $ (2,100) $ (2,702)
=============== ================ =============== ==============
</TABLE>
27
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
<TABLE>
<CAPTION>
Fiscal 2003
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
GAIN (LOSS) ON DISPOSAL OF
DISCONTINUED BUSINESSES
Gain on sale of fixed assets $ 85,983 $ 15,272 $ 85,000 $ 186,255
Fixed asset impairments - (18,968) - (18,968)
--------------- ---------------- --------------- --------------
Gain (loss) on disposal of
discontinued businesses,
before tax 85,983 (3,696) 85,000 167,287
Tax (provision) benefit (36,113) 1,552 (35,700) (70,261)
------------- ---------------- --------------- ----------------
Gain (loss) on disposal of
discontinued businesses,
net of tax $ 49,870 $ (2,144) $ 49,300 $ 97,026
============= ================ =============== ================
</TABLE>
ASSET DISPOSITION INITIATIVES
OVERVIEW
In fiscal 1998 and fiscal 1999, we announced a plan to close two
warehouse facilities and a coffee plant in the U.S., a bakery plant in Canada
and 166 stores including the exit of the Richmond, Virginia and Atlanta, Georgia
markets (Project Great Renewal). In addition, during fiscal 2001, we announced
that certain underperforming operations, including 39 stores (30 in the United
States and 9 in Canada) and 3 warehouses (2 in the United States and 1 in
Canada) would be closed and/or sold, and certain administrative streamlining
would take place (2001 Asset Disposition). During fiscal 2003, we announced an
initiative to close 6 stores and convert 13 stores to our Food Basics banner in
the Detroit, Michigan and Toledo, Ohio markets (Farmer Jack Restructuring). In
addition, through the first three quarters of fiscal 2005, we closed 35 stores
in the Midwest (Closure of Stores in the Midwest).
Presented below is a reconciliation of the activities recorded on our
Consolidated Balance Sheets, Consolidated Statements of Operations and
Consolidated Statements of Cash Flows for fiscal 2005, fiscal 2004, and fiscal
2003. Present value ("PV") interest represents interest accretion on future
occupancy costs which were recorded at present value at the time of the original
charge. Non-accruable items represent charges related to the restructuring that
are required to be expensed as incurred in accordance with SFAS 146 "Accounting
for Costs Associated with Exit or Disposal Activities".
28
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
<TABLE>
<CAPTION>
Fiscal 2005
---------------------------------------------------------------------------
Project 2001 Farmer Closure of
Great Asset Jack Stores in
Renewal Disposition Restructuring the Midwest Total
----------- ----------- --------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET ACCRUALS
Vacancy $ (3,648) $ (2,089) $ 4,376 $ 97,596 $ 96,235
PV interest 1,548 2,170 710 1,582 6,010
Severance - - - 2,666 2,666
--------- --------- --------- --------- ---------
Total accrued to
balance sheets (2,100) 81 5,086 101,844 104,911
--------- --------- --------- --------- ---------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Capital lease termination - - - (588) (588)
Property writeoffs - - - 6,873 6,873
Inventory related costs - - - 1,242 1,242
Loss on sale of property - - - 1,640 1,640
Gain on sale of pharmacy
scripts - - - (870) (870)
Closing costs - - - 5,131 5,131
--------- --------- --------- --------- ---------
Total non-accruable items - - - 13,428 13,428
--------- --------- --------- --------- ---------
Less PV interest (1,548) (2,170) (710) (1,582) (6,010)
--------- --------- --------- --------- ---------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS EXCLUDING
PV INTEREST (3,648) (2,089) 4,376 113,690 112,329
--------- --------- --------- --------- ---------
Less Gain on sale
of pharmacy
scripts - - - 870 870
Less closing costs - - - (5,131) (5,131)
--------- --------- --------- --------- ---------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
CASH FLOWS $ (3,648) $ (2,089) $ 4,376 $ 109,429 $ 108,068
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Fiscal 2004
-----------------------------------------------------------------
Project 2001 Farmer
Great Asset Jack
Renewal Disposition Restructuring Total
------- ----------- ------------- -----
<S> <C> <C> <C> <C>
BALANCE SHEET ACCRUALS
PV interest $ 1,922 $ 2,456 $ 687 $ 5,065
------- ------- ------- -------
Total accrued to
balance sheets 1,922 2,456 687 5,065
------- ------- ------- -------
Occupancy reversals - (4,488) - (4,488)
------- ------- ------- -------
Adjustments to
balance sheets - (4,488) - (4,488)
------- ------- ------- -------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Property writeoffs - 2,659 90 2,749
Inventory related costs - - 291 291
Closing costs - - 689 689
------- ------- ------- -------
Total non-accruable items - 2,659 1,070 3,729
------- ------- ------- -------
Less PV interest (1,922) (2,456) (687) (5,065)
------- ------- ------- -------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS
EXCLUDING PV INTEREST - (1,829) 1,070 (759)
------- ------- ------- -------
Less closing costs - - (689) (689)
------- ------- ------- -------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
CASH FLOWS $ - $(1,829) $ 381 $(1,448)
======= ======= ======= =======
</TABLE>
29
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
<TABLE>
<CAPTION>
Fiscal 2003
-------------------------------------------------------------
Project 2001 Farmer
Great Asset Jack
Renewal Disposition Restructuring Total
---------- ------------- -------------- ---------
<S> <C> <C> <C> <C>
BALANCE SHEET ACCRUALS
PV interest $ 2,638 $ 2,850 $ 56 $ 5,544
Occupancy - - 20,999 20,999
Severance - - 8,930 8,930
Total accrued to
balance sheets 2,638 2,850 29,985 35,473
----------- ----------- ----------- ----------
Occupancy reversals - (6,778) - (6,778)
Additional occupancy
accrual - 991 - 991
Additional severance - 1,613 - 1,613
Adjustments to
balance sheets - (4,174) - (4,174)
----------- ----------- ----------- ----------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Property writeoffs - 422 4,129 4,551
Inventory related costs - - 2,244 2,244
Closing costs - 44 1,449 1,493
----------- ----------- ----------- ----------
Total non-accruable items - 466 7,822 8,288
----------- ----------- ----------- ----------
Less PV interest (2,638) (2,850) (56) (5,544)
----------- ----------- ----------- ----------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS
EXCLUDING PV INTEREST - (3,708) 37,751 34,043
-------- ----------- ----------- ----------
Less closing costs - (44) (1,449) (1,493)
-------- ----------- ----------- ----------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
CASH FLOWS $ - $ (3,752) $ 36,302 $ 32,550
======== =========== ========= =========
</TABLE>
PROJECT GREAT RENEWAL
In May 1998, we initiated an assessment of our business operations in
order to identify the factors that were impacting our performance. As a result
of this assessment, in fiscal 1998 and 1999, we announced a plan to close two
warehouse facilities and a coffee plant in the U.S., a bakery plant in Canada
and 166 stores (156 in the United States and 10 in Canada) including the exit of
the Richmond, Virginia and Atlanta, Georgia markets. As of February 25, 2006, we
had closed all stores and facilities related to this phase of the initiative.
30
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
The following table summarizes the activity related to this phase of
the initiative over the last three fiscal years:
<TABLE>
<CAPTION>
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
February 22, 2003 $ 48,788 $ 487 $ 49,275 $ 2,446 $ - $ 2,446 $ 51,234 $ 487 $ 51,721
Addition (1) 2,276 372 2,648 - - - 2,276 372 2,648
Utilization (2) (19,592) (407) (19,999) (289) - (289) (19,881) (407) (20,288)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 31,472 $ 452 $ 31,924 $ 2,157 $ - $ 2,157 $ 33,629 $ 452 $ 34,081
Addition (1) 1,902 20 1,922 - - - 1,902 20 1,922
Utilization (2) (5,410) (222) (5,632) (497) - (497) (5,907) (222) (6,129)
-------- -------- -------- -------- -------- -------- --------- ---------- ---------
Balance at
February 26, 2005 $ 27,964 $ 250 $ 28,214 $ 1,660 $ - $ 1,660 $ 29,624 $ 250 $ 29,874
Addition (1) 1,541 7 1,548 - - - 1,541 7 1,548
Utilization (2) (5,858) (167) (6,025) (223) - (223) (6,081) (167) (6,248)
Adjustments (3) (3,648) (90) (3,738) - - - (3,648) (90) (3,738)
--------- --------- --------- -------- -------- -------- ---------- ---------- ---------
Balance at
February 25, 2006 $ 19,999 $ - $ 19,999 $ 1,437 $ - $ 1,437 $ 21,436 $ - $ 21,436
======== ======== ======== ======== ======== ======== ========= ========= =========
</TABLE>
(1) The additions to store occupancy of $2.6 million, $1.9 million, and
$1.5 million during fiscal 2003, 2004 and 2005, respectively, represent
the interest accretion on future occupancy costs which were recorded at
present value at the time of the original charge.
(2) Occupancy utilization of $20.0 million, $5.6 million, and $6.0 million
for fiscal 2003, 2004 and 2005, respectively, represents payments made
during those periods for costs such as rent, common area maintenance,
real estate taxes and lease termination costs. Severance utilization of
$0.3 million, $0.5 million, and $0.2 million for fiscal 2003, 2004 and
2005, respectively, represents payments to individuals for severance
and benefits, as well as payments to pension funds for early withdrawal
from multi-employer union pension plans.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. We have continued to make favorable
progress in marketing and subleasing the closed stores. As a result,
during fiscal 2005, we recorded an additional reduction of $3.6 million
in occupancy accruals due to subleasing additional closed stores and
converting a previously closed store to a store that will open in
fiscal 2006. As discussed in Note 2 - Divestiture of Our Business in
Canada and Stores in the Midwest, we sold our Canadian business and as
a result, the Canadian occupancy accruals of $0.1 million are no longer
consolidated in our Consolidated Balance Sheet at February 25, 2006.
We paid $104.4 million of the total occupancy charges from the time of
the original charges through February 25, 2006 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $30.1 million of the total net severance charges from
the time of the original charges through February 25, 2006, which resulted from
the termination of approximately 3,400 employees. The remaining occupancy
liability of $20.0 million relates to expected future payments under long term
leases and is expected to be paid in full by 2020. The remaining severance
liability of $1.4 million primarily relates to expected future payments for
early withdrawals from multi-employer union pension plans and will be fully paid
out in 2020.
None of these stores were open during fiscal 2003, fiscal 2004 or
fiscal 2005. As such, there was no impact from store operations on the
Statements of Consolidated Operations from the 166 stores included in this phase
of the initiative.
At February 25, 2006 and February 26, 2005, approximately $5.1 million
and $5.4 million, respectively, of the reserve was included in "Other accruals"
and the remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
31
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
Based upon current available information, we evaluated the reserve
balances as of February 25, 2006 of $21.4 million for this phase of the asset
disposition initiative and have concluded that they are adequate to cover
expected future costs. The Company will continue to monitor the status of the
vacant properties and adjustments to the reserve balances may be recorded in the
future, if necessary.
2001 Asset Disposition
During the third quarter of fiscal 2001, the Company's Board of
Directors approved a plan resulting from our review of the performance and
potential of each of the Company's businesses and individual stores. At the
conclusion of this review, our Company determined that certain underperforming
operations, including 39 stores (30 in the United States and 9 in Canada) and 3
warehouses (2 in the United States and 1 in Canada) should be closed and/or
sold, and certain administrative streamlining should take place. As of February
25, 2006, we had closed all stores and facilities related to this phase of the
initiative.
The following table summarizes the activity related to this phase of
the initiative recorded on the Consolidated Balance Sheets over the last three
fiscal years:
<TABLE>
<CAPTION>
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
February 22, 2003 $ 53,502 $ 344 $ 53,846 $ 3,813 $ 481 $ 4,294 $ 57,315 $ 825 $ 58,140
Addition (1) 2,847 3 2,850 - - - 2,847 3 2,850
Utilization (2) (9,987) (974) (10,961) (2,457) (1,026) (3,483) (12,444) (2,000) (14,444)
Adjustments (3) (6,778) 1,002 (5,776) 955 603 1,558 (5,823) 1,605 (4,218)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 39,584 $ 375 $ 39,959 $ 2,311 $ 58 $ 2,369 $ 41,895 $ 433 $ 42,328
Addition (1) 2,449 - 2,449 - - - 2,449 - 2,449
Utilization (2) (5,646) (375) (6,021) (2,197) (58) (2,255) (7,843) (433) (8,276)
Adjustments (3) (4,488) - (4,488) - - - (4,488) - (4,488)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 26, 2005 $ 31,899 $ - $ 31,899 $ 114 $ - $ 114 $ 32,013 $ - $ 32,013
Addition (1) 2,170 - 2,170 - - - 2,170 - 2,170
Utilization (2) (5,262) - (5,262) (97) - (97) (5,359) - (5,359)
Adjustments (3) (2,089) - (2,089) - - - (2,089) - (2,089)
-------- -------- -------- -------- -------- -------- ---------- --------- ---------
Balance at
February 25, 2006 $ 26,718 $ - $ 26,718 $ 17 $ - $ 17 $ 26,735 $ - $ 26,735
======== ======== ======== ======== ======== ======== ========= ========= =========
</TABLE>
(1) The additions to store occupancy of $2.9 million, $2.4 million, and
$2.1 million during fiscal 2003, 2004 and 2005, respectively, represent
the interest accretion on future occupancy costs which were recorded at
present value at the time of the original charge.
(2) Occupancy utilization of $11.0 million, $6.0 million, and $5.3 million
during fiscal 2003, 2004 and 2005, respectively, represent payments
made during those periods for costs such as rent, common area
maintenance, real estate taxes and lease termination costs. Severance
utilization of $3.5 million, $2.3 million, and $0.1 million during
fiscal 2003, 2004 and 2005, respectively, represent payments made to
terminated employees during the period.
(3) At each balance sheet date, we assess the adequacy of the reserve
balance to determine if any adjustments are required as a result of
changes in circumstances and/or estimates. During fiscal 2003, we
recorded net adjustments of $5.8 million related to reversals of
previously accrued occupancy costs due to favorable results of
subleasing, assigning and terminating leases. We also accrued $1.6
million for additional severance and benefit costs that were unforeseen
at the time of the original charge. During fiscal 2004, we recorded
adjustments of $4.5 million related to the reversals of previously
accrued occupancy costs due to the disposals and subleases of locations
at more favorable terms than originally anticipated at the time of the
original charge. Finally, during fiscal 2005, we recorded adjustments
of $2.1 million related to the reversals of previously accrued
occupancy costs due to the favorable result of subleasing one of the
closed properties and changes in our original estimate of our future
vacancy obligations for closed stores.
32
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
We paid $44.4 million ($41.4 million in the U.S. and $3.0 million in
Canada) of the total occupancy charges from the time of the original charges
through February 25, 2006 which was primarily for occupancy related costs such
as rent, common area maintenance, real estate taxes and lease termination costs.
We paid $28.2 million ($19.2 million in the U.S. and $9.0 million in Canada) of
the total net severance charges from the time of the original charges through
February 25, 2006, which resulted from the termination of approximately 1,100
employees. The remaining occupancy liability of $26.7 million primarily relates
to expected future payments under long term leases through 2022. The remaining
severance liability of $0.02 million relates to expected future payments for
severance and benefits payments to individual employees and will be fully paid
out in 2006.
At February 25, 2006 and February 26, 2005, approximately $6.6 million
and $7.1 million of the reserve, respectively, was included in "Other accruals"
and the remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
None of these stores were open during fiscal 2003, fiscal 2004 or
fiscal 2005. As such, there was no impact from store operations on the
Statements of Consolidated Operations from the 39 stores that were identified
for closure as part of this asset disposition.
Based upon current available information, we evaluated the reserve
balances as of February 25, 2006 of $26.7 million for this phase of the asset
disposition initiative and have concluded that they are adequate to cover
expected future costs. Our Company will continue to monitor the status of the
vacant properties and adjustments to the reserve balances may be recorded in the
future, if necessary.
FARMER JACK RESTRUCTURING
In the fourth quarter of fiscal 2003, we announced an initiative to
close 6 stores and convert 13 stores to our Food Basics banner in the Detroit,
Michigan and Toledo, Ohio markets. As of February 25, 2006, we had closed all 6
stores and successfully completed the conversions related to this phase of the
initiative.
33
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
The following table summarizes the activity to date related to the
charges recorded for this initiative all of which were in the U.S. The table
does not include property writeoffs as they are not part of any reserves
maintained on the balance sheet. It also does not include non-accruable closing
costs and inventory related costs since they are expensed as incurred in
accordance with generally accepted accounting principles.
<TABLE>
<CAPTION>
Severance
and
Occupancy Benefits Total
------------ ------------- ----------
<S> <C> <C> <C>
Original charge (1) $ 20,999 $ 8,930 $ 29,929
Addition (1) 56 - 56
Utilization (2) (1,093) (4,111) (5,204)
------------ ------------- ----------
Balance at
February 28, 2004 $ 19,962 $ 4,819 $ 24,781
Addition (1) 687 - 687
Utilization (2) (4,747) (4,813) (9,560)
------------ ------------- ----------
Balance at
February 26, 2005 $ 15,902 $ 6 $ 15,908
Addition (1) 710 - 710
Utilization (2) (2,738) (6) (2,744)
Adjustment (3) 4,376 - 4,376
------------ ------------- ----------
Balance at
February 25, 2006 $ 18,250 $ - $ 18,250
============ ============= ==========
</TABLE>
(1) The original charge to occupancy during fiscal 2003 represents charges
related to closures and conversions in the Detroit, Michigan market of
$21.0 million. The additions to occupancy during fiscal 2003, fiscal
2004 and fiscal 2005 represent interest accretion on future occupancy
costs which were recorded at present value at the time of the original
charge. The original charge to severance during fiscal 2003 of $8.9
million related to individual severings as a result of the store
closures, as well as a voluntary termination plan initiated in the
Detroit, Michigan market.
(2) Occupancy utilization of $1.1 million, $4.7 million and $2.7 million
during fiscal 2003, fiscal 2004 and fiscal 2005, respectively,
represents payments made for costs such as rent, common area
maintenance, real estate taxes and lease termination costs. Severance
utilization of $4.1 million, $4.8 million and $0.01 million during
fiscal 2003, fiscal 2004 and fiscal 2005, respectively, represent
payments made to terminated employees during the period.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During fiscal 2005, we recorded an
increase of $4.4 million in occupancy accruals due to changes in our
original estimate of when we would terminate certain leases, obtain
sublease rental income related to such leases and changes in our
original estimate of our future vacancy obligations for closed stores.
We paid $8.6 million of the total occupancy charges from the time of
the original charge through February 25, 2006 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $8.9 million of the total net severance charges from
the time of the original charges through February 25, 2006, which resulted from
the termination of approximately 300 employees. The remaining occupancy
liability of $18.3 million relates to expected future payments under long term
leases and is expected to be paid out in full by 2022. The severance liability
has been fully utilized as of February 25, 2006 and no additional future
payments for severance and benefits to individual employees will be paid out.
34
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
Included in the Statements of Consolidated Operations for fiscal 2004
and fiscal 2003 are the sales and operating results of the 6 stores that were
identified for closure as part of this phase of the initiative. The results of
these operations are as follows:
<TABLE>
<CAPTION>
Fiscal 2005 Fiscal 2004 Fiscal 2003
--------------- ------------- ------------
<S> <C> <C> <C>
Sales $ - $ 2,433 $ 50,760
============= ========= ===========
Operating loss $ - $ (46) $ (6,476)
============= ========= ===========
</TABLE>
At February 25, 2006 and February 26, 2005, approximately $1.6 million
and $2.1 million, respectively, of the liability was included in "Other
accruals" and the remaining amount was included in "Other non-current
liabilities" on our Consolidated Balance Sheets.
We have evaluated the liability balance of $18.3 million as of February
25, 2006 based upon current available information and have concluded that it is
adequate. We will continue to monitor the status of the vacant properties and
adjustments to the reserve balance may be recorded in the future, if necessary.
CLOSURE OF STORES IN THE MIDWEST
During the first quarter of fiscal 2005, we announced plans for a major
strategic restructuring that would focus future effort and investment on our
core operations in the Northeastern United States. Thus, we initiated efforts to
close stores in the Midwest. This planned store closure included the closing of
a total of 35 stores, all of which have been closed as of February 25, 2006. The
remaining business located in the Midwestern United States will continue to
operate as part of our core business going forward.
During fiscal 2005, we recorded charges of $113.7 million related to
these closures ($1.2 million in "Cost of merchandise sold," and $112.5 million
in "Store operating, general and administrative expense" in our Consolidated
Statement of Operations), excluding PV interest.
<TABLE>
<CAPTION>
Fiscal 2005
-------------
<S> <C>
Occupancy related $ 97,596
Severance and benefits 2,666
Capital lease termination (588)
Property writeoffs 6,873
Loss on the sale of fixed assets 1,640
Sale of pharmacy scripts (870)
Inventory related costs 1,242
Nonaccruable closing costs 5,131
------------
Total charges $ 113,690
============
</TABLE>
The following table summarizes the activity to date related to the
charges recorded for these store closures. The table does not include property
writeoffs as they are not part of any reserves maintained on the balance sheet.
It also does not include non-accruable closing costs and inventory related costs
since they are expensed as incurred in accordance with generally accepted
accounting principles.
35
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
<TABLE>
<CAPTION>
Severance
and
Occupancy Benefits Total
------------ ------------- ----------
<S> <C> <C> <C> <C>
Original charge (1) $ 14,766 $ 1,337 $ 16,103
Additions (2) 75,259 1,373 76,632
Utilization (3) (9,538) (2,439) (11,977)
Adjustment (4) 9,153 (44) 9,109
------------ ------------- ----------
Balance at
February 25, 2006 $ 89,640 $ 227 $ 89,867
============ ============= ==========
</TABLE>
(1) The original charge to occupancy during fiscal 2005 represents charges
related to closures of the first 8 stores in conjunction with our
decision to divest our Midwestern business of $14.8 million. The
original charge to severance during fiscal 2005 of $1.3 million related
to individual severings as a result of these store closures.
(2) The additions to occupancy during fiscal 2005 represent charges related
to the closures of an additional 27 stores in the amount of $73.7
million and interest accretion on future occupancy costs which were
recorded at present value at the time of the original charge in the
amount of $1.6 million. The additional charge to severance during
fiscal 2005 of $1.3 million related to individual severings as a result
of these store closures.
(3) Occupancy utilization of $9.5 million for fiscal 2005 represents
payments made for costs such as rent, common area maintenance, real
estate taxes and lease termination costs. Severance utilization of $2.4
million for fiscal 2005 represents payments made to terminated
employees during the period.
(4) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During fiscal 2005, we recorded an
increase of $9.2 million in occupancy accruals due to changes in our
original estimate of our future vacancy obligations for closed stores.
We also recorded a decrease of $0.05 million for the reversal of
previously accrued severance and benefits due to changes in individual
severings and associated benefit costs.
We paid $9.5 million of the total occupancy charges from the time of
the original charge through February 25, 2006 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $2.4 million of the total net severance charges from
the time of the original charges through February 25, 2006, which resulted from
the termination of approximately 125 employees. The remaining occupancy
liability of $89.6 million relates to expected future payments under long term
leases and is expected to be paid out in full by 2021. The remaining severance
liability of $0.2 million relates to expected future payments for severance and
benefits to individual employees and will be fully paid out in 2006.
Included in the Statements of Consolidated Operations for fiscal 2005,
fiscal 2004 and fiscal 2003 are the sales and operating results of the 35 stores
that were closed in the Midwest. The results of these operations are as follows:
<TABLE>
<CAPTION>
Fiscal 2005 Fiscal 2004 Fiscal 2003
--------------- ----------------- ------------------
<S> <C> <C> <C>
Sales $ 110,882 $ 339,879 $ 418,093
============= ============= =============
Operating loss $ (31,506) $ (39,884) $ (36,626)
============== ============== =============
</TABLE>
At February 25, 2006, approximately $22.5 million of the liability was
included in "Other accruals" and the remaining amount was included in "Other
non-current liabilities" on our Consolidated Balance Sheets.
We have evaluated the liability balance of $89.8 million as of February
25, 2006 based upon current available information and have concluded that it is
adequate. We will continue to monitor the status of the vacant properties and
adjustments to the reserve balance may be recorded in the future, if necessary.
36
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The following table presents excerpts from our Consolidated Statements
of Cash Flows:
<TABLE>
<CAPTION>
Fiscal 2005 Fiscal 2004 Fiscal 2003
--------------- --------------- ---------------
<S> <C> <C> <C>
Net cash (used in) provided by operating activities $ (80,715) $ 114,458 $ (16,487)
--------------- --------------- ---------------
Net cash provided by (used in) investing activities $ 464,005 $ (162,501) $ 103,649
--------------- --------------- ---------------
Net cash (used in) provided by financing activities $ (411,566) $ 4,164 $ (19,015)
--------------- --------------- ---------------
</TABLE>
Net cash flow used in operating activities of $80.7 million for fiscal
2005 primarily reflected our net income of $392.6 million, adjusted for non-cash
charges for (i.) depreciation and amortization of $207.3 million, (ii.) asset
disposition initiatives of $108.1 million, (iii.) restructuring charges of $77.1
million, (iv.) income tax provision relating to the sale of our Canadian
operations of $98.1 million, and (v.) other property impairments of $28.1
million, a decrease in inventories of $109.5 million and an increase in other
accruals of $48.9 million partially offset by the gain on sale of Canadian
operations of $912.1 million, an increase in receivables of $56.1 million, a
decrease in accounts payable of $101.3 million, and a decrease in other
non-current liabilities of $76.3 million primarily due to the sale of our
Canadian operations. Refer to Working Capital below for discussion of changes in
working capital items. Net cash provided by operating activities of $114.5
million for fiscal 2004 primarily reflected our net loss of $188.1 million,
adjusted for non-cash charges of $268.1 million for depreciation and
amortization and $34.7 million for the Midwest long lived assets / goodwill
impairment partially offset by a gain on disposal of owned property and
write-down of property, net of $28.7 million, a decrease in accounts receivable
of $29.2 million, and an increase in accounts payable of $46.3 million partially
offset by an increase in inventories of $12.6 million, an increase in prepaid
assets and other current assets of $6.0 million, an increase in other assets of
$19.0 million, and a decrease in other accruals of $34.1 million. Net cash used
in operating activities of $16.5 million for fiscal 2003 primarily reflected our
net loss of $156.9 million adjusted for non-cash charges of $60.1 million
related to our Farmer Jack long lived asset / goodwill impairment, $32.6 million
related to our Farmer Jack restructuring program, and depreciation and
amortization of $276.5 million, and a decrease in inventories of $44.1 million,
partially offset by the gain on sale of the discontinued operations of $167.3
million, a decrease in accounts payable of $57.2 million and a decrease in other
non-current liabilities of $50.0 million.
Net cash flow provided by investing activities of $464.0 million for
fiscal 2005 primarily reflected proceeds from the sale of our Canadian
operations of $960.7 million, proceeds received from the sale of certain of our
assets of $72.3 million partially offset by property expenditures totaling
$191.1 million, which included 3 new supermarkets and 41 major remodels,
disposal related expenditures for sale of the Canadian operations of $53.9
million, payments for derivatives of $15.4 million, the increase in restricted
cash of $146.3 million, and the net purchases of marketable securities of $167.0
million. Net cash used in investing activities of $162.5 million for fiscal 2004
primarily reflected property expenditures totaling $216.1 million, which
included 24 new supermarkets and 18 major remodels partially offset by cash
received from the sale of certain of our assets of $53.6 million. Net cash
provided by investing activities of $103.6 million for fiscal 2003 primarily
reflected cash received from the sale of our assets of $264.6 million (most of
which related to our discontinued operations), partially offset by property
expenditures totaling $161.0 million, which included 19 new supermarkets and 2
major remodels.
37
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
For fiscal 2006, we have planned capital expenditures of approximately
$200.0 million, which relate primarily to opening approximately up to 5 new
supermarkets under the Fresh format, enlarging or remodeling up to 40
supermarkets to the new Fresh format, converting up to 10 stores to the new Food
Basics(R) format, converting 1 supermarket to the new Gourmet format, and minor
renovations on up to 30 conventional supermarkets. We currently expect to close
up to 4 stores during fiscal 2006.
Net cash flow used in financing activities of $411.6 million for fiscal
2005 primarily reflected principal payments on long term borrowings and other
fees of $414.0 million and principal payments on capital leases of $11.0 million
partially offset by proceeds from the exercise of stock options of $26.1
million. Net cash provided by financing activities of $4.2 million for fiscal
2004 primarily reflected net proceeds from long term real estate liabilities of
$37.1 million partially offset by principal payments on capital leases of $13.5
million, a decrease in book overdrafts of $13.7 million and principal payments
on long term borrowings and other fees of $6.1 million. Net cash used in
financing activities of $19.0 million for fiscal 2003 primarily reflected $135.0
million in principal payments on our revolving lines of credit, $47.1 million in
principal payments on long term borrowings and other fees, $10.3 million paid in
deferred financing fees, and $13.8 million in principal payments on capital
leases, partially offset by $193.8 million in net proceeds from long-term real
estate liabilities.
We reviewed our Company's strategy during fiscal 2005 to establish and
sustain a profitable business with long-range growth potential. That review
concluded with the plan that future effort and investment should be focused on
our core operations in the Northeastern United States, which accounted for about
half of total sales, our strongest market positions, and we believe, the best
potential for profitable growth going forward. Therefore, we initiated efforts
to divest our businesses in both Canada and the Midwestern U.S. At the close of
business on August 13, 2005, our Company completed the sale of our Canadian
business to Metro, Inc., a supermarket and pharmacy operator in the Provinces of
Quebec and Ontario, Canada, for $1.5 billion in cash, stock and certain debt to
be assumed by Metro, Inc. We have closed 35 of the 101 stores in the Midwest at
this time and as we have not identified a buyer for our remaining operations in
the Midwestern United States, our current plan is to operate this business as
part of our core business going forward.
We operate under an annual operating plan which is reviewed and
approved by our Board of Directors and incorporates the specific operating
initiatives we expect to pursue and the anticipated financial results of our
Company. Our plan for fiscal 2006 at this time has been approved and we believe
that our present cash resources, including invested cash on hand as well as our
marketable securities, available borrowings from our Credit Agreement
("Revolver") and other sources, are sufficient to meet our needs. In addition,
effective April 4, 2006, aggregate commitments under our Revolver, dated as of
November 15, 2005, were increased by $100 million resulting in total commitments
of $250 million.
38
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
On April 25, 2006, our Company paid a special one-time dividend to our
shareholders of record on April 17, 2006 equal to $7.25 per share. The dividend
payout totaled approximately $300 million based on the current shares
outstanding. The transaction was funded primarily by cash available on the
balance sheet resulting from the strategic restructuring of the Company during
fiscal 2005.
Profitability, cash flow, asset sale proceeds and timing can be
impacted by certain external factors such as unfavorable economic conditions,
competition, labor relations and fuel and utility costs which could have a
significant impact on cash generation. If our profitability and cash flow do not
improve in line with our plans or if the taxing authorities do not affirm the
adequacy of our Company's Domestic Reinvestment Plan, we anticipate that we
would be able to liquidate our investment in Metro, Inc. and or modify the
operating plan in order to ensure that we have appropriate resources.
WORKING CAPITAL
We had working capital of $599.7 million at February 25, 2006 compared
to working capital of $86.5 million at February 26, 2005. We had cash and cash
equivalents aggregating $229.6 million at February 25, 2006 compared to $257.7
million at February 26, 2005. The increase in working capital was attributable
primarily to the following:
o An increase in restricted cash that can only be used as collateral for our
new Letter of Credit Agreement that we entered into during fiscal 2005;
o An increase in marketable securities as we invested our cash received from
the sale of our Canadian operations;
o An increase in accounts receivable mainly due to the timing of receipts
partially offset by the sale of our Canadian operations;
o An increase in prepaid expenses and other current assets mainly due to the
timing of payments, an increase in our deferred tax assets partially offset
by the sale of our Canadian operations;
o A decrease in the current portion of our long-term debt and obligations
under capital leases due to the timing of payments, the cash tender offer
to repurchase our outstanding long-term debt and the sale of our Canadian
operations;
o A decrease in accounts payable (inclusive of book overdrafts) due to the
sale of our Canadian operations and timing; and
o A decrease in accrued salaries, wages and benefits, and taxes due primarily
to the sale of our Canadian operations and timing of payments.
Partially offset by the following:
o A decrease in cash and cash equivalents as detailed in the Consolidated
Statements of Cash Flows; and
o A decrease in inventories mainly due to the sale of our Canadian
operations.
39
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
REVOLVING CREDIT AGREEMENT
During fiscal 2005 and due to the sale of our Canadian operations as
discussed in Note 2 - Divestiture of Our Business in Canada and Stores in the
Midwest, our $400 million secured Revolving Credit Agreement ("Revolving Credit
Agreement") was amended, eliminating the Canadian portion of the agreement and
reducing the commitments by $65 million. As of the end of the second quarter of
fiscal 2005, we had a $335 million Revolving Credit Agreement with a syndicate
of lenders enabling us to borrow funds on a revolving basis for short-term
borrowings and provide working capital as needed.
During the third quarter of fiscal 2005, the Revolving Credit Agreement
was terminated. Concurrently, we entered into a new, cash collateralized, Letter
of Credit Agreement that enables us to issue letters of credit up to $200
million. We also secured an additional $150 million Revolver with four lenders
enabling us to borrow funds on a revolving basis for working capital loans and
letters of credit. The Revolver includes a $100 million accordion feature which
gives us the ability to increase commitments from $150 million to $250 million.
Effective April 4, 2006, we exercised the accordion option and increased our
commitments to $250 million. Under the terms of this agreement, should
availability fall below $25.0 million and should cash on hand fall below $50.0
million, a borrowing block will be implemented which provides that no additional
loans be made unless we are able to maintain a minimum consolidated EBITDA
covenant on a trailing twelve month basis. In the event that availability falls
below $25.0 million, cash on hand falls below $50.0 million, and we do not
maintain the required minimum EBITDA covenant, unless otherwise waived or
amended, the lenders may, at their discretion, declare, in whole or in part, all
outstanding obligations immediately due and payable.
The Revolver is collateralized by inventory, certain accounts
receivable and pharmacy scripts. Borrowings under the Revolver bear interest
based on LIBOR or Prime interest rate pricing. This agreement expires in
November 2010. As of February 25, 2006, there were no loans or letters of credit
outstanding under this agreement. As of February 25, 2006, after reducing
availability for borrowing base requirements, we had $150.0 million available
under the Revolver. Combined with cash we held in short-term investments and
marketable securities of $318.6 million, we had total cash availability of
$468.6 million at February 25, 2006.
Under the Revolver, we are permitted to pay cumulative cash dividends
on common shares as well as make bond repurchases which we may do from time to
time in the future.
PUBLIC DEBT OBLIGATIONS
Outstanding notes totaling $244.7 million at February 25, 2006
consisted of $31.9 million of 7.75% Notes due April 15, 2007, $12.8 million of
9.125% Senior Notes due December 15, 2011 and $200 million of 9.375% Notes due
August 1, 2039. Interest is payable quarterly on the 9.375% Notes and
semi-annually on the 9.125% and 7.75% Notes. The 7.75% Notes are not redeemable
prior to their maturity. The 9.375% notes are now callable at par ($25 per bond)
and the 9.125% Notes may be called at a premium to par after December 15, 2006.
The 9.375% Notes are unsecured obligations and were issued under the terms of
our senior debt securities indenture, which contains among other provisions,
covenants restricting the incurrence of secured debt. The 9.375% Notes are
effectively subordinate to the Revolver and do not contain cross default
provisions. All covenants and restrictions for the 7.75% Notes and the 9.125%
Senior Notes have been eliminated in connection with the cash tender offer as
discussed in Note 9 - Indebtedness in the Notes to the Consolidated Financial
Statements. Our notes are not guaranteed by any of our subsidiaries.
40
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
During fiscal 2005, we repurchased in the open market $14.9 million of
our 7.75% Notes due April 15, 2007. The cost of this open market repurchase
resulted in a pretax loss due to the early extinguishment of debt of $0.6
million. In accordance with SFAS No. 145, "Rescission of FASB Statements 4, 44
and 64, Amendment of FASB 13, and Technical Corrections" ("SFAS 145"), this loss
has been classified within loss from operations.
Also during fiscal 2005, we repurchased in the open market $166.7
million of our 7.75% Notes due April 15, 2007 and $203.7 million of our 9.125%
Senior Notes due December 15, 2011 through a cash tender offer. The cost of this
open market repurchase resulted in a pretax loss due to the early extinguishment
of debt of $29.4 million. In accordance with SFAS No. 145, this loss has been
classified within loss from operations. Refer to Note 9 - Indebtedness in the
Notes to the Consolidated Financial Statements for further discussion of the
cash tender offer.
During fiscal 2004, we repurchased in the open market $6.0 million of
our 7.75% Notes due April 15, 2007. The cost of this open market repurchase
resulted in a pretax gain due to the early extinguishment of debt of $0.8
million. In accordance with SFAS No. 145, this gain has been classified within
loss from operations.
During fiscal 2003, we repurchased in the open market $9.8 million of
our 7.75% Notes due April 15, 2007 and $14.0 million of our 9.125% Notes due
December 15, 2011. These open market repurchases resulted in a net gain due to
the early extinguishment of debt of $1.9 million, which has been classified
within loss from operations in accordance with SFAS 145.
OTHER
During fiscal 2005 and fiscal 2004, we sold 5 and 7 properties,
respectively, and simultaneously leased them back from the purchaser. However,
due to our Company's continuing involvement with 1 and 5 these properties,
respectively, as (i.) we receive sublease income that is more than 10% of the
fair market value of these properties, (ii.) lease contains renewal options that
extend beyond the economic useful life of the property, and (iii.) we are
obligated to repurchase the properties if certain circumstances occur, the sales
did not qualify for sale-leaseback accounting in accordance with SFAS 98,
"Accounting for Leases" but rather as long-term real estate liabilities under
the provisions of SFAS 66, "Accounting for Sales of Real Estate" ("SFAS 66"). In
accordance with SFAS 66, the carrying value of these properties of approximately
$9.0 million and $8.9 million remained on our Consolidated Balance Sheets at
February 26, 2005 and February 28, 2004, respectively, and no sale was
recognized. Instead, the sales price of these properties of $20.8 million and
$23.3 million was recorded as a long-term real estate liability with a maturity
of 20 years within "Long-term real estate liabilities" on our Consolidated
Balance Sheets at February 25, 2006 and February 26, 2005, respectively. In
addition, all lease payments are being charged to "Interest expense" in our
Consolidated Statements of Operations. Of the 1 and 5 properties sold during
fiscal 2005 and fiscal 2004, respectively, all were sold for a profit resulting
in a gain, after deducting expenses, which has been deferred and will not be
recognized until the end of the respective leases when our continuing
involvement ceases.
41
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
"Long-term real estate liabilities" on our Consolidated Balance Sheets
also include various leases in which our Company received landlord allowances to
offset the costs of structural improvements we made to the leased space. As we
had paid directly for a substantial portion of the structural improvement costs,
we were considered the owner of the building during the construction period. In
all situations upon completion of the construction, we were unable to meet the
requirements under SFAS 98, "Accounting for Leases" to qualify for
sale-leaseback treatment; thus, the landlord allowances have been recorded as
long-term real estate liabilities on our Consolidated Balance Sheets and have
been amortized over the lease term based on rent payments designated in the
lease agreements. These leases have terms ranging between 12 and 25 years and
effective annual percentage rates between 4.74% and 44.78%. The effective annual
percentage rates were implicitly calculated based upon technical accounting
guidance.
The remaining 4 and 2 properties sold and simultaneously leased them
back from the purchaser during fiscal 2005 and fiscal 2004, respectively, had a
carrying value of approximately $16.1 million and $8.6 million, respectively.
Net proceeds received related to these transactions amounted to approximately
$32.6 million and $26.3 million, respectively. These properties were sold for a
profit resulting in (i.) a gain that was immediately recognized of $5.1 million
and nil, respectively, as we are leasing back more than a minor part but less
than substantially all of the property sold in accordance with SFAS 28,
"Accounting for Sales with Leasebacks," and (ii.) a deferred gain after
deducting expenses of $11.1 million and $17.6 million, respectively, which will
be recognized as an offset to rent expense over the remaining life of the
leases.
During fiscal 2005, fiscal 2004, and fiscal 2003, we recognized gains
related to all of our sale leaseback transactions of $8.8 million, of which $5.1
million related to recognition of a portion of the gain on sale in the current
year as we are leasing back more than a minor part but less than substantially
all of the property sold as discussed above, $2.6 million, and $4.7 million, of
which $2.3 million related to the deferred gain that was recognized as a result
of the sale of the Landover coffee plant, respectively. The remaining deferred
gain at February 25, 2006 and February 26, 2005 amounted to $63.5 million and
$58.5 million, respectively.
We expect to enter into similar transactions for other owned properties
from time to time in the future.
We currently have Registration Statements dated January 23, 1998 and
June 23, 1999, allowing us to offer up to $75 million of debt and/or equity
securities at terms contingent upon market conditions at the time of sale.
Although our Company declared and paid a special one-time dividend to
our shareholders of record on April 17, 2006 equal to $7.25 per share on April
25, 2006, which is subsequent to our fiscal year end of February 25, 2006, our
Company's policy is to not pay dividends. As such, we have not made dividend
payments in the previous three years and do not intend to pay dividends in the
normal course of business in fiscal 2006. However, our Company is permitted,
under the terms of our Revolver, to pay cash dividends on common shares.
42
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
As of February 25, 2006, we have the following contractual obligations
and commitments:
<TABLE>
<CAPTION>
Payments Due by Period (in millions)
------------------------------------------------------------------------------------
Contractual Less than
Obligations Total 1 Year 1 - 3 Years 4 - 5 Years Thereafter
---------------------- ------------- -------------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Debt (1) $ 246.9 $ 0.6 $ 32.2 $ 0.2 $ 213.9
Capital Leases (2) 75.0 5.5 9.8 9.1 50.6
Operating Leases(2) 2,150.3 182.3 352.7 326.4 1,288.9
Long-term Real Estate
Liabilities (2) 651.0 35.0 70.4 71.1 474.5
Pension Obligations (3) 62.9 11.2 11.7 11.8 28.2
Postretirement
Obligations (4) 33.9 1.5 3.1 3.2 26.1
Occupancy Payments (5) 428.2 47.2 82.5 69.7 228.8
Severance and other
related items (6) 15.2 10.9 2.8 0.3 1.2
Interest (7) 637.0 22.5 40.4 40.0 534.1
Environmental Liability (8) 1.3 0.6 0.7 - -
Postemployment
Obligations (9) 10.5 1.5 2.9 2.9 3.2
Defined Contribution
Plans (10) 9.3 9.3 - - -
Multi-employer Pension
Plans (10) 37.8 37.8 - - -
Purchase Commitments (11):
Equipment Purchases 1.3 1.3 - - -
Equipment Rentals 3.5 1.3 2.1 0.1 -
Suppliers 1,546.3 337.4 272.5 181.3 755.1
Manufacturers/Vendors 17.9 8.7 6.7 0.8 1.7
Service Contracts 17.7 12.4 5.3 - -
Consulting 4.1 4.1 - - -
---------- ---------- -------- -------- ----------
Total $ 5,950.1 $ 731.1 $ 895.8 $ 716.9 $ 3,606.3
========== ========== ======== ======== ==========
</TABLE>
(1) Amounts represent contractual amounts due. Refer to Note 9 of our
Consolidated Financial Statements for information regarding long-term debt.
We expect to settle such long-term debt by several methods, including cash
flows from operations.
(2) Amounts represent contractual amounts due. Refer to Note 11 of our
Consolidated Financial Statements for information regarding capital leases,
operating leases and long-term real estate liabilities.
(3) Amounts represent future benefit payments that were actuarially determined
for our unfunded defined benefit pension plans as well as future
contributions to our defined benefit pension plans. Refer to Note 13 of our
Consolidated Financial Statements for information regarding our defined
benefit pension plans.
(4) Amounts represent future benefit payments that were actuarially determined
for our unfunded postretirement benefit obligation. Refer to Note 13 of our
Consolidated Financial Statements for information regarding our
postretirement benefits.
(5) Amounts represent our future occupancy payments primarily relating to our
asset disposition initiatives (refer to Note 8 of our Consolidated
Financial Statements), discontinued operations (refer to Note 7 of our
Consolidated Financial Statements) and store closures made during the
normal course of business.
(6) Amounts represent our future severance obligations and other related items
primarily relating to our normal course of business, asset disposition
initiatives, and discontinued operations.
43
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
(7) Amounts represent contractual amounts due. Refer to Note 9 of our
Consolidated Financial Statements for information regarding our interest
payments. Note that amounts presented exclude estimates on future variable
interest rate payments as we do not have any variable interest rate debt as
of the balance sheet date.
(8) Amounts represent our future contractual amounts payable.
(9) Amounts represent our future benefit payments that were actuarially
determined for our short and long term disability programs. Refer to Note
13 of our Consolidated Financial Statements for information regarding our
postemployment obligations.
(10) Amounts represent our best estimate of our immediate funding requirements
of our defined contribution and multiemployer plans in which we
participate. Refer to Note 13 of our Consolidated Financial Statements for
information regarding these obligations.
(11) The purchase commitments include agreements to purchase goods or services
that are enforceable and legally binding and that specify all significant
terms, including open purchase orders. We expect to fund these commitments
with cash flows from operations.
<TABLE>
<CAPTION>
Expiration of Commitments (in millions)
-----------------------------------------------------------------------------------
Other Less than
Commitments Total 1 Year 1 - 3 Years 4 - 5 Years Thereafter
---------------------- ------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Guarantees $ 1.8 $ 0.2 $ 0.5 $ 0.5 $ 0.6
============= ============== ============= ============= =============
</TABLE>
We are the guarantor of a loan of $1.8 million related to a shopping
center, which will expire in 2011.
In the normal course of business, we have assigned to third parties
various leases related to former operating stores (the "Assigned Leases"). When
the Assigned Leases were assigned, we generally remained secondarily liable with
respect to these lease obligations. As such, if any of the assignees were to
become unable to continue making payments under the Assigned Leases, we could be
required to assume the lease obligation. As of February 25, 2006, 129 Assigned
Leases remain in place. Assuming that each respective assignee became unable to
continue to make payments under an Assigned Lease, an event we believe to be
remote, we estimate our maximum potential obligation with respect to the
Assigned Leases to be approximately $348.8 million, which could be partially or
totally offset by reassigning or subletting such leases.
Our existing senior debt rating was Caa1 with stable outlook with
Moody's Investors Service ("Moody's") and B- with developing outlook with
Standard & Poor's Ratings Group ("S&P") as of February 25, 2006. Our liquidity
rating was SGL1 with Moody's as of February 25, 2006. Our recovery rating was 1
with S&P as of February 25, 2006 indicating a high expectation of 100% recovery
of our senior debt to our lenders. On April 6, 2006, as a result of the
declaration of a special one-time dividend to our shareholders of record on
April 17, 2006, Moody's changed our rating outlook to negative from stable and
lowered our liquidity rating to SGL3 from SGL1. S&P also revised our outlook to
stable from developing. Future rating changes could affect the availability and
cost of financing to our Company.
MARKET RISK
Market risk represents the risk of loss from adverse market changes
that may impact our consolidated financial position, results of operations or
cash flows. Among other possible market risks, we are exposed to such risk in
the areas of interest rates and foreign currency exchange rates.
44
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
From time to time, we may enter hedging agreements in order to manage
risks incurred in the normal course of business including forward exchange
contracts to manage our exposure to fluctuations in foreign exchange rates.
INTEREST RATES
Our exposure to market risk for changes in interest rates relates
primarily to our debt obligations. We do not have cash flow exposure due to rate
changes on our $246.9 million in total indebtedness as of February 25, 2006
because they are at fixed interest rates. However, we do have cash flow exposure
on our committed bank lines of credit due to our variable floating rate pricing.
Accordingly, during fiscal 2005 and fiscal 2004, a presumed 1% change in the
variable floating rate would not have impacted interest expense as there were
minimal or no borrowings under our committed bank lines of credit. During fiscal
2003, a presumed 1% change in the variable floating rate would have impacted
interest expense by $0.2 million.
FOREIGN EXCHANGE RISK
We are exposed to foreign exchange risk to the extent of adverse
fluctuations in the Canadian dollar. A change in the Canadian currency of 10%
would have resulted in a fluctuation in our investment in Metro, Inc. of $33.9
million at February 25, 2006. We do not believe that a change in the Canadian
currency of 10% will have a material effect on our statements of operations or
cash flows.
During fiscal 2005, we entered into a six month currency exchange
forward contract totaling $900 million Canadian dollar notional value to hedge
our net investment in our Canadian foreign operation against adverse movements
in exchange rates. Also during fiscal 2005 and upon completion of the sale of
our Canadian operations as discussed in Note 17 - Hedge of Net Investment in
Foreign Operations, this forward contract was terminated prior to its
expiration.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those accounting estimates that we
believe are important to the portrayal of our financial condition and results of
operations and require our most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("U.S. GAAP")
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
45
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
SELF-INSURANCE RESERVES
Our Consolidated Balance Sheets include liabilities with respect to
self-insured workers' compensation and general liability claims. We estimate the
required liability of such claims on a discounted basis, utilizing an actuarial
method, which is based upon various assumptions, which include, but are not
limited to, our historical loss experience, projected loss development factors,
actual payroll and other data. The total current and non-current liability for
self-insurance reserves recorded at February 25, 2006 related to our United
States segment was $131.0 million, which includes a $8.5 million adjustment for
workers compensation state assessment charges relating to prior year claims.
During fiscal 2005, we changed our method of accruing estimated workers
compensation state assessment charges for future years from an accrual basis to
an actuarial basis as required by Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SOP 97-3").
The difference between actual workers compensation state assessment expense
recognized in our Consolidated Statement of Operations and workers compensation
state assessment expense that should have been recorded per SOP 97-3 was not
significant. An adjustment of $8.5 million was recorded for expected future
workers compensation state assessment charges that will be paid related to the
incurred workers compensation claims on our Consolidated Balance Sheet at
February 25, 2006. This amount was recorded in "Store operating, general and
administrative expense" in our Consolidated Statement of Operations for the year
ended February 25, 2006.
The discount rate used at February 25, 2006 was 4.75% and was based on
the timing of the projected cash flows of future payments to be made for claims.
A 1% increase in the discount rate would decrease the required liability by $3.7
million. Conversely, a 1% decrease in the discount rate would increase the
required liability by $3.9 million. The required liability is also subject to
adjustment in the future based upon the changes in claims experience, including
changes in the number of incidents (frequency) and changes in the ultimate cost
per incident (severity).
LONG-LIVED ASSETS
We review the carrying values of our long-lived assets for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. Such review is based upon
groups of assets and the undiscounted estimated future cash flows from such
assets to determine if the carrying value of such assets is recoverable from
their respective cash flows. If such review indicates an impairment exists, we
measure such impairment on a discounted basis using a probability weighted
approach and a 7 year U.S. Treasury risk free rate.
46
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
We also review assets in stores planned for closure or conversion for
impairment upon determination that such assets will not be used for their
intended useful life. During fiscal 2005, we recorded property impairment losses
of $49.6 million as follows:
<TABLE>
<CAPTION>
Fiscal 2005
-----------------------------------
U.S. Canada Total
--------- --------- ---------
<S> <C> <C> <C>
Impairments due to closure or conversion in the normal course
of business $ 9,851 $ 506 $ 10,357
Impairments due to unrecoverable assets 17,728 - 17,728
Impairments due to closure of stores impacted by Hurricane
Katrina (1) 6,090 - 6,090
Impairments related to the closure of stores in the Midwest (2) 6,873 - 6,873
Impairments related to the sale of U.S. distribution operations
And warehouses (3) 8,590 - 8,590
--------- --------- ---------
Total impairments $ 49,132 $ 506 $ 49,638
========= ========= =========
</TABLE>
(1) Refer to Note 4 - Hurricane Katrina and Impact on U.S. Business.
(2) Refer to Note 8 - Asset Disposition Initiatives.
(3) Refer to Note 3 - Sale of Our U.S. Distribution Operations and
Warehouses.
All of these amounts are included in SG&A in our Consolidated
Statements of Operations. The effects of changes in estimates of useful lives
were not material to ongoing depreciation expense.
If current operating levels do not improve, there may be additional
future impairments on long-lived assets, including the potential for impairment
of assets that are held and used.
CLOSED STORE AND CLOSED WAREHOUSE RESERVES
For closed stores and warehouses that are under long-term leases, we
record a discounted liability using a risk free rate for the future minimum
lease payments and related costs, such as utilities and taxes, from the date of
closure to the end of the remaining lease term, net of estimated probable
recoveries from projected sublease rentals. If estimated cost recoveries exceed
our liability for future minimum lease payments, the excess is recognized as
income over the term of the sublease. We estimate future net cash flows based on
our experience in and our knowledge of the market in which the closed store and
warehouse is located. However, these estimates project net cash flow several
years into the future and are affected by variable factors such as inflation,
real estate markets and economic conditions. While these factors have been
relatively stable in recent years, variation in these factors could cause
changes to our estimates. As of February 25, 2006, we had recorded liabilities
for estimated probable obligations of $203 million. Of this amount, $23 million
relates to stores closed in the normal course of business, $154 million relates
to stores closed as part of the asset disposition initiatives (see Note 8 of our
Consolidated Financial Statements), $15 million relates to closed warehouses as
part of the sale of our U.S. distribution operation and warehouses (see Note 3
of our Consolidated Financial Statements) and $11 million relates to stores
closed as part of our exit of the northern New England and Kohl's businesses
(see Note 7 of our Consolidated Financial Statements).
47
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
EMPLOYEE BENEFIT PLANS
The determination of our obligation and expense for pension and other
postretirement benefits is dependent, in part, on our selection of certain
assumptions used by our actuaries in calculating these amounts. These
assumptions are disclosed in Note 13 of our Consolidated Financial Statements
and include, among other things, the discount rate, the expected long-term rate
of return on plan assets and the rates of increase in compensation and health
care costs. In accordance with U.S. GAAP, actual results that differ from our
Company's assumptions are accumulated and amortized over future periods and,
therefore, affect our recognized expense and recorded obligation in such future
periods. While we believe that our assumptions are appropriate, significant
differences in our actual experience or significant changes in our assumptions
may materially affect our pension and other post-retirement obligations and our
future expense.
An example of how changes in these assumptions can affect our financial
statements occurred in fiscal 2005. Based on our review of market interest
rates, actual return on plan assets and other factors, we lowered our discount
rate for U.S. plans to 5.50% at year-end 2005 from 5.75% at year-end 2004. We
also lowered our expected return on plan assets for U.S. plans to 6.50% at
year-end 2005 from 6.75% at year-end 2004. These rates are applied to the
calculated value of plan assets and liabilities, which results in an amount that
is included in pension expense or income in the following years. When not
considering other changes in assumptions or actual return on plan assets, a 1%
change in the discount rate alone would either increase the benefit obligation
by $22.6 million or decrease the benefit obligation by $19.0 million, and a 1%
change in expected return on plan assets alone would either increase or decrease
2005 U.S. pension expense by $1.9 million.
When not considering other changes in assumptions for our
post-retirement benefits, a 1% change in the U. S. discount rate alone would
either increase or decrease U.S. 2005 service and interest cost by $0.04
million, while the accumulated post-retirement benefit obligation would either
increase by $2.2 million or decrease by $1.9 million. The effect of a 1% change
in the assumed health care cost trend rate for each future year on the sum of
U.S. 2005 service and interest cost would either be an increase or decrease of
$0.1 million, while accumulated post-retirement benefit obligation would either
increase by $1.3 million or decrease by $1.2 million.
Refer to Note 13 - Retirement Plans and Benefits in the Notes to
Consolidated Financial Statements for a full discussion of our Company's
employee benefit plans.
INVENTORIES
We evaluate inventory shrinkage throughout the year based on actual
physical counts and record reserves based on the results of these counts to
provide for estimated shrinkage between the store's last inventory and the
balance sheet date.
INCOME TAXES
As discussed in Note 12 of the Consolidated Financial Statements, our
Company recorded a valuation allowance for the entire U.S. net deferred tax
asset since, in accordance with SFAS 109, it was more likely than not that the
net deferred tax asset would not be utilized based on historical cumulative
losses. Under SFAS 109, this valuation allowance could be reversed in future
periods if our Company experiences improvement in our U.S. operations.
48
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standard Board ("FASB")
issued SFAS 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4" ("SFAS
151"). SFAS 151 requires that handling costs and waste material (spoilage) be
recognized as current-period charges regardless of whether they meet the
previous requirement of being abnormal. In addition, this Statement requires
that allocations of fixed overhead to the cost of inventory be based on the
normal capacity of the production facilities. SFAS 151 is effective for our 2006
fiscal year. We have evaluated the provisions of SFAS 151 and concluded that its
adoption will not have a material impact on our consolidated financial position
or results of operations.
In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary
Assets, an Amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 is based on
the principle that exchanges of nonmonetary assets should be measured based on
the fair value of the assets exchanged. This pronouncement amends APB No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is effective for nonmonetary
exchanges occurring in fiscal periods beginning after June 15, 2005 (the quarter
ended June 17, 2006 for our Company). We have evaluated the provisions of SFAS
153 and concluded that its adoption will not have a material impact on our
consolidated financial position or results of operations.
In December 2004, the FASB issued SFAS 123R (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, supersedes APB
No. 25 and related interpretations and amends SFAS No. 95, "Statement of Cash
Flows." Refer to Note 14 - Stock Based Compensation for further discussion
regarding our Company's adoption of SFAS 123R.
In March 2005, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 107, "Share Based Payments" ("SAB 107") to provide
public companies additional guidance in applying the provisions of SFAS 123R.
Among other things, SAB 107 describes the SEC staff's expectations in
determining the assumptions that underlie the fair value estimates and discusses
the interaction of Statement 123R with certain existing SEC guidance. We have
adopted the provisions of SAB 107 in conjunction with the adoption of FAS 123R
beginning February 27, 2005. Refer to Note 14 - Stock Based Compensation for
further discussion and disclosure.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting
for Contingent Asset Retirement Obligations" ("FIN 47"), an interpretation of
FASB Statement No. 143, "Asset Retirement Obligations" ("SFAS 143"). FIN 47
clarifies that the term "conditional asset retirement obligation" as used in
SFAS 143 refers to a legal obligation to perform an asset retirement activity in
which the timing and (or) method of settlement are conditional on a future event
that may or may not be within the control of the entity. An entity is required
to recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated, even
if conditional on a future event. FIN 47 is effective no later than the end of
fiscal years ending after December 15, 2005, or our fiscal year ending February
25, 2006. For existing contingent asset retirement obligations which are
determined to be recognizable under FIN 47, the effect of applying FIN 47 would
be recognized as a cumulative effect of a change in accounting principle. We
have evaluated the provisions of FIN 47 and concluded that its adoption did not
have a material impact on our consolidated financial position or results of
operations.
49
<PAGE>
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections" ("SFAS 154") which replaces Accounting Principles Board Opinions
No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements-An Amendment of APB Opinion No. 28." SFAS 154
provides guidance on the accounting for and reporting of accounting changes and
error corrections. It establishes retrospective application, unless
impracticable, as the required method for reporting a change in accounting
principle and the reporting of a correction of an error. FAS 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005 and is required to be adopted by our Company in the
first quarter of fiscal 2006. Our Company is not currently contemplating an
accounting change which would be impacted by SFAS 154.
In June 2005, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 05-6, "Determining the Amortization Period for
Leasehold Improvements Purchased after Lease Inception or Acquired in a Business
Combination" ("EITF 05-6"). EITF 05-6 requires that leasehold improvements
acquired in a business combination be amortized over the shorter of the useful
life of the assets or a term that includes required lease periods and renewals
that are deemed to be reasonably assured at the date of acquisition. EITF 05-6
also requires that leasehold improvements that are placed in service
significantly after and not contemplated at or near the beginning of the lease
term be amortized over the shorter of the useful life of the assets or a term
that includes required lease periods and renewals that are deemed to be
reasonably assured at the date the leasehold improvements are purchased. EITF
05-6 is effective for our third quarter beginning September 11, 2005. The impact
of EITF 05-6 did not have a material effect on our Company's financial condition
and results of operations.
In September 2005, the FASB ratified the consensus reached in EITF
Issue No. 04-13, "Accounting for Purchases and Sales of Inventory with the Same
Counterparty" (EITF 04-13). EITF 04-13 defines when a purchase and a sale of
inventory with the same party that operates in the same line of business should
be considered a single nonmonetary transaction. EITF 04-13 is effective for new
arrangements that a company enters into in periods beginning after March 15,
2006 (our second quarter beginning June 18, 2006). We have evaluated the
provisions of EITF 04-13 and have adopted the guidance. This adoption did not
have a material impact on our Company's financial condition or results of
operations.
In October 2005, the FASB issued FASB Staff Position FAS 13-1 ("FSP FAS
13-1"), which requires companies to expense rental costs associated with ground
or building operating leases that are incurred during a construction period. As
a result, companies that are currently capitalizing these rental costs are
required to expense them beginning in its first reporting period beginning after
December 15, 2005. FSP FAS 13-1 is effective for our Company as of the first
quarter of fiscal 2006. We evaluated the provisions of FSP FAS 13-1 and do not
believe that its adoption will have a material impact on our Company's financial
condition or results of operations.
50
<PAGE>
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis - Continued
On November 3, 2005, the FASB issued FASB Staff Position FAS 115-1 and
FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments" (FSP FAS 115-1 and FAS 124-1"). FSP FAS 115-1 and FAS
124-1 address the determination as to when an investment is considered impaired,
whether that impairment is other-than-temporary and the measurement of loss. It
also includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. FSP FAS 115-1 and FAS 124-1 are effective for reporting periods
beginning after December 15, 2005 and are required to be adopted by our Company
in the first quarter of fiscal 2006. We have evaluated the impact of FSP FAS
115-1 and FAS 124-1 on our Company and concluded that its adoption will not have
a material impact on our consolidated financial position or results of
operations. We have included the necessary disclosures relating to unrealized
losses that have not been recognized as other-than-temporary impairments in Note
5 - Cash, Restricted Cash, Cash Equivalents and Marketable Securities at
February 25, 2006.
CAUTIONARY NOTE
This presentation may contain forward-looking statements about the
future performance of our Company, and is based on our assumptions and beliefs
in light of information currently available. We assume no obligation to update
this information. These forward-looking statements are subject to uncertainties
and other factors that could cause actual results to differ materially from such
statements including but not limited to: competitive practices and pricing in
the food industry generally and particularly in our principal markets; our
relationships with our employees; the terms of future collective bargaining
agreements; the costs and other effects of lawsuits and administrative
proceedings; the nature and extent of continued consolidation in the food
industry; changes in the financial markets which may affect our cost of capital
or the ability to access capital; supply or quality control problems with our
vendors; and changes in economic conditions, which may affect the buying
patterns of our customers.
51
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal 2005 Fiscal 2004 Fiscal 2003
-------------- -------------- ---------------
<S> <C> <C> <C>
Sales $ 8,740,347 $ 10,854,911 $ 10,899,308
Cost of merchandise sold (6,235,275) (7,813,771) (7,827,211)
-------------- -------------- ---------------
Gross margin 2,505,072 3,041,140 3,072,097
Store operating, general and
administrative expense (2,825,730) (3,114,062) (3,214,938)
-------------- -------------- ---------------
Loss from operations (320,658) (72,922) (142,841)
Gain on sale of Canadian operations 912,129 - -
Interest expense (92,248) (114,107) (103,098)
Interest income 13,457 2,776 2,282
Minority interest in earnings of consolidated
franchisees (1,131) 772 (142)
Equity in earnings of Metro, Inc. 7,801 - -
-------------- -------------- ---------------
Income (loss) from continuing operations
before income taxes 519,350 (183,481) (243,799)
(Provision for) benefit from income taxes (128,927) (528) 30,574
-------------- -------------- ---------------
Income (loss) from continuing operations 390,423 (184,009) (213,225)
Discontinued operations:
Income (loss) from operations of
discontinued businesses, net of tax
provision of $1,178 and $0 for the
years ended February 25, 2006, and
February 26, 2005, respectively, and
tax benefit of $23,682 for the year
ended February 22, 2003 1,626 (1,387) (32,703)
Gain (loss) on disposal of discontinued
operations, net of tax provision of
$421, $0 and $70,261 for the years ended
February 25, 2006, February 26, 2005,
and February 28, 2004, respectively 581 (2,702) 97,026
-------------- -------------- ---------------
Income (loss) from discontinued
operations 2,207 (4,089) 64,323
-------------- -------------- ---------------
Income (loss) before cumulative effect of
change in accounting principle 392,630 (188,098) (148,902)
Cumulative effect of change in accounting
principle - FIN 46-R, net of tax - - (8,047)
-------------- -------------- ---------------
Net income (loss) $ 392,630 $ (188,098) $ (156,949)
============== ============== ===============
Net income (loss) per share - basic:
Continuing operations $ 9.69 $ (4.77) $ (5.54)
Discontinued operations 0.05 (0.11) 1.67
Cumulative effect of change in
accounting principle - FIN 46-R - - (0.21)
-------------- -------------- ---------------
Net income (loss) per share - basic $ 9.74 $ (4.88) $ (4.08)
============== ============== ===============
Net income (loss) per share - diluted:
Continuing operations $ 9.59 $ (4.77) $ (5.54)
Discontinued operations 0.05 (0.11) 1.67
Cumulative effect of change in
accounting principle - FIN 46-R - - (0.21)
-------------- -------------- ---------------
Net income (loss) per share - diluted $ 9.64 $ (4.88) $ (4.08)
============== ============== ===============
Weighted average common shares outstanding:
Basic 40,301,132 38,558,598 38,516,750
============== ============== ===============
Diluted 40,725,942 38,558,598 38,516,750
============== ============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
52
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE (LOSS) INCOME
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Retained
Accumulated earnings
Common stock Additional other (accumu- Total
----------------------------- paid-in comprehensive lated stockholders'
Shares Amount capital (loss) income deficit) equity
------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT 2/22/03 38,515,806 $ 38,516 $ 459,411 $ (61,123) $ 78,849 $ 515,653
Net loss (156,949) (156,949)
Stock options exercised 3,099 3 168 171
Other comprehensive income 33,884 33,884
------------- ----------- ----------- ------------- ----------- -----------
BALANCE AT 2/28/04 38,518,905 38,519 459,579 (27,239) (78,100) 392,759
Net loss (188,098) (188,098)
Stock options exercised 246,094 246 1,380 1,626
Other share based awards 3,584 3,584
Other comprehensive income 23,931 23,931
------------- ----------- ----------- ------------- ----------- -----------
BALANCE AT 2/26/05 38,764,999 38,765 $ 464,543 (3,308) (266,198) 233,802
Net income 392,630 392,630
Stock options exercised 2,378,685 2,379 23,677 26,056
Other share based awards 5,303 5 8,973 8,978
Other comprehensive income 10,261 10,261
------------- ----------- ----------- ------------- ----------- -----------
BALANCE AT 2/25/06 41,148,987 $ 41,149 $ 497,193 $ 6,953 $ 126,432 $ 671,727
============= =========== =========== ============= =========== ===========
</TABLE>
COMPREHENSIVE (LOSS) INCOME
- ---------------------------
<TABLE>
<CAPTION>
Fiscal 2005 Fiscal 2004 Fiscal 2003
------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss) $ 392,630 $ (188,098) $ (156,949)
----------- ----------- -------------
Foreign currency translation adjustment 9,839 26,927 38,604
Minimum pension liability adjustment, net of tax 1,494 (3,211) (1,547)
Net unrealized loss on marketable securities, net of tax (1,015) - -
Net unrealized (loss) gain on derivatives, net of tax (57) 215 (3,173)
------------ ----------- -------------
Other comprehensive income, net of tax 10,261 23,931 33,884
----------- ----------- ------------
Total comprehensive income (loss) $ 402,891 $ (164,167) $ (123,065)
=========== =========== =============
</TABLE>
ACCUMULATED OTHER COMPREHENSIVE LOSS BALANCES
- ---------------------------------------------
<TABLE>
<CAPTION>
Net Unrealized Accumulated
Foreign Loss on Net Unrealized Minimum Other
Currency Marketable Gain / (Loss) Pension Comprehensive
Translation Securities on Derivatives Liability (Loss) Income
----------- -------------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance at February 22, 2003 $ (62,496) $ - $ 3,015 $ (1,642) $ (61,123)
Current period change 38,604 - (3,173) (1,547) 33,884
------------ ----------- ---------- ----------- -----------
Balance at February 28, 2004 (23,892) - (158) (3,189) (27,239)
Current period change 26,927 - 215 (3,211) 23,931
------------ ----------- ---------- ----------- -----------
Balance at February 26, 2005 3,035 - 57 (6,400) (3,308)
Current period change 9,839 (1,015) (57) 1,494 10,261
------------ ----------- ---------- ----------- -----------
Balance at February 26, 2005 $ 12,874 $ (1,015) $ - $ (4,906) $ 6,953
============ =========== ========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
53
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
February 25, 2006 February 26, 2005
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 229,589 $ 257,748
Restricted cash 146,309 -
Marketable securities 167,405 -
Accounts receivable, net of allowance for doubtful
accounts of $7,042 and $5,713 at February 25, 2006
and February 26, 2005, respectively 175,939 145,507
Inventories 405,310 720,799
Prepaid expenses and other current assets 85,462 40,627
------------ ------------
Total current assets 1,210,014 1,164,681
------------ ------------
Property:
Land 51,899 80,221
Buildings 183,572 307,933
Equipment 245,161 999,556
Leasehold improvements 662,410 1,193,318
------------ ------------
Total - at cost 1,143,042 2,581,028
Less accumulated depreciation and amortization (267,902) (1,104,454)
------------ ------------
Property owned, net 875,140 1,476,574
Property under capital leases, net 23,094 39,126
------------ ------------
Property - net 898,234 1,515,700
Equity investment in Metro, Inc. 338,756 -
Other assets 51,861 121,587
------------ ------------
Total assets $ 2,498,865 $ 2,801,968
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 569 $ 2,278
Current portion of obligations under capital leases 2,274 8,331
Accounts payable 209,774 543,481
Book overdrafts 35,447 83,306
Accrued salaries, wages and benefits 121,734 181,173
Accrued taxes 34,215 51,991
Other accruals 206,260 207,642
------------ ------------
Total current liabilities 610,273 1,078,202
------------ ------------
Long-term debt 246,282 634,028
Long-term obligations under capital leases 32,270 52,184
Long-term real estate liabilities 297,453 328,316
Other non-current liabilities 640,860 471,382
Minority interest in consolidated franchisees - 4,054
------------ ------------
Total liabilities 1,827,138 2,568,166
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - no par value; authorized - 3,000,000
shares; issued - none - -
Common stock - $1 par value; authorized - 80,000,000
shares; issued and outstanding - 41,148,987 and
38,764,999 shares at February 25, 2006 and
February 26, 2005, respectively 41,149 38,765
Additional paid-in capital 497,193 464,543
Accumulated other comprehensive income (loss) 6,953 (3,308)
Accumulated earnings (deficit) 126,432 (266,198)
------------ ------------
Total stockholders' equity 671,727 233,802
------------ ------------
Total liabilities and stockholders' equity $ 2,498,865 $ 2,801,968
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
54
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Fiscal 2005 Fiscal 2004 Fiscal 2003
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 392,630 $ (188,098) $ (156,949)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Asset disposition initiatives 108,068 (1,448) 32,550
Restructuring charge 77,054
Depreciation and amortization 207,329 268,105 276,545
Income tax provision relating to the sale of our Canadian operations 98,079 - -
Deferred income tax (benefit) provision - (1,370) 8,670
(Gain) loss on disposal of owned property and write-down of property, net (24,787) (28,704) 348
Impairment loss relating to Hurricane Katrina 6,090 - -
Midwest long-lived asset / goodwill impairment charge - 34,688 60,082
Other property impairments 28,085 8,629 8,660
(Gain) loss on disposal of discontinued operations (1,002) 2,702 (167,287)
Gain on sale of Canadian operations (912,129) - -
Loss on derivatives 15,446 - -
Equity in earnings of Metro, Inc. (7,801) - -
Loss on early extinguishment of debt 28,623 - -
Non-cash impact of early extinguishment of debt 809 - -
Other share based awards 8,978 - -
Cumulative effect of change in accounting principle - FIN 46-R - - 8,047
Other changes in assets and liabilities:
(Increase) decrease in receivables (56,130) 29,223 (3,779)
Decrease (increase) in inventories 109,521 (12,614) 44,121
Decrease (increase) in prepaid expenses and other current assets 585 (6,024) (43,427)
(Increase) decrease in other assets (7,344) (19,041) 5,334
(Decrease) increase in accounts payable (101,342) 46,295 (57,150)
(Decrease) increase in accrued salaries, wages and benefits, and taxes (31,414) (24,170) 4,958
(Decrease) increase in other accruals 48,931 (34,121) 16,623
Increase (decrease) in minority interest 1,806 (3,542) (742)
(Decrease) increase in other non-current liabilities (76,309) 42,591 (49,953)
Other, net 5,509 1,357 (3,138)
------------ ------------ ------------
Net cash (used in) provided by operating activities (80,715) 114,458 (16,487)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (191,050) (216,142) (160,951)
Proceeds from disposal of property 72,293 53,641 264,600
Proceeds from sale of Canadian operations, net of cash disposed 960,689 - -
Disposal related expenditures for sale of Canadian operations (53,882) - -
Payments for derivatives (15,446) - -
Increase in restricted cash (146,309) - -
Purchases of marketable securities (667,808) - -
Proceeds from maturities of marketable securities 500,810 - -
Proceeds from dividends from Metro, Inc. 4,708 - -
------------ ------------ ------------
Net cash provided by (used in) investing activities 464,005 (162,501) 103,649
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on revolving lines of credit - - (135,000)
Proceeds from short-term borrowings - 3,000 217,600
Principal payments on short-term borrowings - (3,000) (217,600)
Principal payments on long-term borrowings and other fees (413,961) (6,068) (47,137)
Net proceeds from long-term real estate liabilities 22,122 37,086 193,810
Principal payments on capital leases (11,033) (13,454) (13,828)
Proceeds from capital leases 10,000 - -
Decrease in book overdrafts (42,957) (13,665) (6,562)
Deferred financing fees (1,793) (1,334) (10,319)
Proceeds from exercises of stock options 26,056 1,599 21
------------ ------------ ------------
Net cash (used in) provided by financing activities (411,566) 4,164 (19,015)
------------ ------------ ------------
Initial impact of FIN 46-R - - 20,921
Effect of exchange rate changes on cash and
cash equivalents 117 4,619 8,926
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (28,159) (39,260) 97,994
Cash and cash equivalents at beginning of year 257,748 297,008 199,014
------------ ------------ ------------
Cash and cash equivalents at end of year $ 229,589 $ 257,748 $ 297,008
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
55
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts, and where noted)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of The Great
Atlantic & Pacific Tea Company, Inc. ("We," "Our," "Us" or "our Company") and
all majority-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated. Our Company uses the equity method of
accounting for our investment in Metro, Inc. on the basis that we have
significant influence over substantive operating decisions made by Metro, Inc.
through our membership on Metro, Inc.'s Board of Directors and its committees
and information technology services agreement.
At February 25, 2006, we operated retail supermarkets in the United
States. The operations are mainly in the Eastern part of the U.S. and certain
parts of the Midwest. Our principal stockholder, Tengelmann
Warenhandelsgesellschaft KG ("Tengelmann"), owned 53.5% of our common stock as
of February 25, 2006.
During fiscal 2005, we announced plans for a major strategic
restructuring that would focus future effort and investment on our core
operations in the Northeastern United States. Therefore, we initiated efforts to
divest our businesses in Canada and the Midwestern United States.
As further discussed in Note 2 - Divestiture of Our Business in Canada
and Stores in the Midwest United States, we sold our Canadian business at the
close of business on August 13, 2005 to Metro, Inc., a supermarket and pharmacy
operator in the Provinces of Quebec and Ontario, Canada. Although the Canadian
operations have been sold, our Company retained significant continuing
involvement in the operations of this business due to our ongoing equity
interests.
As we have not identified a buyer for our operations in the Midwestern
United States, our current plan is to operate this business as part of our core
business going forward. Thus, the assets and liabilities relating to our
operations in the Midwestern United States have not been classified as held for
sale at February 25, 2006.
Fiscal Year
Our fiscal year ends on the last Saturday in February. Fiscal 2005
ended February 25, 2006, fiscal 2004 ended February 26, 2005, and fiscal 2003
ended February 28, 2004. Fiscal 2005 and fiscal 2004 were each comprised of 52
weeks, and Fiscal 2003 was comprised of 53 weeks.
Use of 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 can differ from those estimates.
56
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Revenue Recognition
Retail revenue is recognized at point-of-sale. Discounts and allowances
that we provide to our customers are accounted for as a reduction to sales.
Cost of Merchandise Sold
Cost of merchandise sold includes cost of inventory sold during the
period, including purchasing and distribution costs. These costs include inbound
freight charges, purchasing and receiving costs, warehouse inspection costs,
warehousing costs, internal transfer costs and other distribution costs through
C&S Wholesale Grocers, Inc.
Vendor Allowances
Vendor allowances that relate to our Company's buying and merchandising
activities consist primarily of advertising, promotional and slotting
allowances. With the exception of allowances described below, all allowances are
recognized as a reduction of cost of goods sold when the related performance is
completed and the related inventory is sold. Lump-sum payments received for
multi-year contracts are generally amortized on a straight line basis over the
life of the contracts. Vendor rebates or refunds that are contingent upon our
Company completing a specified level of purchases or remaining a reseller for a
specified time period are recognized as a reduction of cost of goods sold based
on a systematic and rational allocation of the rebate or refund to each of the
underlying transactions that results in progress toward earning that rebate or
refund, assuming that we can reasonably estimate the rebate or refund and it is
probable that the specified target will be obtained. If we believe attaining the
milestone is not probable, the rebate or refund is recognized as the milestone
is achieved.
In November 2003, the Emerging Issues Task Force ("EITF") confirmed as
a consensus EITF Issue No. 03-10, "Application of EITF Issue No. 02-16,
Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor, by Resellers to Sales Incentives Offered to Consumers by
Manufacturers". EITF 03-10 did not impact our Company's existing accounting and
reporting policies for manufacturers' coupons that can be presented at any
retailer that accepts coupons. For arrangements with vendors that are entered
into or modified after February 28, 2004, our Company is required to record the
vendor reimbursement as a reduction of cost of sales (instead of sales) if the
coupon can only be redeemed at a Company retail store.
Advertising Costs
Advertising costs incurred to produce media advertising are expensed in
the period the advertisement is first shown. Other advertising costs, primarily
costs to produce circulars, place advertisements and pay advertising agency
fees, are expensed when incurred. We recorded advertising expense of $93.0
million for fiscal 2005, $120.2 million for fiscal 2004 and $143.2 million for
fiscal 2003.
Pre-opening Costs
Non-capital expenditures incurred in opening new stores or remodeling
existing stores are expensed as incurred. Rent incurred during the construction
period is capitalized and amortized over the primary lease term.
57
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In October 2005, the Financial Accounting Standards Board ("FASB")
issued FASB Staff Position FAS 13-1 ("FSP FAS 13-1"), which requires companies
to expense rental costs associated with ground or building operating leases that
are incurred during a construction period. As a result, companies that are
currently capitalizing these rental costs are required to expense them beginning
in its first reporting period beginning after December 15, 2005. FSP FAS 13-1 is
effective for our Company as of the first quarter of fiscal 2006. We evaluated
the provisions of FSP FAS 13-1 and do not believe that its adoption will have a
material impact on our Company's financial condition or results of operations.
Software Costs
We capitalize externally purchased software and amortize it over five
years. Amortization expense related to software costs for fiscal 2005, 2004 and
2003 was $9.9 million, $6.4 million and $6.4 million, respectively.
We capitalize certain internally generated software costs after
feasibility is reached. In fiscal 2005, 2004 and 2003, we capitalized $2.9
million, $8.6 million and $4.0 million, respectively, of such software costs.
These costs are amortized over 5 years. For fiscal 2005, 2004 and 2003, we
recorded related amortization expense of $14.5 million, $14.6 million and $13.4
million, respectively.
Externally purchased and internally developed software are classified
in "Property - Equipment" on our Consolidated Balance Sheets.
Earnings Per Share
We calculate earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") 128, "Earnings Per Share" ("SFAS 128").
SFAS 128 requires dual presentation of basic and diluted earnings per share
("EPS") on the face of the Consolidated Statements of Operations and requires a
reconciliation of the numerators and denominators of the basic and diluted EPS
calculations. Basic EPS is computed by dividing net income (loss) by the
weighted average shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if options to issue common stock were
exercised and converted to common stock.
The weighted average shares outstanding utilized in the basic EPS
calculation were 40,301,132 for fiscal 2005, 38,558,598 for fiscal 2004 and
38,516,750 for fiscal 2003. The additional common stock equivalents for fiscal
2005, fiscal 2004, and fiscal 2003 were 424,810, 294,884 and 391,915,
respectively. However, such shares for fiscal 2004 and 2003 were antidilutive
and thus excluded from the diluted EPS calculation.
Translation of Canadian Currency
Assets and liabilities denominated in Canadian currency are translated
at year-end rates of exchange, and revenues and expenses are translated at
average rates of exchange during the year. Gains and losses resulting from
translation adjustments are accumulated as a separate component of accumulated
other comprehensive loss within Stockholders' Equity.
58
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Cash and Cash Equivalents
Short-term investments that are highly liquid with maturities of ninety
days or less when purchased are deemed to be cash equivalents. These balances as
well as credit card receivables of $32.6 million and $32.8 million at February
25, 2006 and February 26, 2005, respectively, are included in "Cash and cash
equivalents" on our Consolidated Balance Sheets.
Restricted Cash
Restricted cash is held in a money market fund and can only be used as
collateral for our new Letter of Credit Agreement that we entered into during
fiscal 2005. Refer to Note 9 - Indebtedness for further discussion of our new
Letter of Credit Agreement and Revolving Credit Agreement.
Marketable Securities
Investments with maturities greater than ninety days when purchased are
considered marketable securities. Our marketable securities are principally
comprised of commercial paper, corporate bonds, securities of the U.S,
government and its agencies, and auction rate securities. Our Company's
investments are considered to be available-for-sale and are reported at fair
value, with unrealized gains and losses, net of tax, reported as a separate
component of stockholder's equity. Our Company records other than temporary
declines in fair value to earnings as realized losses.
Inventories
Store inventories are stated principally at the lower of cost or market
with cost determined under the retail method on a first-in, first-out basis.
Under the retail method, the valuation of inventories at cost and resulting
gross margins are determined by applying a cost-to-retail ratio for various
groupings of similar items to the retail value of inventories. Inherent in the
retail inventory method calculations are certain management judgments and
estimates, including shrinkage, which could impact the ending inventory
valuation at cost as well as the resulting gross margins. Perishables and
pharmacy inventories are stated at the lower of cost or market with cost
determined under the gross profit method. Distribution center and other
inventories are stated primarily at the lower of cost or market with cost
determined on a first-in, first-out basis.
We estimate inventory shrinkage throughout the year based on the
results of our periodic physical counts in our stores and distribution centers
and record reserves based on the results of these counts to provide for
estimated shrinkage as of the balance sheet date.
Properties Held for Sale
Properties held for sale include those properties, which have been
identified for sale by our Company and are recorded at the lower of their
carrying value or fair value less cost to sell. Once properties are identified
as held for sale, they are no longer depreciated and are reclassified to
"Prepaid expenses and other current assets" on our Consolidated Balance Sheets.
At both February 25, 2006 and February 26, 2005, our properties held for sale
were $1.3 million.
Long-Lived Assets
We review the carrying values of our long-lived assets for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. Such review is primarily based
upon groups of assets and the undiscounted estimated future cash flows from such
assets to determine if the carrying value of such assets is recoverable from
their respective cash flows. If such review indicates an impairment exists, we
measure such impairment on a discounted basis using a probability weighted
approach and a 7 year U.S. Treasury risk free rate.
59
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
During fiscal 2005, fiscal 2004, and fiscal 2003, we recorded property
impairment losses as follows:
<TABLE>
<CAPTION>
Fiscal 2005 Fiscal 2004 Fiscal 2003
------------------------------- ------------------------------ ------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
--------- -------- --------- --------- --------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Impairments due to
closure or conversion
in the normal course
of business (1) $ 9,851 $ 506 $ 10,357 $ 6,000 $ 709 $ 6,709 $ 4,439 $ 1,670 $ 6,109
Impairments due to
unrecoverable
assets (1) 17,728 - 17,728 34,688 - 34,688 33,102 - 33,102
Impairments due to
Closure of stores
Impacted by Hurricane
Katrina (1) (2) 6,090 - 6,090 - - - - - -
Impairments related to
the closure of stores
in the Midwest (1) (3) 6,873 - 6,873 - - - - - -
Impairments related to
the sale of U.S.
distribution operations
and warehouses (1) (4) 8,590 - 8,590 - - - - - -
Impairments related to
the 2001 Asset
Disposition (1) (3) - - - 2,659 - 2,659 422 - 422
Impairments related to
the Farmer Jack
restructuring (1) (3) - - - 90 - 90 4,129 - 4,129
Impairments related to
our exit of the northern
New England and
Kohl's markets (1) (5) - - - 602 - 602 18,968 - 18,968
--------- --------- --------- --------- --------- -------- -------- -------- --------
Total impairments $ 49,132 $ 506 $ 49,638 $ 44,039 $ 709 $ 44,748 $ 61,060 $ 1,670 $ 62,730
========= ========= ========= ========= ========= ======== ======== ======== ========
</TABLE>
(1) Refer to Note 6 - Valuation of Goodwill and Long-Lived Assets.
(2) Refer to Note 4 - Hurricane Katrina and Impact on U.S. Business.
(3) Refer to Note 8 - Asset Disposition Initiatives.
(4) Refer to Note 3 - Sale of our U.S. Distribution Operations and
Warehouses.
(5) Refer to Note 7 - Discontinued Operations.
All of these amounts with the exception of the impairments related to
our exit of the northern New England and Kohl's markets are included in Store
operating, general and administrative expense in our Consolidated Statements of
Operations. The impairments related to our exit of the northern New England and
Kohl's markets are included in "Gain (loss) on disposal of discontinued
operations, net of tax" on our Consolidated Statements of Operations.
The effects of changes in estimates of useful lives were not material
to ongoing depreciation expense.
60
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Property
Depreciation and amortization are calculated on the straight-line basis
over the estimated useful lives of the assets. Buildings are depreciated based
on lives varying from twenty to fifty years and equipment is depreciated based
on lives varying from three to twelve years. Leasehold improvements are
amortized over the lesser of their estimated useful lives or the remaining
available lease terms. Property leased under capital leases is amortized over
the lives of the respective leases or over their economic useful lives,
whichever is less. During fiscal 2005, 2004 and 2003, in addition to the
impairment losses discussed above, we disposed of and/or wrote down certain
assets, which resulted in a pretax net gain of $24.8 million, pretax net gain of
$28.7 million, pretax net loss of $0.3 million, respectively.
Goodwill and Other Intangible Assets
In accordance with SFAS 142 "Goodwill and Other Intangible Assets,"
goodwill is no longer required to be amortized, but tested for impairment at
least annually by reassessing the appropriateness of the goodwill balance based
on forecasts of cash flows from operating results on a discounted basis in
comparison to the carrying value of such operations. If the results of such
comparison indicate that an impairment may exist, we determine the implied fair
market value of the goodwill using a purchase price allocation approach and
compare this value to the balance sheet amount. If such comparison indicates
that an impairment exists, we will recognize a charge to operations at that time
based upon the difference between the implied fair market value of the goodwill
and the balance sheet amount. During fiscal 2003, we determined that goodwill
relating to the Farmer Jack reporting unit was entirely impaired; thus, we
recorded an impairment charge of $27.0 million as a component of operating
income in "Store operating, general and administrative expense" in our
Consolidated Statements of Operations. Refer to Note 6 - Valuation of Goodwill
and Long Lived Assets in the Notes to our Consolidated Financial Statements for
further discussion relating to the impairment charges recorded.
The book value of goodwill and other intangible assets acquired at
February 26, 2005 relating to our Canadian operations was $6.1 million, net of
accumulated amortization of $1.4 million. As further discussed in Note 2 -
Divestiture of Our Business in Canada and Stores in the Midwest, we sold our
Canadian business at the close of business on August 13, 2005 to Metro, Inc.;
thus, we no longer consolidate this balance at February 25, 2006.
Through the date of sale of the Canadian operations in fiscal 2005 and
during fiscal 2004, we determined that a portion of the remaining goodwill and
other intangible assets relating to our Canadian goodwill and other intangible
assets had a definite life and recorded amortization expense of $0.1 million and
$0.3 million, respectively. No amortization expense was recorded for fiscal
2003.
Current Liabilities
Certain accounts payable checks issued but not presented to banks
frequently result in negative book balances for accounting purposes. Such
amounts are classified as "Book overdrafts" on our Consolidated Balance Sheets.
Liabilities for compensated absences of $50.7 million and $67.3 million
at February 25, 2006 and February 26, 2005, respectively, are included in
"Accrued salaries, wages and benefits" on our Consolidated Balance Sheets.
We accrue for vested vacation pay earned by our employees.
61
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Self Insurance Reserves
Our Consolidated Balance Sheets include liabilities with respect to
self-insured workers' compensation and general liability claims. The current
portion of these liabilities is included in "Other accruals" and the non-current
portion is included in "Other non-current liabilities" on our Consolidated
Balance Sheets. We estimate the required liability of such claims on a
discounted basis, utilizing an actuarial method, which is based upon various
assumptions, which include, but are not limited to, our historical loss
experience, projected loss development factors, actual payroll and other data.
The required liability is also subject to adjustment in the future based upon
the changes in claims experience, including changes in the number of incidents
(frequency) and changes in the ultimate cost per incident (severity).
During fiscal 2005, we changed our method of accruing estimated workers
compensation state assessment charges for future years from an accrual basis to
an actuarial basis as required by Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SOP 97-3").
The difference between actual workers compensation state assessment expense
recognized in our Consolidated Statement of Operations and workers compensation
state assessment expense that should have been recorded per SOP 97-3 was not
significant. An adjustment of $8.5 million was recorded for expected future
workers compensation state assessment charges relating to prior year claims that
will be paid related to the incurred workers compensation claims on our
Consolidated Balance Sheet at February 25, 2006. This amount was recorded in
"Store operating, general and administrative expense" in our Consolidated
Statement of Operations for the year ended February 25, 2006.
During fiscal 2005, we recorded a $8.6 million increase in our workers'
compensation and general liability reserves, primarily relating to the $8.5
million adjustment for workers compensation state assessment charges we recorded
as discussed above. During fiscal 2004 and fiscal 2003, we recorded a $20.9
million and $9.5 million, respectively, increase in our workers' compensation
and general liability reserves in response to both adverse development of prior
years' costs and other developments including a continuing trend of rising
costs. These amounts were recorded within "Store operating, general and
administrative expense" in our Consolidated Statements of Operations.
Closed Store and Warehouse Reserves
For stores and warehouses closed that are under long-term leases, we
record a discounted liability using a risk free rate for future minimum lease
payments and related costs, such as utilities and taxes, from the date of
closure to the end of the remaining lease term, net of estimated probable
recoveries from projected sublease rentals. If estimated cost recoveries exceed
our liability for future minimum lease payments, the excess is recognized as
income over the term of the sublease. We estimate net future cash flows based on
our experience in and knowledge of the market in which the closed store is
located. However, these estimates project net cash flow several years into the
future and are affected by variable factors such as inflation, real estate
markets and economic conditions. While these factors have been relatively stable
in recent years, variation in these factors could cause changes to our
estimates.
62
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Income Taxes
We provide deferred income taxes on temporary differences between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax regulations. A valuation allowance is recorded to
reduce a deferred tax asset to the amount expected to be realized.
Comprehensive Income (Loss)
Our Company's other comprehensive income (loss) relates to changes in
foreign currency translation, minimum pension liability and unrealized gains or
losses on derivatives and marketable securities available for sale.
Changes in other comprehensive income for the years ended February 25,
2006, February 26, 2005, and February 28, 2004 related to:
<TABLE>
<CAPTION>
Deferred Tax
Gross Benefit Net
------------------ ----------------- ---------------
<S> <C> <C> <C>
Foreign currency translation adjustment $ 9,839 $ - $ 9,839
Minimum pension liability adjustment 1,494 - 1,494
Unrealized loss on marketable securities (1,015) - (1,015)
Unrealized loss on derivatives (133) 76 (57)
------------------ ----------------- ---------------
For the year ended 2/25/06 $ 10,185 $ 76 $ 10,261
================== ================= ===============
Foreign currency translation adjustment $ 26,927 $ - $ 26,927
Minimum pension liability adjustment (3,211) - (3,211)
Unrealized gain on derivatives 189 26 215
------------------ ----------------- ---------------
For the year ended 2/26/05 $ 23,905 $ 26 $ 23,931
================== ================= ===============
Foreign currency translation adjustment $ 38,604 $ - $ 38,604
Minimum pension liability adjustment (1,547) - (1,547)
Unrealized loss on derivatives (4,972) 1,799 (3,173)
------------------ ----------------- ---------------
For the year ended 2/28/04 $ 32,085 $ 1,799 $ 33,884
================== ================= ===============
</TABLE>
Stock-Based Compensation
During fiscal 2005, we adopted and applied the fair value based method
of accounting prescribed by SFAS 123R, "Share-Based Payment" ("SFAS 123R") for
all share-based payment transactions with employees. Refer to Note 14 - Stock
Based Compensation for further discussion regarding our Company's adoption of
SFAS 123R.
During fiscal 2004 and fiscal 2003, we applied the intrinsic
value-based method of accounting prescribed by Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" with pro forma
disclosure of compensation expense, net income or loss and earnings or loss per
share as if the fair value based method prescribed by SFAS 123R had been
applied. Had compensation cost for our stock options been determined based on
the fair value at the grant dates for awards under those plans consistent with
the fair value methods prescribed by SFAS 123R, our net loss and net loss per
share would have been increased to the pro forma amounts indicated below:
63
<PAGE>
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003
---------------- ---------------
<S> <C> <C>
Net loss, as reported: $ (188,098) $ (156,949)
Deduct/(Add): Stock-based employee
compensation income (expense)
included in reported net loss, net of
related tax effects (1,617) (151)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (4,180) (6,509)
------------- --------------
Pro forma net loss $ (190,661) $ (163,307)
============= ==============
Net loss per share - basic and diluted:
As reported $ (4.88) $ (4.08)
Pro forma $ (4.94) $ (4.24)
</TABLE>
There were no stock options granted during fiscal 2005. The fair value
of the fiscal 2004 and fiscal 2003 option grants was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
Fiscal 2004 Fiscal 2003
------------------ ------------------
Expected life 7 years 7 years
Volatility 54% 51%
Dividend yield range 0% 0%
Risk-free interest rate range 3.17%-4.51% 2.71%-4.01%
New Accounting Pronouncements
In November 2004, the Financial Accounting Standard Board
("FASB") issued SFAS 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter
4" ("SFAS 151"). SFAS 151 requires that handling costs and waste material
(spoilage) be recognized as current-period charges regardless of whether they
meet the previous requirement of being abnormal. In addition, this Statement
requires that allocations of fixed overhead to the cost of inventory be based on
the normal capacity of the production facilities. SFAS 151 is effective for our
2006 fiscal year. We have evaluated the provisions of SFAS 151 and concluded
that its adoption will not have a material impact on our consolidated financial
position or results of operations.
In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary
Assets, an Amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 is based on
the principle that exchanges of nonmonetary assets should be measured based on
the fair value of the assets exchanged. This pronouncement amends APB No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is effective for nonmonetary
exchanges occurring in fiscal periods beginning after June 15, 2005 (the quarter
ended June 17, 2006 for our Company). We have evaluated the provisions of SFAS
153 and concluded that its adoption will not have a material impact on our
consolidated financial position or results of operations.
64
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In December 2004, the FASB issued SFAS 123R (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, supersedes APB
No. 25 and related interpretations and amends SFAS No. 95, "Statement of Cash
Flows." Refer to Note 14 - Stock Based Compensation for further discussion
regarding our Company's adoption of SFAS 123R.
In March 2005, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 107, "Share Based Payments" ("SAB 107") to provide
public companies additional guidance in applying the provisions of SFAS 123R.
Among other things, SAB 107 describes the SEC staff's expectations in
determining the assumptions that underlie the fair value estimates and discusses
the interaction of Statement 123R with certain existing SEC guidance. We have
adopted the provisions of SAB 107 in conjunction with the adoption of FAS 123R
beginning February 27, 2005. Refer to Note 14 - Stock Based Compensation for
further discussion and disclosure.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting
for Contingent Asset Retirement Obligations" ("FIN 47"), an interpretation of
FASB Statement No. 143, "Asset Retirement Obligations" ("SFAS 143"). FIN 47
clarifies that the term "conditional asset retirement obligation" as used in
SFAS 143 refers to a legal obligation to perform an asset retirement activity in
which the timing and (or) method of settlement are conditional on a future event
that may or may not be within the control of the entity. An entity is required
to recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated, even
if conditional on a future event. FIN 47 is effective no later than the end of
fiscal years ending after December 15, 2005, or our fiscal year ending February
25, 2006. For existing contingent asset retirement obligations which are
determined to be recognizable under FIN 47, the effect of applying FIN 47 would
be recognized as a cumulative effect of a change in accounting principle. We
have evaluated the provisions of FIN 47 and concluded that its adoption did not
have a material impact on our consolidated financial position or results of
operations.
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections" ("SFAS 154") which replaces Accounting Principles Board Opinions
No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements-An Amendment of APB Opinion No. 28." SFAS 154
provides guidance on the accounting for and reporting of accounting changes and
error corrections. It establishes retrospective application, unless
impracticable, as the required method for reporting a change in accounting
principle and the reporting of a correction of an error. FAS 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005 and is required to be adopted by our Company in the
first quarter of fiscal 2006. Our Company is not currently contemplating an
accounting change which would be impacted by SFAS 154.
In June 2005, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 05-6, "Determining the Amortization Period for
Leasehold Improvements Purchased after Lease Inception or Acquired in a Business
Combination" ("EITF 05-6"). EITF 05-6 requires that leasehold improvements
acquired in a business combination be amortized over the shorter of the useful
life of the assets or a term that includes required lease periods and renewals
that are deemed to be reasonably assured at the date of acquisition. EITF 05-6
also requires that leasehold improvements that are placed in service
significantly after and not contemplated at or near the beginning of the lease
term be amortized over the shorter of the useful life of the assets or a term
that includes required lease periods and renewals that are deemed to be
reasonably assured at the date the leasehold improvements are purchased. EITF
05-6 is effective for our third quarter beginning September 11, 2005. The impact
of EITF 05-6 did not have a material effect on our Company's financial condition
and results of operations.
65
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In September 2005, the FASB ratified the consensus reached in EITF
Issue No. 04-13, "Accounting for Purchases and Sales of Inventory with the Same
Counterparty" (EITF 04-13). EITF 04-13 defines when a purchase and a sale of
inventory with the same party that operates in the same line of business should
be considered a single nonmonetary transaction. EITF 04-13 is effective for new
arrangements that a company enters into in periods beginning after March 15,
2006 (our second quarter beginning June 18, 2006). We have evaluated the
provisions of EITF 04-13 and have adopted the guidance. This adoption did not
have a material impact on our Company's financial condition or results of
operations.
In October 2005, the FASB issued FASB Staff Position FAS 13-1 ("FSP FAS
13-1"), which requires companies to expense rental costs associated with ground
or building operating leases that are incurred during a construction period. As
a result, companies that are currently capitalizing these rental costs are
required to expense them beginning in its first reporting period beginning after
December 15, 2005. FSP FAS 13-1 is effective for our Company as of the first
quarter of fiscal 2006. We evaluated the provisions of FSP FAS 13-1 and do not
believe that its adoption will have a material impact on our Company's financial
condition or results of operations.
On November 3, 2005, the FASB issued FASB Staff Position FAS 115-1 and
FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments" (FSP FAS 115-1 and FAS 124-1"). FSP FAS 115-1 and FAS
124-1 address the determination as to when an investment is considered impaired,
whether that impairment is other-than-temporary and the measurement of loss. It
also includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. FSP FAS 115-1 and FAS 124-1 are effective for reporting periods
beginning after December 15, 2005 and are required to be adopted by our Company
in the first quarter of fiscal 2006. We have evaluated the impact of FSP FAS
115-1 and FAS 124-1 on our Company and concluded that its adoption will not have
a material impact on our consolidated financial position or results of
operations. We have included the necessary disclosures relating to unrealized
losses that have not been recognized as other-than-temporary impairments in Note
5 - Cash, Restricted Cash, Cash Equivalents and Marketable Securities at
February 25, 2006.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform
to current year presentation.
66
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 2 - DIVESTITURE OF OUR BUSINESS IN CANADA AND STORES IN THE MIDWEST
During fiscal 2005, we announced plans for a major strategic
restructuring that focuses future effort and investment on our core operations
in the Northeastern United States. Therefore, we initiated efforts to divest our
businesses in Canada and the Midwestern United States.
Canadian Operations
At the close of business on August 13, 2005, our Company completed the
sale of our Canadian business to Metro, Inc., a supermarket and pharmacy
operator in the Provinces of Quebec and Ontario, Canada, for $1.5 billion in
cash, stock and certain debt that was assumed by Metro, Inc. The stock received
consisted of 18,076,645 Class A subordinate shares of Metro, Inc., representing
approximately 15.83% of the outstanding shares of that class after issuance.
We use the equity method of accounting to account for our investment in
Metro, Inc. on the basis that we have significant influence over substantive
operating decisions made by Metro, Inc. through our membership on Metro, Inc.'s
Board of Directors and its committees and information technology services
agreement. The value of our equity investment in Metro, Inc. based upon Metro,
Inc.'s quoted market price is $464.6 million at February 25, 2006.
The following table summarizes the status and results of our Company's
equity investment in Metro, Inc. from the date of ownership through February 25,
2006:
Beginning investment at August 13, 2005 $ 494,578
Deferred portion of gain on sale of
A&P Canada (171,650)
Dividends and distributions received (4,708)
Equity earnings in Metro, Inc. 7,801
Foreign currency translation 12,735
------------
Equity investment in Metro, Inc. $ 338,756
============
In accordance with Emerging Issues Task Force ("EITF") 01-2,
"Interpretations of APB Opinion No. 29," we have indefinitely deferred $171.7
million of the gain resulting from the sale of our Canadian operations that
directly related to the economic interest we retained in Metro, Inc. We will
record our equity earnings or losses relating to our equity investment in Metro,
Inc. on about a three-month lag period as permitted by APB 18, "The Equity
Method of Accounting for Investments in Common Stock." Thus, during fiscal 2005,
we recorded $7.8 million in equity earnings relating to our equity investment in
Metro, Inc. and included this amount in "Equity in earnings of Metro, Inc." on
our Consolidated Statements of Operations.
The difference between the carrying value of our investment of $338.8
million and the amount of our underlying equity in Metro, Inc.'s net assets of
$210.3 million is $128.5 million.
67
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Metro, Inc.'s summarized financial information, derived from its
unaudited first quarter ended December 17, 2005 and audited year ended September
24, 2005 financial statements, is as follows (in millions):
<TABLE>
<CAPTION>
First Quarter Year
Ended Ended
Dec. 17, 2005 Sept. 24, 2005
----------------- -----------------
<S> <C> <C>
Balance sheet:
Current assets $ 912.9 $ 833.9
Noncurrent assets 2,584.1 2,574.2
----------------- -----------------
Total assets $ 3,497.0 $ 3,408.1
================= =================
Current liabilities $ 906.3 $ 914.7
Noncurrent liabilities * 1,259.4 1,180.2
----------------- -----------------
Total liabilities $ 2,165.7 $ 2,094.9
================== =================
Income statement:
Net sales $ 2,106.1 $ 5,587.1
================= =================
Cost of sales and operating expenses $ 2,001.0 $ 5,281.7
================= =================
Net income $ 26.7 $ 158.9
================= =================
</TABLE>
* Includes minority interests of $5.5 million for both the first
quarter ended December 17, 2005 and the year ended September 24, 2005.
During fiscal 2005, we recorded a pretax gain of $912.1 million (gain
of $805.3 million after tax), which is included in "Gain on sale of Canadian
operations" in our Consolidated Statements of Operations. Although the Canadian
operations have been sold at February 25, 2006, the criteria necessary to
classify the Canadian operations as discontinued have not been satisfied as our
Company retained significant continuing involvement in the operations of this
business upon its sale through our equity investment in Metro, Inc.
Midwestern United States Operations
As we have not identified a buyer for our operations in the Midwestern
United States, we have decided to retain and operate this business as part of
our core business going forward. As further discussed in Note 8 - Asset
Disposition Initiatives, we closed 35 of these stores during fiscal 2005. None
of these stores in any combination comprised a complete asset grouping and thus,
we have not included these stores within discontinued operations. However, as
discussed in Note 6 - Valuation of Long-Lived Assets, we recorded impairment
losses on property and equipment as a result of the closure of these stores in
the Midwest.
NOTE 3 - SALE OF OUR U.S. DISTRIBUTION OPERATIONS AND WAREHOUSES
During fiscal 2005, our Company sold our U.S. distribution operations
and some warehouse facilities and related assets to C&S Wholesale Grocers, Inc.
On June 27, 2005, the definitive agreements, including an Asset Purchase
Agreement and a 15 year Supply Agreement, were finalized and signed. The Asset
Purchase Agreement included the assignment of our leases in Central Islip, New
York and Baltimore, Maryland, and a warranty deed for our owned facilities in
Dunmore, Pennsylvania. In the Supply Agreement, C&S Wholesale Grocers, Inc. will
supply our Company with all of our requirements for groceries, perishables,
frozen food and other merchandise in the product categories carried by C&S
Wholesale Grocers, Inc. The transition of our owned warehouses and operations
began in the second quarter of fiscal 2005 and was completed during the fourth
quarter of fiscal 2005.
68
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Due to the scope of C&S Wholesale Grocers, Inc.'s distribution network,
our owned warehouses in Edison, New Jersey, Bronx, New York, and New Orleans,
Louisiana, were not sold as part of the transaction and have been closed. As a
result of this decision, we recorded a charge of $87.7 million ($4.5 million in
"Cost of merchandise sold" and $83.2 million in "Store, operating, general and
administrative expense" in our Consolidated Statement of Operations) relating to
the closing of these facilities during the 52 weeks ended February 25, 2006.
These costs are detailed as follows:
<TABLE>
<CAPTION>
52 weeks ended
February 25, 2006
-------------------
<S> <C>
BALANCE SHEET ACCRUALS
Occupancy related $ 15,420
Severance and benefits 47,220
-------------------
Total accrued to Balance Sheet 62,640
-------------------
NON-ACCRUABLE ITEMS RECORDED ON
STATEMENTS OF OPERATIONS
Property writeoffs 9,947
Inventory related costs 4,467
Non-accruable closing costs 10,656
-------------------
Total non-accruable items 25,070
-------------------
TOTAL AMOUNT RECORDED ON STATEMENTS
OF OPERATIONS 87,710
-------------------
Less non-accruable closing costs (10,656)
-------------------
TOTAL AMOUNT RECORDED ON STATEMENTS
OF CASH FLOWS - RESTRUCTURING CHARGE $ 77,054
===================
</TABLE>
The following table summarizes the activity to date related to the
charges recorded for the closing of these facilities. The table does not include
property writeoffs as they are not part of any reserves maintained on the
balance sheet. It also does not include inventory related costs and
non-accruable closing costs since they are expensed as incurred in accordance
with generally accepted accounting principles.
Severance
and
Occupancy Benefits Total
----------- ----------- -----------
Original charge (1) $ - $ 40,417 $ 40,417
Additions (2) 15,420 7,296 22,716
Utilization (3) (337) (43,597) (43,934)
Adjustments (4) - (493) (493)
----------- ----------- -----------
Balance at
February 25, 2006 $ 15,083 $ 3,623 $ 18,706
=========== =========== ===========
(1) The original charge to severance and benefits during the first quarter
of fiscal 2005 of $40.4 million related to (i.) individual severings as
well as retention and productivity incentives that were accrued as
earned of $7.6 million and (ii.) costs for future obligations for early
withdrawal from multi-employer union pension plans of $32.8 million.
69
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(2) The additions to occupancy during the remainder of fiscal 2005 related
to future occupancy costs such as rent, common area maintenance and
real estate taxes, and future obligations for the warehouses sold to
C&S Wholesale Grocers, Inc. The additions to severance and benefits
during the remainder of fiscal 2005 represented charges related to
additional individual severings as well as retention and productivity
incentives that were accrued as earned.
(3) Occupancy utilization of $0.3 million for fiscal 2005 represents
payments associated with the closure of certain warehouses. Severance
and benefits utilization of $43.6 million for fiscal 2005 represents
payments made to terminated employees during the period as well as
payments made to pension funds for early withdrawal from multi-employer
union pension plans.
(4) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During the fiscal 2005, we recorded
adjustments of $0.5 million primarily related to reversals of
previously accrued severance and benefits due to changes in individual
severings and associated benefit costs.
As of February 25, 2006, approximately $1.4 million of the liability
was included in "Accrued salaries, wages and benefits," $11.3 million of the
liability was included in "Other Accruals" and the remaining amount was included
in "Other non-current liabilities" on our Consolidated Balance Sheets.
We have evaluated the liability balance of $18.7 million as of February
25, 2006 based upon current available information and have concluded that it is
adequate. We will continue to monitor the status of the warehouses and
adjustments to the reserve balance may be recorded in the future, if necessary.
Our Company currently acquires a significant amount of our saleable
inventory from one supplier, C&S Wholesale Grocers, Inc. Although there are a
limited number of distributors that can supply our stores, we believe that other
suppliers could provide similar product on comparable terms. However, a change
in suppliers could cause a delay in distribution and a possible loss of sales,
which would affect operating results adversely.
NOTE 4 - HURRICANE KATRINA AND IMPACT ON U.S. BUSINESS
In August 2005, Hurricane Katrina had a major effect on certain
portions of the Gulf Coast region and resulted in the closure of our 28 stores
and warehouse facilities. As of February 25, 2006, 21 of these stores were open
and operating. During fiscal 2005, we determined that we would not re-open 5 of
our stores and recorded a charge for future occupancy costs of $7.1 million,
which has been included in "Store operating, general and administrative expense"
in our Statement of Consolidated Operations. The remaining 2 stores were
re-opened in March 2006.
We maintain insurance coverage for this type of loss which provides for
reimbursement from losses resulting from property damage, loss of product as
well as business interruption coverage. As of the balance sheet date, February
25, 2006, we were able to determine that we incurred impairment losses of $6.1
million for property & equipment that was not covered by insurance. This amount
has been included in "Impairment loss relating to Hurricane Katrina" in our
Consolidated Statement of Cash Flows for fiscal 2005. As of the balance sheet
date, February 25, 2006, we also determined that we incurred $0.9 million in
other related hurricane costs that were not covered by insurance, which has
been included in "Store operating, general and administrative expense" in our
Statement of Consolidated Operations for fiscal 2005.
70
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Our Company is currently assessing the remaining extent of our losses
in the Gulf Coast region and we expect to recover the losses caused by Hurricane
Katrina, except for those discussed above, in excess of our estimated insurance
deductible of approximately $5.0 million, which was recorded in "Store
operating, general and administrative expense" in our Consolidated Statements of
Operations for fiscal 2005.
NOTE 5 - CASH, RESTRICTED CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
At February 25, 2006, we had $146.3 million in restricted cash, which
was held in a money market fund, and can only be used as collateral for our new
Letter of Credit Agreement that we entered into during fiscal 2005. Refer to
Note 9 - Indebtedness for further discussion of our new Letter of Credit
Agreement and Credit Agreement.
The following is a summary of cash, cash equivalents, restricted cash,
and marketable securities as of February 25, 2006 and February 26, 2005:
<TABLE>
<CAPTION>
At February 25, 2006
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Costs Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CLASSIFIED AS:
Cash $ 78,414 $ - $ - $ 78,414
Cash equivalents:
Money market funds 151,175 - - 151,175
----------- ----------- ----------- -----------
Total cash and cash equivalents 229,589 - - 229,589
----------- ----------- ----------- -----------
Restricted cash 146,309 - - 146,309
Marketable securities:
Corporate bonds 51,456 - (457) 50,999
Securities of the U.S. government and its agencies 45,943 - (558) 45,385
Auction rate securities 71,021 - - 71,021
----------- ----------- ----------- -----------
Total marketable securities 168,420 - (1,015) 167,405
----------- ----------- ------------ -----------
Total cash, cash equivalents, restricted cash and
marketable securities $ 544,318 $ - $ (1,015) $ 543,303
=========== =========== ============ ===========
SECURITIES AVAILABLE-FOR-SALE:
Maturing within one year $ 233,921 $ 233,879
=========== ===========
Maturing greater than one year $ 85,674 $ 84,701
=========== ===========
</TABLE>
71
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
At February 26, 2005
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Costs Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CLASSIFIED AS:
Cash $ 153,791 $ - $ - $ 153,791
Cash equivalents:
Money market funds 78,983 - - 78,983
Commercial paper 24,974 - - 24,974
----------- ----------- ----------- -----------
Total cash equivalents 103,957 - - 103,957
----------- ----------- ----------- -----------
Total cash and cash equivalents $ 257,748 $ - $ - $ 257,748
=========== =========== =========== ===========
SECURITIES AVAILABLE-FOR-SALE:
Maturing within one year $ 103,957 $ 103,957
=========== ===========
Maturing greater than one year $ - $ -
=========== ===========
</TABLE>
The following table provides the breakdown of the investments with
unrealized losses at February 25, 2006. There were no investments with
unrealized losses at February 26, 2005.
<TABLE>
<CAPTION>
Less than 12 Months 12 Months or Longer Total
--------------------------------- -------------------------------- ---------------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
---------------- --------------- --------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Corporate bonds $ 11,683 $ (41) $ 39,316 $ (416) $ 50,999 $ (457)
Securities of the U.S.
government and
its agencies - - 45,385 (558) 45,385 (558)
-------------- ------------- ------------- ------------- ------------- -------------
Total $ 11,683 $ (41) $ 84,701 $ (974) $ 96,384 $ (1,015)
============== ============= ============= ============= ============= =============
</TABLE>
Corporate bonds: Our unrealized losses on investments in corporate bonds were
caused by interest rate increases by the Federal Reserve. The contractual terms
of those investments do not permit the issuer to settle the security at a price
less than the amortized cost of the investment. We do not believe it is probable
that we will be unable to collect all amounts due according to the contractual
terms of these investments. Therefore, it is expected that the debentures would
not be settled at a price less than the amortized cost of the investment.
Because we have the ability and intent to hold those investments until a
recovery of fair value, which may be maturity, we do not consider those
investments to be other-than-temporarily impaired at February 25, 2006.
Securities of the U.S. government and its agencies: The unrealized losses on our
investments in securities of the U.S. government and its agencies were caused by
interest rate increases by the Federal Reserve. The contractual terms of those
investments do not permit the issuer to settle the securities at a price less
than the amortized cost of the investment. Because we have the ability and
intent to hold those investments until a recovery of fair value, which may be
maturity, we do not consider those investments to be other-than-temporarily
impaired at February 25, 2006.
There were no gross realized gains or losses on sales of investments during
fiscal 2005.
72
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 6 - VALUATION OF GOODWILL AND LONG-LIVED ASSETS
GOODWILL
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). As disclosed previously, goodwill will no
longer be amortized but will be subject to impairment tests on an annual basis
and whenever events or circumstances occur indicating that the goodwill may be
impaired. SFAS 142 was effective for our Company on February 24, 2002. We
completed our initial impairment review during the second quarter of fiscal 2002
and concluded that a transitional impairment charge from the adoption of the
standard was not required.
In accordance with the standard, we selected our fiscal fourth quarter
to conduct our annual impairment test for goodwill. However, through the third
quarter of fiscal 2003, we experienced operating losses for the past two years
for one of our Midwest asset groups, which we believe was a triggering event
under Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144") for potential
impairment of the asset group's long-lived assets. In addition, the triggering
event under SFAS 144 also triggered testing the Midwest's goodwill for potential
impairment under SFAS 142.
To assess the Midwest's goodwill for impairment under SFAS 142, we
performed an assessment of the carrying value of the reporting unit to determine
if the fair value of the reporting unit was below its carrying value. The fair
value of the Midwest reporting unit was determined through internal analysis and
a valuation performed by an independent third party appraiser, primarily using
the discounted cash flow approach based on forward looking information regarding
revenues and costs of the Midwest. This valuation was based on a number of
estimates and assumptions, including the projected future operating results of
the Midwest, discount rate, and long term growth rate. As a result of this
review, we determined that the fair value of the Midwest was below its carrying
value and that the carrying value of the reporting unit goodwill exceeded its
implied fair value (defined as the fair value of the reporting unit less the
fair value of all assets and liabilities other than goodwill). Further, based
upon the analysis, we concluded that the Midwest's goodwill was entirely
impaired and we recorded an impairment charge of $27.0 million as a component of
operating loss in "Store operating, general and administrative expense" in our
Consolidated Statement of Operations for the year ended February 28, 2004. There
were no such amounts recorded during the years ended February 26, 2005 and
February 25, 2006.
LONG-LIVED ASSETS
In accordance with SFAS 144, we review the carrying values of our
long-lived assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable. Such review is primarily based upon groups of assets and the
undiscounted estimated future cash flows from such assets to determine if the
carrying value of such assets is recoverable from their respective cash flows.
If such review indicates an impairment exists, we measure such impairment on a
discounted basis using a probability weighted approach and a 7 year U.S.
Treasury risk free rate.
73
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
During fiscal 2005, fiscal 2004 and fiscal 2003, we recorded property
impairment losses as follows:
<TABLE>
<CAPTION>
Fiscal 2005 Fiscal 2004 Fiscal 2003
------------------------------- ------------------------------ ------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
--------- -------- --------- --------- --------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Impairments due to
closure or conversion
in the normal course
of business $ 9,851 $ 506 $ 10,357 $ 6,000 $ 709 $ 6,709 $ 4,439 $ 1,670 $ 6,109
Impairments due to
unrecoverable
assets 17,728 - 17,728 34,688 - 34,688 33,102 - 33,102
Impairments due to
Closure of stores
Impacted by Hurricane
Katrina (1) 6,090 - 6,090 - - - - - -
Impairments related to
the closure of stores
in the Midwest (2) 6,873 - 6,873 - - - - - -
Impairments related to
the sale of U.S.
distribution operations
and warehouses (3) 8,590 - 8,590 - - - - - -
Impairments related to
the 2001 Asset
Disposition (2) - - - 2,659 - 2,659 422 - 422
Impairments related to
the Farmer Jack
restructuring (2) - - - 90 - 90 4,129 - 4,129
Impairments related to
our exit of the northern
New England and
Kohl's markets (4) - - - 602 - 602 18,968 - 18,968
--------- --------- --------- --------- --------- -------- -------- -------- --------
Total impairments $ 49,132 $ 506 $ 49,638 $ 44,039 $ 709 $ 44,748 $ 61,060 $ 1,670 $ 62,730
========= ========= ========= ========= ========= ======== ======== ======== ========
</TABLE>
(1) Refer to Note 4 - Hurricane Katrina and Impact on U.S. Business.
(2) Refer to Note 8 - Asset Disposition Initiatives.
(3) Refer to Note 3 - Sale of our U.S. Distribution Operations and
Warehouses.
(4) Refer to Note 7 - Discontinued Operations.
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 fiscal 2005, fiscal 2004, and fiscal 2003, we
recorded impairment losses on property and equipment of $10.4 million, $5.8
million, and $6.1 million, respectively, related to stores that were or will be
closed in the normal course of business.
Our impairment reviews may also be triggered by appraisals of or offers
for our long-lived assets we receive in the normal course of business. During
fiscal 2004, we recorded an impairment loss of $0.9 million in the U.S. related
to certain idle property that, based upon new information received about such
assets, including an appraisal and an offer, was impaired and written down to
its net realizable value. There were no such amounts recorded during fiscal 2005
and fiscal 2003.
All of these amounts were included in "Store operating, general and
administrative expense" in our Consolidated Statements of Operations.
74
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Impairments due to unrecoverable assets
During the third quarter of fiscal 2003 and in connection with the
goodwill impairment test discussed above, we reviewed the carrying value of all
of the Midwest's long-lived assets for potential impairment under SFAS 144. We
estimated the Midwest's future cash flows from its long-lived assets, primarily
equipment and leasehold improvements, based on internal analysis and valuations
performed by an independent third party appraiser. For those asset groups for
which the carrying value was not recoverable from their future cash flows, we
determined the fair value of the related assets based on the same analysis,
primarily using the discounted cash flow approach. As a result of this review,
we recorded an impairment charge for the Midwest's long-lived assets of $33.1
million as a component of operating loss in "Store operating, general and
administrative expense" in our Consolidated Statements of Operations for the
year ended February 28, 2004.
During the third quarter of fiscal 2004, we updated our review of the
carrying value of several of the Midwest's long-lived assets for potential
impairment under SFAS 144 as we experienced operating losses for the past two
years for several of our Midwest asset groups. We estimated the Midwest's future
cash flows from their long-lived assets, primarily equipment and leasehold
improvements, based on internal analysis and valuations performed by an
independent third party appraiser. For those asset groups for which the carrying
value was not recoverable from their future cash flows, we determined the fair
value of the related assets based on the same analysis, primarily using the
discounted cash flow approach. As a result of this review, we recorded
impairment charges for the Midwest's long-lived assets of $34.7 million, which
was recorded as a component of operating loss in "Store operating, general and
administrative expense" in our Consolidated Statements of Operations for the
year ended February 26, 2005.
During fiscal 2005, we experienced operating losses for two of the past
three years for two of our United States' asset groups, located in the
Northeast, which we believe was a triggering event under SFAS 144 for potential
impairment of the asset group's long-lived assets. Thus, we reviewed the
carrying value of these asset groups for potential impairment, and based upon
internal analysis, we estimated the asset groups' future cash flows from their
long-lived assets, which primarily consisted of equipment and leasehold
improvements. As these asset groups' carrying value was not recoverable from
their future cash flows, we determined the fair value of the related assets
based on the same analysis, primarily using the discounted cash flow approach.
As a result of this review, we recorded an impairment charge for these asset
groups' long-lived assets of $17.7 million, as a component of operating loss in
"Store operating, general and administrative expense" in our Consolidated
Statements of Operations for the year ended February 25, 2006.
Impairments related to closure of stores impacted by Hurricane Katrina
During fiscal 2005, we recorded impairment losses on property and
equipment that was not covered by insurance of $6.1 million as discussed in Note
4 - Hurricane Katrina and Impact on U.S. Business. This amount was included in
"Store operating, general and administrative expense" in our Consolidated
Statements of Operations for the year ended February 25, 2006. There were no
such amounts recorded during fiscal 2004 and fiscal 2003.
75
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Impairments related to the closure of stores in the Midwest
During fiscal 2005, we recorded impairment losses on property and
equipment of $6.9 million related to property write-downs as a result of the
closure of stores in the Midwest as discussed in Note 8 - Asset Disposition
Initiatives. These amounts were included in "Store operating, general and
administrative expense" in our Consolidated Statements of Operations for the
year ended February 25, 2006. There were no such amounts recorded during fiscal
2004 and fiscal 2003.
Impairments related to the sale of U.S. distribution operations and warehouses
During fiscal 2005, we recorded impairment losses on property and
equipment of $8.6 million related to property write-downs as a result of our
decision to sell our U.S. distribution operations and warehouses to C&S
Wholesale Grocers as discussed in Note 3 - Sale of Our U.S. Distribution
Operations and Warehouses. These amounts were included in "Store operating,
general and administrative expense" in our Consolidated Statements of Operations
for the year ended February 25, 2006. There were no such amounts recorded during
fiscal 2004 and fiscal 2003.
Impairments related to the 2001 Asset Disposition
During fiscal 2004 and fiscal 2003, we recorded additional impairments
related to the 2001 Asset Disposition of $2.6 million and $0.4 million,
respectively, as a result of not realizing the original expectations of
redeploying idle assets. These amounts were included in "Store operating,
general and administrative expense" in our Consolidated Statements of Operations
for the years ended February 26, 2005 and February 28, 2004. There were no such
amounts recorded during the year ended February 25, 2006.
Impairments related to the Farmer Jack Restructuring
During fiscal 2004 and fiscal 2003, we recorded impairment losses on
property and equipment of $0.1 million and $4.1 million, respectively, related
to property write-downs as a result of the Farmer Jack restructuring as
discussed in Note 8 - Asset Disposition Initiatives. These amounts were included
in "Store operating, general and administrative expense" in our Consolidated
Statements of Operations for the years ended February 26, 2005 and February 28,
2004. There were no such amounts recorded during the year ended February 25,
2006.
Impairments related to our exit of the northern New England and Kohl's markets
During fiscal 2004 and fiscal 2003, we recorded impairment losses of
$0.6 million and $19.0 million, respectively, related to stores closed as a
result of our exit of the northern New England and Kohl's markets. These amounts
were included in our Consolidated Statements of Operations under the caption
"(Loss) gain on disposal of discontinued operations, net of tax" (see Note 8 of
our Consolidated Financial Statements) for the years ended February 26, 2005 and
February 28, 2004. There were no such amounts recorded during the year ended
February 25, 2006.
76
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The effects of changes in estimates of useful lives were not material
to ongoing depreciation expense.
NOTE 7 -- DISCONTINUED OPERATIONS
In February 2003, we announced the sale of a portion of our non-core
assets, including nine of our stores in northern New England and seven stores in
Madison, Wisconsin. In March 2003, we entered into an agreement to sell an
additional eight stores in northern New England.
Also, during fiscal 2003, we adopted a formal plan to exit the
Milwaukee, Wisconsin market, where our remaining 23 Kohl's stores were located,
as well as our Eight O'Clock Coffee business, through the sale and/or disposal
of these assets.
Upon the decision to sell these stores, we applied the provisions of
SFAS 144 to these properties held for sale. SFAS 144 requires properties held
for sale to be classified as a current asset and valued on an asset-by-asset
basis at the lower of carrying amount or fair value less costs to sell. In
applying those provisions, we considered, where available, the binding sale
agreements related to these properties as an estimate of the assets' fair value.
We have accounted for all of these separate business components as
discontinued operations in accordance with SFAS 144. In determining whether a
store or group of stores qualifies as discontinued operations treatment, we
include only those stores for which (i.) the operations and cash flows will be
eliminated from our ongoing operations as a result of the disposal and (ii.) we
will not have any significant continuing involvement in the operations of the
stores after the disposal. In making this determination, we consider the
geographic location of the stores. If stores to be disposed of are replaced by
other stores in the same geographic district, we would not include the stores as
discontinued operations.
Amounts in the financial statements and related notes for all periods
shown have been reclassified to reflect the discontinued operations. Summarized
below are the operating results for these discontinued businesses, which are
included in our Consolidated Statements of Operations, under the caption "Income
(loss) from operations of discontinued businesses, net of tax" for fiscal 2005,
fiscal 2004, and fiscal 2003, and the results of disposing these businesses
which are included in "Gain (loss) on disposal of discontinued operations, net
of tax" on our Consolidated Statements of Operations for fiscal 2005, fiscal
2004 and fiscal 2003.
77
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
Fiscal 2005
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
(LOSS) INCOME FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses (58) 3,049 (187) 2,804
--------------- ---------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses, before
tax (58) 3,049 (187) 2,804
Tax benefit (provision) 24 (1,281) 79 (1,178)
--------------- ---------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses, net
of tax $ (34) $ 1,768 $ (108) $ 1,626
=============== ================ =============== ================
Disposal related costs included in
operating expenses above:
Non-accruable closing costs $ (58) $ (62) $ (187) $ (307)
Reversal of previously accrued
occupancy related costs - 3,717 - 3,717
Interest accretion on present value
of future occupancy and
severance costs - (606) - (606)
--------------- ---------------- --------------- ----------------
Total disposal related costs $ (58) $ 3,049 $ (187) $ 2,804
--------------- ---------------- --------------- ----------------
GAIN ON DISPOSAL OF DISCONTINUED
BUSINESSES
Gain on sale of property $ - $ 1,002 $ - $ 1,002
--------------- ---------------- --------------- -------------
Gain on disposal of discontinued
businesses, before tax - 1,002 - 1,002
Tax provision - (421) - (421)
--------------- ---------------- --------------- ----------------
Gain on disposal of discontinued
businesses, net of tax $ - $ 581 $ - $ 581
=============== ================ =============== ================
</TABLE>
78
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
Fiscal 2004
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
INCOME (LOSS) FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses 292 (981) (698) (1,387)
------------- --------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, before
tax 292 (981) (698) (1,387)
Tax provision - - - -
--------------- ---------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, net of
tax $ 292 $ (981) $ (698) $ (1,387)
=============== ================ =============== =============
Disposal related costs included in
operating expenses above:
Severance and benefits $ (326) $ - $ - $ (326)
Reversal of previously accrued
occupancy related costs - 354 - 354
Non-accruable closing costs 626 (595) (698) (667)
Interest accretion on present value
of future occupancy costs (8) (740) - (748)
--------------- ---------------- --------------- -------------
Total disposal related costs $ 292 $ (981) $ (698) $ (1,387)
--------------- ---------------- --------------- -------------
LOSS ON DISPOSAL OF DISCONTINUED
BUSINESSES
Property impairments $ - $ (602) $ - $ (602)
Loss on sale of business - - (2,100) (2,100)
--------------- ---------------- --------------- --------------
Loss on disposal of discontinued
businesses, before tax - (602) (2,100) (2,702)
Tax provision - - - -
--------------- ---------------- --------------- -------------
Loss on disposal of discontinued
businesses, net of tax $ - $ (602) $ (2,100) $ (2,702)
=============== ================ =============== ==============
</TABLE>
79
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
Fiscal 2003
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
(LOSS) INCOME FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ 32,726 $ 123,229 $ 65,265 $ 221,220
Operating expenses (42,536) (174,890) (60,179) (277,605)
------------- ------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, before
tax (9,810) (51,661) 5,086 (56,385)
Tax benefit (provision) 4,120 21,698 (2,136) 23,682
--------------- ---------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, net of
tax $ (5,690) $ (29,963) $ 2,950 $ (32,703)
=============== ================ =============== ==============
Disposal related costs included in
operating expenses above:
Pension withdrawal liability $ - $ (6,500) $ - $ (6,500)
Occupancy related costs (3,993) (28,387) - (32,380)
Reversal of previously accrued
occupancy related costs - 4,458 - 4,458
Non-accruable inventory costs (175) (2,511) - (2,686)
Non-accruable closing costs (2,555) (2,890) (12,275) (17,720)
Gain on sale of inventory 1,645 - - 1,645
Severance and benefits (2,670) (6,562) - (9,232)
Interest accretion on present value
of future occupancy costs (6) (353) - (359)
--------------- ---------------- --------------- --------------
Total disposal related costs $ (7,754) $ (42,745) $ (12,275) $ (62,774)
--------------- ---------------- --------------- -------------
GAIN (LOSS) ON DISPOSAL OF
DISCONTINUED BUSINESSES
Gain on sale of fixed assets $ 85,983 $ 15,272 $ 85,000 $ 186,255
Fixed asset impairments - (18,968) - (18,968)
--------------- ---------------- --------------- ----------------
Gain (loss) on disposal of
discontinued businesses,
before tax 85,983 (3,696) 85,000 167,287
Tax (provision) benefit (36,113) 1,552 (35,700) (70,261)
------------- ---------------- --------------- ----------------
Gain (loss) on disposal of
discontinued businesses,
net of tax $ 49,870 $ (2,144) $ 49,300 $ 97,026
============= ================ =============== ================
</TABLE>
80
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Northern New England
As previously stated, as part of our strategic plan we decided, in
February 2003, to exit the northern New England market by closing and/or selling
21 stores in that region in order to focus on our core geographic markets. At
February 25, 2006, we have closed all locations in the northern New England
market.
As a result of the sale of certain locations, we generated proceeds of
$117.5 million, resulting in a gain of $86.0 million ($49.9 million after tax).
This gain was included in "Gain (loss) on disposal of discontinued operations,
net of tax" on our Consolidated Statements of Operations for fiscal 2003. In
addition, as part of the exit of this business, we reported a loss of $9.8
million ($5.7 million after tax) for fiscal 2003, which was included in "Income
(loss) from operations of discontinued businesses, net of tax" on our
Consolidated Statements of Operations. During fiscal 2004, we recorded gains of
$0.3 million primarily due to favorable results of winding down this business.
This amount is included in "Income (loss) from operations of discontinued
businesses, net of tax" in our Consolidated Statements of Operations for fiscal
2004. During fiscal 2005, we incurred additional pretax costs to wind down our
operations in this region subsequent to the sale of these stores of $0.06
million ($0.03 million after tax), primarily related to non-accruable closing
costs. These amounts were included in "Income (loss) from operations of
discontinued businesses, net of tax" on our Consolidated Statements of
Operations for fiscal 2005.
The following table summarizes the reserve activity related to the exit
of the northern New England market since the charge was recorded:
<TABLE>
<CAPTION>
Severance
and
Occupancy Benefits Total
------------- -------------- ---------------
<S> <C> <C> <C>
Fiscal 2003 charge (1) $ 3,993 $ 2,670 $ 6,663
Additions (2) 6 - 6
Utilization (3) (3,547) (2,612) (6,159)
------------- -------------- ---------------
Balance at
February 28, 2004 $ 452 $ 58 $ 510
Additions (2) 8 326 334
Utilization (3) (460) (384) (844)
------------ ------------- ---------------
Balance at
February 26, 2005 $ - $ - $ -
Additions (2) - - -
Utilization (3) - - -
------------ ------------- --------------
Balance at
February 25, 2006 $ - $ - $ -
============ ============= ==============
</TABLE>
(1) The fiscal 2003 charge to occupancy consists of $4.0 million related to
future occupancy costs such as rent, common area maintenance and real
estate taxes. The fiscal 2003 charge to severance and benefits of $2.7
million related to severance to be paid to employees terminated as a
result of our exit from the northern New England market.
(2) The additions to occupancy presented represent the interest accretion
on future occupancy costs which were recorded at present value at the
time of the original charge. The fiscal 2004 charge to severance and
benefits of $0.3 million related to additional severance required to be
paid to employees terminated in accordance with a union contract as a
result of our exit from the northern New England market.
(3) Occupancy utilization represents vacancy related payments for closed
locations. Severance and benefits utilization represents payments made
to terminated employees during the period.
81
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
As of February 25, 2006, we had paid approximately $3.0 million in
severance and benefits costs, which resulted from the termination of
approximately 300 employees.
Kohl's Market
As previously stated, as part of our strategic plan we decided to exit
the Madison and Milwaukee, Wisconsin markets, which comprised our Kohl's banner.
As a result of the Madison sales, we generated proceeds of $20.1
million, resulting in a gain of $8.8 million ($5.6 million after tax). This gain
was included in "Gain (loss) on disposal of discontinued operations, net of tax"
on our Consolidated Statements of Operations for fiscal 2003.
As a result of the Milwaukee sales, we generated proceeds of $10.4
million and a gain of $6.4 million ($3.7 million after tax). This gain was
included in "Gain (loss) on disposal of discontinued operations, net of tax" on
our Consolidated Statements of Operations for fiscal 2003.
As a result of the decision to exit Milwaukee, we estimated the assets'
fair market value using a probability weighted average approach based upon
expected proceeds and recorded impairment losses on the property and equipment
at the remaining Kohl's locations of $19.0 million during fiscal 2003. Further,
during fiscal 2004, we recorded additional impairment losses of $0.6 million as
a result of originally estimated proceeds on the disposal of these assets not
being achieved. This net loss is also included in "Gain (loss) on disposal of
discontinued operations, net of tax" on our Consolidated Statements of
Operations.
During fiscal 2005, we recorded a pretax gain on the sale of property
of $1.0 million, which is included in "Gain (loss) on disposal of discontinued
operations, net of tax" on our Consolidated Statements of Operations.
As a result of the closure and impending sale of certain Milwaukee
locations, we recorded exit costs net of the results of these businesses while
they were open of $51.7 million for fiscal 2003. During fiscal 2004, we recorded
charges of $1.0 million primarily due to the costs of winding down this
business. During fiscal 2005, we recorded a pretax gain of $3.0 million
primarily due to the reversal of previously accrued occupancy related costs
offset by the costs of winding down this business. These amounts are detailed in
the tables above and included in "Income (loss) from operations of discontinued
businesses, net of tax" in our Consolidated Statements of Operations for fiscal
2003, fiscal 2004 and fiscal 2005.
82
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table summarizes the reserve activity since the charge
was recorded:
<TABLE>
<CAPTION>
Severance
and Fixed
Occupancy Benefits Assets Total
------------- ------------- --------------- ----------------
<S> <C> <C> <C> <C>
Fiscal 2003 charge (1) $ 25,487 $ 13,062 $ 18,968 $ 57,517
Additions (2) 352 - - 352
Utilization (3) (5,342) (8,228) (18,968) (32,538)
Adjustments (4) (1,458) - - (1,458)
------------ ------------- ------------- ------------
Balance at February 28, 2004 19,039 4,834 - 23,873
Additions (2) 688 52 602 1,342
Utilization (3) (1,918) (2,201) (602) (4,721)
Adjustments (4) (354) - - (354)
----------- ------------- ------------- ------------
Balance at February 26, 2005 $ 17,455 $ 2,685 $ - $ 20,140
Additions (2) 562 44 - 606
Utilization (3) (3,235) (2,128) - (5,363)
Adjustments (4) (4,299) 582 - (3,717)
------------- ------------- ------------- -------------
Balance at February 25, 2006 $ 10,483 $ 1,183 $ - $ 11,666
============ ============= ============= ============
</TABLE>
(1) The fiscal 2003 charge to occupancy consists of $25.5 million related
to future occupancy costs such as rent, common area maintenance and
real estate taxes. The fiscal 2003 charge to severance and benefits of
$13.1 million related to severance costs of $6.6 million and costs for
future obligations for early withdrawal from multi-employer union
pension plans and a health and welfare plan of $6.5 million. The fiscal
2003 charge to property of $18.9 million represents the impairment
losses at certain Kohl's locations.
(2) The fiscal 2003, fiscal 2004 and fiscal 2005 additions to occupancy and
severance and benefits represent the interest accretion on future
occupancy costs and future obligations for early withdrawal from
multi-employer union pension plans which were recorded at present value
at the time of the original charge. The addition to fixed assets
represents additional impairment losses recorded as a result of
originally estimated proceeds on the disposal of these assets not being
achieved.
(3) Occupancy utilization represents vacancy related payments for closed
locations such as rent, common area maintenance, real estate taxes and
lease termination payments. Severance and benefits utilization
represents payments made to terminated employees during the period and
payments for pension withdrawal.
(4) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During fiscal 2003, we recorded net
adjustments of $1.5 million primarily related to reversals of
previously accrued vacancy related costs due to favorable results of
terminating and subleasing certain locations of $4.5 million offset by
additional vacancy accruals of $3.0 million. During fiscal 2004, we
recorded a reversal of previously accrued occupancy related costs due
to favorable results of terminating leases. During fiscal 2005, we
recorded adjustments relating to (i.) a reversal of previously accrued
occupancy related costs of $3.7 million due to favorable results of
terminating the Kohl's warehouse lease and (ii.) the reclassification
of $0.6 million between the liabilities for occupancy and severance and
benefits to properly state their respective ending balances at February
25, 2006.
As of February 25, 2006, we paid $10.5 million of the total occupancy
charges from the time of the original charge which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. The remaining occupancy liability of $10.5 million relates to
expected future payments under long term leases and is expected to be paid out
in full by 2020.
As of February 25, 2006, we had paid approximately $12.6 million of the
total original severance and benefits charge recorded, which resulted from the
termination of approximately 2,000 employees. The remaining severance liability
of $1.2 million relates to future obligations for early withdrawal from
multi-employer union pension plans which will be paid by mid-2006.
83
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At February 25, 2006, and February 26, 2005, $3.7 million and $5.9
million, respectively, of the Kohl's exit reserves were included in "Other
accruals" and $8.0 million and $14.2 million, respectively, were included in
"Other non-current liabilities" on our Consolidated Balance Sheets. We have
evaluated the liability balance of $11.7 million as of February 25, 2006 based
upon current available information and have concluded that it is appropriate. We
will continue to monitor the status of the vacant properties and adjustments to
the reserve balance may be recorded in the future, if necessary.
Eight O'Clock Coffee
During fiscal 2003, we completed the sale of our Eight O'Clock Coffee
business, generating gross proceeds of $107.5 million and a net gain after
transaction related costs of $85.0 million ($49.3 million after tax). The sale
of the coffee business also included a contingent note for up to $20.0 million,
the value and payment of which is based upon certain elements of the future
performance of the Eight O'Clock Coffee business and therefore is not included
in the gain.
During fiscal 2003, we incurred costs of $12.3 million related to the
sale, which was included in "Income (loss) from operations of discontinued
businesses, net of tax" on our Consolidated Statements of Operations. During
fiscal 2004, we incurred costs of $2.1 million which consisted of a post-sale
working capital settlement between the buyer and our Company for which the
amount was not determinable at the time of the sale. This amount is included in
"Gain (loss) on disposal of discontinued operations, net of tax" in our
Consolidated Statements of Operations. Further, during fiscal 2004, we incurred
costs of $0.7 million related to winding down this business subsequent to its
sale and included this amount in "Income (loss) from operations of discontinued
businesses, net of tax" in our Consolidated Statements of Operations. During
fiscal 2005, we incurred pretax costs of $0.2 million to wind down our
operations in this business subsequent to the sale. These amounts are included
in "Gain (loss) from operations of discontinued operations, net of tax" in our
Consolidated Statements of Operations for fiscal 2005.
OTHER
Although the Canadian operations have been sold as of February 25,
2006, the criteria necessary to classify the Canadian operations as discontinued
have not been satisfied as our Company retained significant continuing
involvement in the operations of this business upon its sale.
NOTE 8 - ASSET DISPOSITION INITIATIVES
OVERVIEW
In fiscal 1998 and fiscal 1999, we announced a plan to close two
warehouse facilities and a coffee plant in the U.S., a bakery plant in Canada
and 166 stores including the exit of the Richmond, Virginia and Atlanta, Georgia
markets (Project Great Renewal). In addition, during fiscal 2001, we announced
that certain underperforming operations, including 39 stores (30 in the United
States and 9 in Canada) and 3 warehouses (2 in the United States and 1 in
Canada) would be closed and/or sold, and certain administrative streamlining
would take place (2001 Asset Disposition). During fiscal 2003, we announced an
initiative to close 6 stores and convert 13 stores to our Food Basics banner in
the Detroit, Michigan and Toledo, Ohio markets (Farmer Jack Restructuring). In
addition, through the first three quarters of fiscal 2005, we closed 35 stores
in the Midwest (Closure of Stores in the Midwest).
84
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Presented below is a reconciliation of the activities recorded on our
Consolidated Balance Sheets, Consolidated Statements of Operations and
Consolidated Statements of Cash Flows for fiscal 2005, fiscal 2004, and fiscal
2003. Present value ("PV") interest represents interest accretion on future
occupancy costs which were recorded at present value at the time of the original
charge. Non-accruable items represent charges related to the restructuring that
are required to be expensed as incurred in accordance with SFAS 146 "Accounting
for Costs Associated with Exit or Disposal Activities".
<TABLE>
<CAPTION>
Fiscal 2005
-----------------------------------------------------------------
Project 2001 Farmer Closure of
Great Asset Jack Stores in
Renewal Disposition Restructuring the Midwest Total
-------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET ACCRUALS
Vacancy $ (3,648) $ (2,089) $ 4,376 $ 97,596 $ 96,235
PV interest 1,548 2,170 710 1,582 6,010
Severance - - - 2,666 2,666
-------- ----------- ------------- ----------- -----------
Total accrued to
balance sheets (2,100) 81 5,086 101,844 104,911
-------- ----------- ------------- ----------- -----------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Capital lease termination - - - (588) (588)
Property writeoffs - - - 6,873 6,873
Inventory related costs - - - 1,242 1,242
Loss on sale of property - - - 1,640 1,640
Gain on sale of pharmacy
scripts - - - (870) (870)
Closing costs - - - 5,131 5,131
-------- ----------- ------------- ----------- -----------
Total non-accruable items - - - 13,428 13,428
-------- ----------- ------------- ----------- -----------
Less PV interest (1,548) (2,170) (710) (1,582) (6,010)
-------- ----------- ------------- ----------- -----------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS EXCLUDING
PV INTEREST (3,648) (2,089) 4,376 113,690 112,329
-------- ----------- ------------- ----------- -----------
Less Gain on sale
of pharmacy
scripts - - - 870 870
Less closing costs - - - (5,131) (5,131)
-------- ----------- ------------- ----------- -----------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
CASH FLOWS $ (3,648) $ (2,089) $ 4,376 $ 109,429 $ 108,068
======== ========== ============= =========== ===========
</TABLE>
85
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
Fiscal 2004
--------------------------------------------------
Project 2001 Farmer
Great Asset Jack
Renewal Disposition Restructuring Total
-------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
BALANCE SHEET ACCRUALS
PV interest $ 1,922 $ 2,456 $ 687 5,065
-------- ----------- ------------- ---------
Total accrued to
balance sheets 1,922 2,456 687 5,065
-------- ----------- ------------- ---------
Occupancy reversals - (4,488) - (4,488)
-------- ----------- ------------- ---------
Adjustments to
balance sheets - (4,488) - (4,488)
-------- ----------- ------------- ---------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Property writeoffs - 2,659 90 2,749
Inventory related costs - - 291 291
Closing costs - - 689 689
-------- ----------- ------------- ---------
Total non-accruable items - 2,659 1,070 3,729
-------- ----------- ------------- ---------
Less PV interest (1,922) (2,456) (687) (5,065)
-------- ----------- ------------- ---------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS
EXCLUDING PV INTEREST - (1,829) 1,070 (759)
-------- ----------- ------------- ---------
Less closing costs - - (689) (689)
-------- ----------- ------------- ---------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
CASH FLOWS $ - $ (1,829) $ 381 $ (1,448)
======== =========== ============ =========
</TABLE>
<TABLE>
<CAPTION>
Fiscal 2003
--------------------------------------------------
Project 2001 Farmer
Great Asset Jack
Renewal Disposition Restructuring Total
-------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
BALANCE SHEET ACCRUALS
PV interest $ 2,638 $ 2,850 $ 56 $ 5,544
Occupancy - - 20,999 20,999
Severance - - 8,930 8,930
-------- ----------- ----------- ---------
Total accrued to
balance sheets 2,638 2,850 29,985 35,473
-------- ----------- ----------- ---------
Occupancy reversals - (6,778) - (6,778)
Additional occupancy
accrual - 991 - 991
Additional severance - 1,613 - 1,613
-------- ----------- ----------- ---------
Adjustments to
balance sheets - (4,174) - (4,174)
-------- ----------- ----------- ---------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Property writeoffs - 422 4,129 4,551
Inventory related costs - - 2,244 2,244
Closing costs - 44 1,449 1,493
-------- ----------- ----------- ---------
Total non-accruable items - 466 7,822 8,288
-------- ----------- ----------- ---------
Less PV interest (2,638) (2,850) (56) (5,544)
-------- ----------- ----------- ---------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS
EXCLUDING PV INTEREST - (3,708) 37,751 34,043
-------- ----------- ----------- ---------
Less closing costs - (44) (1,449) (1,493)
-------- ----------- ----------- ---------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
CASH FLOWS $ - $ (3,752) $ 36,302 $ 32,550
======== =========== =========== =========
</TABLE>
86
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PROJECT GREAT RENEWAL
In May 1998, we initiated an assessment of our business operations in
order to identify the factors that were impacting our performance. As a result
of this assessment, in fiscal 1998 and 1999, we announced a plan to close two
warehouse facilities and a coffee plant in the U.S., a bakery plant in Canada
and 166 stores (156 in the United States and 10 in Canada) including the exit of
the Richmond, Virginia and Atlanta, Georgia markets. As of February 25, 2006, we
had closed all stores and facilities related to this phase of the initiative.
The following table summarizes the activity related to this phase of
the initiative over the last three fiscal years:
<TABLE>
<CAPTION>
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
February 22, 2003 $ 48,788 $ 487 $ 49,275 $ 2,446 $ - $ 2,446 $ 51,234 $ 487 $ 51,721
Addition (1) 2,276 372 2,648 - - - 2,276 372 2,648
Utilization (2) (19,592) (407) (19,999) (289) - (289) (19,881) (407) (20,288)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 31,472 $ 452 $ 31,924 $ 2,157 $ - $ 2,157 $ 33,629 $ 452 $ 34,081
Addition (1) 1,902 20 1,922 - - - 1,902 20 1,922
Utilization (2) (5,410) (222) (5,632) (497) - (497) (5,907) (222) (6,129)
-------- -------- -------- -------- -------- -------- --------- ---------- ---------
Balance at
February 26, 2005 $ 27,964 $ 250 $ 28,214 $ 1,660 $ - $ 1,660 $ 29,624 $ 250 $ 29,874
Addition (1) 1,541 7 1,548 - - - 1,541 7 1,548
Utilization (2) (5,858) (167) (6,025) (223) - (223) (6,081) (167) (6,248)
Adjustments (3) (3,648) (90) (3,738) - - - (3,648) (90) (3,738)
--------- --------- --------- -------- -------- -------- ---------- ---------- ---------
Balance at
February 25, 2006 $ 19,999 $ - $ 19,999 $ 1,437 $ - $ 1,437 $ 21,436 $ - $ 21,436
======== ======== ======== ======== ======== ======== ========= ========= =========
</TABLE>
(1) The additions to store occupancy of $2.6 million, $1.9 million, and
$1.5 million during fiscal 2003, 2004 and 2005, respectively, represent
the interest accretion on future occupancy costs which were recorded at
present value at the time of the original charge.
(2) Occupancy utilization of $20.0 million, $5.6 million, and $6.0 million
for fiscal 2003, 2004 and 2005, respectively, represents payments made
during those periods for costs such as rent, common area maintenance,
real estate taxes and lease termination costs. Severance utilization of
$0.3 million, $0.5 million, and $0.2 million for fiscal 2003, 2004 and
2005, respectively, represents payments to individuals for severance
and benefits, as well as payments to pension funds for early withdrawal
from multi-employer union pension plans.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. We have continued to make favorable
progress in marketing and subleasing the closed stores. As a result,
during fiscal 2005, we recorded an additional reduction of $3.6 million
in occupancy accruals due to subleasing additional closed stores and
converting a previously closed store to a store that will open in
fiscal 2006. As discussed in Note 2 - Divestiture of Our Business in
Canada and Stores in the Midwest, we sold our Canadian business and as
a result, the Canadian occupancy accruals of $0.1 million are no longer
consolidated in our Consolidated Balance Sheet at February 25, 2006.
We paid $104.4 million of the total occupancy charges from the time of
the original charges through February 25, 2006 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $30.1 million of the total net severance charges from
the time of the original charges through February 25, 2006, which resulted from
the termination of approximately 3,400 employees. The remaining occupancy
liability of $20.0 million relates to expected future payments under long term
leases and is expected to be paid in full by 2020. The remaining severance
liability of $1.4 million primarily relates to expected future payments for
early withdrawals from multi-employer union pension plans and will be fully paid
out in 2020.
87
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
None of these stores were open during fiscal 2003, fiscal 2004 or
fiscal 2005. As such, there was no impact from store operations on the
Statements of Consolidated Operations from the 166 stores included in this phase
of the initiative.
At February 25, 2006 and February 26, 2005, approximately $5.1 million
and $5.4 million, respectively, of the reserve was included in "Other accruals"
and the remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
Based upon current available information, we evaluated the reserve
balances as of February 25, 2006 of $21.4 million for this phase of the asset
disposition initiative and have concluded that they are adequate to cover
expected future costs. The Company will continue to monitor the status of the
vacant properties and adjustments to the reserve balances may be recorded in the
future, if necessary.
2001 Asset Disposition
During the third quarter of fiscal 2001, the Company's Board of
Directors approved a plan resulting from our review of the performance and
potential of each of the Company's businesses and individual stores. At the
conclusion of this review, our Company determined that certain underperforming
operations, including 39 stores (30 in the United States and 9 in Canada) and 3
warehouses (2 in the United States and 1 in Canada) should be closed and/or
sold, and certain administrative streamlining should take place. As of February
25, 2006, we had closed all stores and facilities related to this phase of the
initiative.
The following table summarizes the activity related to this phase of
the initiative recorded on the Consolidated Balance Sheets over the last three
fiscal years:
<TABLE>
<CAPTION>
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
February 22, 2003 $ 53,502 $ 344 $ 53,846 $ 3,813 $ 481 $ 4,294 $ 57,315 $ 825 $ 58,140
Addition (1) 2,847 3 2,850 - - - 2,847 3 2,850
Utilization (2) (9,987) (974) (10,961) (2,457) (1,026) (3,483) (12,444) (2,000) (14,444)
Adjustments (3) (6,778) 1,002 (5,776) 955 603 1,558 (5,823) 1,605 (4,218)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 39,584 $ 375 $ 39,959 $ 2,311 $ 58 $ 2,369 $ 41,895 $ 433 $ 42,328
Addition (1) 2,449 - 2,449 - - - 2,449 - 2,449
Utilization (2) (5,646) (375) (6,021) (2,197) (58) (2,255) (7,843) (433) (8,276)
Adjustments (3) (4,488) - (4,488) - - - (4,488) - (4,488)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 26, 2005 $ 31,899 $ - $ 31,899 $ 114 $ - $ 114 $ 32,013 $ - $ 32,013
Addition (1) 2,170 - 2,170 - - - 2,170 - 2,170
Utilization (2) (5,262) - (5,262) (97) - (97) (5,359) - (5,359)
Adjustments (3) (2,089) - (2,089) - - - (2,089) - (2,089)
-------- -------- -------- -------- -------- -------- ---------- --------- ---------
Balance at
February 25, 2006 $ 26,718 $ - $ 26,718 $ 17 $ - $ 17 $ 26,735 $ - $ 26,735
======== ======== ======== ======== ======== ======== ========= ========= =========
</TABLE>
(1) The additions to store occupancy of $2.9 million, $2.4 million, and
$2.1 million during fiscal 2003, 2004 and 2005, respectively, represent
the interest accretion on future occupancy costs which were recorded at
present value at the time of the original charge.
(2) Occupancy utilization of $11.0 million, $6.0 million, and $5.3 million
during fiscal 2003, 2004 and 2005, respectively, represent payments
made during those periods for costs such as rent, common area
maintenance, real estate taxes and lease termination costs. Severance
utilization of $3.5 million, $2.3 million, and $0.1 million during
fiscal 2003, 2004 and 2005, respectively, represent payments made to
terminated employees during the period.
88
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(3) At each balance sheet date, we assess the adequacy of the reserve
balance to determine if any adjustments are required as a result of
changes in circumstances and/or estimates. During fiscal 2003, we
recorded net adjustments of $5.8 million related to reversals of
previously accrued occupancy costs due to favorable results of
subleasing, assigning and terminating leases. We also accrued $1.6
million for additional severance and benefit costs that were unforeseen
at the time of the original charge. During fiscal 2004, we recorded
adjustments of $4.5 million related to the reversals of previously
accrued occupancy costs due to the disposals and subleases of locations
at more favorable terms than originally anticipated at the time of the
original charge. Finally, during fiscal 2005, we recorded adjustments
of $2.1 million related to the reversals of previously accrued
occupancy costs due to the favorable result of subleasing one of the
closed properties and changes in our original estimate of our future
vacancy obligations for closed stores.
We paid $44.4 million ($41.4 million in the U.S. and $3.0 million in
Canada) of the total occupancy charges from the time of the original charges
through February 25, 2006 which was primarily for occupancy related costs such
as rent, common area maintenance, real estate taxes and lease termination costs.
We paid $28.2 million ($19.2 million in the U.S. and $9.0 million in Canada) of
the total net severance charges from the time of the original charges through
February 25, 2006, which resulted from the termination of approximately 1,100
employees. The remaining occupancy liability of $26.7 million primarily relates
to expected future payments under long term leases through 2022. The remaining
severance liability of $0.02 million relates to expected future payments for
severance and benefits payments to individual employees and will be fully paid
out in 2006.
At February 25, 2006 and February 26, 2005, approximately $6.6 million
and $7.1 million of the reserve, respectively, was included in "Other accruals"
and the remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
None of these stores were open during fiscal 2003, fiscal 2004 or
fiscal 2005. As such, there was no impact from store operations on the
Statements of Consolidated Operations from the 39 stores that were identified
for closure as part of this asset disposition.
Based upon current available information, we evaluated the reserve
balances as of February 25, 2006 of $26.7 million for this phase of the asset
disposition initiative and have concluded that they are adequate to cover
expected future costs. Our Company will continue to monitor the status of the
vacant properties and adjustments to the reserve balances may be recorded in the
future, if necessary.
FARMER JACK RESTRUCTURING
In the fourth quarter of fiscal 2003, we announced an initiative to
close 6 stores and convert 13 stores to our Food Basics banner in the Detroit,
Michigan and Toledo, Ohio markets. As of February 25, 2006, we had closed all 6
stores and successfully completed the conversions related to this phase of the
initiative.
89
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table summarizes the activity to date related to the
charges recorded for this initiative all of which were in the U.S. The table
does not include property writeoffs as they are not part of any reserves
maintained on the balance sheet. It also does not include non-accruable closing
costs and inventory related costs since they are expensed as incurred in
accordance with generally accepted accounting principles.
Severance
and
Occupancy Benefits Total
------------ ------------- ----------
Original charge (1) $ 20,999 $ 8,930 $ 29,929
Addition (1) 56 - 56
Utilization (2) (1,093) (4,111) (5,204)
------------ ------------- ----------
Balance at
February 28, 2004 $ 19,962 $ 4,819 $ 24,781
Addition (1) 687 - 687
Utilization (2) (4,747) (4,813) (9,560)
------------ ------------- ----------
Balance at
February 26, 2005 $ 15,902 $ 6 $ 15,908
Addition (1) 710 - 710
Utilization (2) (2,738) (6) (2,744)
Adjustment (3) 4,376 - 4,376
------------ ------------- ----------
Balance at
February 25, 2006 $ 18,250 $ - $ 18,250
============ ============= ==========
(1) The original charge to occupancy during fiscal 2003 represents charges
related to closures and conversions in the Detroit, Michigan market of
$21.0 million. The additions to occupancy during fiscal 2003, fiscal
2004 and fiscal 2005 represent interest accretion on future occupancy
costs which were recorded at present value at the time of the original
charge. The original charge to severance during fiscal 2003 of $8.9
million related to individual severings as a result of the store
closures, as well as a voluntary termination plan initiated in the
Detroit, Michigan market.
(2) Occupancy utilization of $1.1 million, $4.7 million and $2.7 million
during fiscal 2003, fiscal 2004 and fiscal 2005, respectively,
represents payments made for costs such as rent, common area
maintenance, real estate taxes and lease termination costs. Severance
utilization of $4.1 million, $4.8 million and $0.01 million during
fiscal 2003, fiscal 2004 and fiscal 2005, respectively, represent
payments made to terminated employees during the period.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During fiscal 2005, we recorded an
increase of $4.4 million in occupancy accruals due to changes in our
original estimate of when we would terminate certain leases, obtain
sublease rental income related to such leases and changes in our
original estimate of our future vacancy obligations for closed stores.
We paid $8.6 million of the total occupancy charges from the time of
the original charge through February 25, 2006 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $8.9 million of the total net severance charges from
the time of the original charges through February 25, 2006, which resulted from
the termination of approximately 300 employees. The remaining occupancy
liability of $18.3 million relates to expected future payments under long term
leases and is expected to be paid out in full by 2022. The severance liability
has been fully utilized as of February 25, 2006 and no additional future
payments for severance and benefits to individual employees will be paid out.
90
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Included in the Statements of Consolidated Operations for fiscal 2004
and fiscal 2003 are the sales and operating results of the 6 stores that were
identified for closure as part of this phase of the initiative. The results of
these operations are as follows:
Fiscal 2005 Fiscal 2004 Fiscal 2003
----------- ----------- -----------
Sales $ - $ 2,433 $ 50,760
=========== =========== ===========
Operating loss $ - $ (46) $ (6,476)
=========== =========== ===========
At February 25, 2006 and February 26, 2005, approximately $1.6 million
and $2.1 million, respectively, of the liability was included in "Other
accruals" and the remaining amount was included in "Other non-current
liabilities" on our Consolidated Balance Sheets.
We have evaluated the liability balance of $18.3 million as of February
25, 2006 based upon current available information and have concluded that it is
adequate. We will continue to monitor the status of the vacant properties and
adjustments to the reserve balance may be recorded in the future, if necessary.
CLOSURE OF STORES IN THE MIDWEST
During the first quarter of fiscal 2005, we announced plans for a major
strategic restructuring that would focus future effort and investment on our
core operations in the Northeastern United States. Thus, we initiated efforts to
close stores in the Midwest. This planned store closure included the closing of
a total of 35 stores, all of which have been closed as of February 25, 2006. The
remaining business located in the Midwestern United States will continue to
operate as part of our core business going forward.
During fiscal 2005, we recorded charges of $113.7 million related to
these closures ($1.2 million in "Cost of merchandise sold," and $112.5 million
in "Store operating, general and administrative expense" in our Consolidated
Statement of Operations), excluding PV interest.
Fiscal 2005
-----------
Occupancy related $ 97,596
Severance and benefits 2,666
Capital lease termination (588)
Property writeoffs 6,873
Loss on the sale of fixed assets 1,640
Sale of pharmacy scripts (870)
Inventory related costs 1,242
Nonaccruable closing costs 5,131
-----------
Total charges $ 113,690
===========
91
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table summarizes the activity to date related to the
charges recorded for these store closures. The table does not include property
writeoffs as they are not part of any reserves maintained on the balance sheet.
It also does not include non-accruable closing costs and inventory related costs
since they are expensed as incurred in accordance with generally accepted
accounting principles.
Severance
and
Occupancy Benefits Total
------------ ------------- ----------
Original charge (1) $ 14,766 $ 1,337 $ 16,103
Additions (2) 75,259 1,373 76,632
Utilization (3) (9,538) (2,439) (11,977)
Adjustment (4) 9,153 (44) 9,109
------------ ------------- ----------
Balance at
February 25, 2006 $ 89,640 $ 227 $ 89,867
============ ============= ==========
(1) The original charge to occupancy during fiscal 2005 represents charges
related to closures of the first 8 stores in conjunction with our
decision to divest our Midwestern business of $14.8 million. The
original charge to severance during fiscal 2005 of $1.3 million related
to individual severings as a result of these store closures.
(2) The additions to occupancy during fiscal 2005 represent charges related
to the closures of an additional 27 stores in the amount of $73.7
million and interest accretion on future occupancy costs which were
recorded at present value at the time of the original charge in the
amount of $1.6 million. The additional charge to severance during
fiscal 2005 of $1.3 million related to individual severings as a result
of these store closures.
(3) Occupancy utilization of $9.5 million for fiscal 2005 represents
payments made for costs such as rent, common area maintenance, real
estate taxes and lease termination costs. Severance utilization of $2.4
million for fiscal 2005 represents payments made to terminated
employees during the period.
(4) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During fiscal 2005, we recorded an
increase of $9.2 million in occupancy accruals due to changes in our
original estimate of our future vacancy obligations for closed stores.
We also recorded a decrease of $0.05 million for the reversal of
previously accrued severance and benefits due to changes in individual
severings and associated benefit costs.
We paid $9.5 million of the total occupancy charges from the time of
the original charge through February 25, 2006 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $2.4 million of the total net severance charges from
the time of the original charges through February 25, 2006, which resulted from
the termination of approximately 125 employees. The remaining occupancy
liability of $89.6 million relates to expected future payments under long term
leases and is expected to be paid out in full by 2021. The remaining severance
liability of $0.2 million relates to expected future payments for severance and
benefits to individual employees and will be fully paid out in 2006.
92
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Included in the Statements of Consolidated Operations for fiscal 2005,
fiscal 2004 and fiscal 2003 are the sales and operating results of the 35 stores
that were closed in the Midwest. The results of these operations are as follows:
Fiscal 2005 Fiscal 2004 Fiscal 2003
------------- ----------- -----------
Sales $ 110,882 $ 339,879 $ 418,093
============= =========== ===========
Operating loss $ (31,506) $ (39,884) $ (36,626)
============= =========== ===========
At February 25, 2006, approximately $22.5 million of the liability was
included in "Other accruals" and the remaining amount was included in "Other
non-current liabilities" on our Consolidated Balance Sheets.
We have evaluated the liability balance of $89.8 million as of February
25, 2006 based upon current available information and have concluded that it is
adequate. We will continue to monitor the status of the vacant properties and
adjustments to the reserve balance may be recorded in the future, if necessary.
NOTE 9 - INDEBTEDNESS
Debt consists of the following:
<TABLE>
<CAPTION>
February 25, February 26,
2006 2005
----------- -----------
<S> <C> <C>
9.375% Notes, due August 1, 2039 $ 200,000 $ 200,000
9.125% Senior Notes, due December 15, 2011 12,840 216,500
7.75% Notes, due April 15, 2007 31,905 213,515
Deferred gain from termination of interest rate swaps 599 5,190
Mortgages and Other Notes, due 2006 through 2018
(average interest rates at each year end of 8.00%) 1,540 1,607
Less unamortized discount on 7.75% Notes (33) (506)
----------- -----------
246,851 636,306
Less current portion of long-term debt (569) (2,278)
----------- -----------
Long-term debt $ 246,282 $ 634,028
=========== ===========
</TABLE>
REVOLVING CREDIT AGREEMENT
At February 26, 2005, we had a $400 million secured Revolving Credit
Agreement ("Revolving Credit Agreement") with a syndicate of lenders enabling us
to borrow funds on a revolving basis sufficient to refinance short-term
borrowings and provide working capital as needed. The Revolving Credit Agreement
was collateralized by inventory, certain accounts receivable and certain
pharmacy scripts. Borrowings under the Revolving Credit Agreement bear interest
based on LIBOR and Prime interest rate pricing. This agreement was scheduled to
expire in December 2007. This facility provided us with greater operating
flexibility and provides for increased capital spending. Under the terms of this
agreement, should availability fall below $50 million, a borrowing block would
have been implemented which provided that no additional borrowings be made
unless we were able to maintain a fixed charge coverage ratio of 1.0 to 1.0.
93
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
During fiscal 2005 and due to the sale of our Canadian operations as
discussed in Note 2 - Divestiture of Our Business in Canada and Stores in the
Midwest, our $400 million secured Revolving Credit Agreement was amended,
eliminating the Canadian portion of the agreement and reducing the commitments
by $65 million. As of the end of the second quarter of fiscal 2005, we had a
$335 million Revolving Credit Agreement. During the third quarter of fiscal
2005, the Revolving Credit Agreement was terminated. Concurrently, we entered
into a new, cash collateralized, Letter of Credit Agreement that enables us to
issue letters of credit up to $200 million. At February 25, 2006, we had $146.3
million in restricted cash, which was held in a money market fund, and can only
be used as collateral for our Letter of Credit Agreement. We secured an
additional $150 million Credit Agreement ("Revolver") with four lenders enabling
us to borrow funds on a revolving basis for working capital loans and letters of
credit. The Revolver includes a $100 million accordion feature which gives us
the ability to increase commitments from $150 million to $250 million. Effective
April 4, 2006, we exercised the accordion option and increased our commitments
to $250 million. Under the terms of this agreement, should availability fall
below $25.0 million and should cash on hand fall below $50.0 million, a
borrowing block will be implemented which provides that no additional loans be
made unless we are able to maintain a minimum consolidated EBITDA covenant on a
trailing twelve month basis. In the event that availability falls below $25.0
million, cash on hand falls below $50.0 million, and we do not maintain the
required minimum EBITDA covenant, unless otherwise waived or amended, the
lenders may, at their discretion, declare, in whole or in part, all outstanding
obligations immediately due and payable.
The Revolver is collateralized by inventory, certain accounts
receivable and pharmacy scripts. Borrowings under the Revolver bear interest
based on LIBOR or Prime interest rate pricing. This agreement expires in
November 2010. As of February 25, 2006, there were no loans or letters of credit
outstanding under this agreement. As of February 25, 2006, after reducing
availability for borrowing base requirements, we had $150.0 million available
under the Revolver. Combined with our short-term investments in money market
funds and marketable securities of $318.6 million, we had total cash
availability of $468.6 million at February 25, 2006.
Under the Revolver, we are permitted to pay cumulative cash dividends
on common shares as well as make bond repurchases which we may do from time to
time in the future.
PUBLIC DEBT OBLIGATIONS
Outstanding notes totaling $244.7 million at February 25, 2006
consisted of $31.9 million of 7.75% Notes due April 15, 2007, $12.8 million of
9.125% Senior Notes due December 15, 2011 and $200 million of 9.375% Notes due
August 1, 2039. Interest is payable quarterly on the 9.375% Notes and
semi-annually on the 9.125% and 7.75% Notes. The 7.75% Notes are not redeemable
prior to their maturity. The 9.375% notes are now callable at par ($25 per bond)
and the 9.125% Notes may be called at a premium to par after December 15, 2006.
The 9.375% Notes are unsecured obligations and were issued under the terms of
our senior debt securities indenture, which contains among other provisions,
covenants restricting the incurrence of secured debt. The 9.375% Notes are
effectively subordinate to the Revolver and do not contain cross default
provisions. All covenants and restrictions for the 7.75% Notes and the 9.125%
Senior Notes have been eliminated in connection with the cash tender offer as
discussed below. Our notes are not guaranteed by any of our subsidiaries.
94
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
During fiscal 2005, we repurchased in the open market $14.9 million of
our 7.75% Notes due April 15, 2007. The cost of this open market repurchase
resulted in a pretax loss due to the early extinguishment of debt of $0.6
million. In accordance with SFAS No. 145, "Rescission of FASB Statements 4, 44
and 64, Amendment of FASB 13, and Technical Corrections" ("SFAS 145"), this loss
has been classified within loss from operations.
Also in August 2005, our Company commenced a cash tender offer for all
of the outstanding principal amount of our 7.75% Notes due April 15, 2007 and
9.125% Senior Notes due December 15, 2011. The tender offer expired on September
7, 2005. On September 8, 2005, our Company purchased pursuant to the tender
offer $166.7 million of our $199 million 7.75% Notes due April 15, 2007 and
$203.7 million of our $216.5 million 9.125% Senior Notes due December 15, 2011
using $370.4 million of the gross proceeds from the sale of our Canadian
operations as discussed in Note 2 - Divestiture of Our Business in Canada and
Stores in the Midwest. Our Company also paid $28.6 million in tender premiums
and other fees and expenses and wrote off approximately $3.9 million of
unamortized debt discount and issuance costs related to this tender offer.
In addition, due to the early extinguishment of a significant portion
of the 7.75% Notes due April 15, 2007, we recognized $3.1 million of the
deferred gain that resulted from the termination of three interest rate swaps we
entered into during fiscal 2002 to effectively convert a portion of our 7.75%
Notes due April 15, 2007 from fixed rate debt to floating rate debt. The portion
of the deferred gain that was recognized related to the underlying debt
instrument that was early extinguished. The remaining portion of the deferred
gain will continue to be amortized as an offset to interest expense over the
life of the remaining underlying debt instrument and is classified as "Long term
debt" in our Consolidated Balance Sheets.
In accordance with SFAS No. 145, both the tender premiums and other
fees and expenses as well as the recognition of the deferred gain are classified
within loss from operations and are included in "Store operating, general and
administrative expense" in our Consolidated Statements of Operations for fiscal
2005.
During fiscal 2004, we repurchased in the open market $6.0 million of
our 7.75% Notes due April 15, 2007. The cost of this open market repurchase
resulted in a pretax gain due to the early extinguishment of debt of $0.8
million. In accordance with SFAS No. 145, this gain has been classified within
loss from operations.
During fiscal 2003, we repurchased in the open market $9.8 million of
our 7.75% Notes due April 15, 2007 and $14.0 million of our 9.125% Notes due
December 15, 2011. These open market repurchases resulted in a net gain due to
the early extinguishment of debt of $1.9 million, which has been classified
within income from operations in accordance with SFAS 145.
Under the prior year agreement, the net book value of real estate
pledged as collateral for our $400 million Secured Credit Agreement amounted to
$16.1 million at February 26, 2005. There is no real estate pledged as
collateral under the new Revolver.
95
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Although our Company declared and paid a special one-time dividend to
our shareholders of record on April 17, 2006 equal to $7.25 per share in April
2006, which was subsequent to our fiscal year end of February 25, 2006, our
Company's policy is to not pay dividends. As such, we have not made dividend
payments in the previous three years and do not intend to pay dividends in the
normal course of business in fiscal 2006. However, our Company is permitted,
under the terms of our Revolver, to pay cash dividends on common shares. Refer
to Note 19 - Subsequent Events for further discussion of the dividend declared
and paid in April 2006.
Maturities for the next five fiscal years and thereafter are: 2006 -
$0.6 million; 2007 - $32.1 million; 2008 - $0.1 million; 2009 - $0.1 million;
2010 - $0.1 million; 2011 and thereafter - $213.9 million. Interest payments on
indebtedness were approximately $48 million for fiscal 2005, $56 million for
fiscal 2004 and $63 million for fiscal 2003.
NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of our financial instruments are as follows:
<TABLE>
<CAPTION>
February 25, 2006 February 26, 2005
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
9.375% Notes, due August 1, 2039 $ 200,000 $ 200,000 $ 200,000 $ 190,720
9.125% Senior Notes, due December 15, 2011 12,840 13,723 216,500 204,593
7.75% Notes, due April 15, 2007 32,471 32,065 218,199 214,583
Mortgages and Other Notes, due 2006
through 2018 1,540 1,540 1,607 1,607
Derivative - Energy - - (197) (197)
Derivative - Cardboard Swap - - 64 64
</TABLE>
Fair value for the public debt securities and cardboard swap derivative
is based on quoted market prices. Fair value of our energy derivative is based
on estimated market prices on the balance sheet date. As of February 25, 2006
and February 26, 2005, the carrying values of cash and cash equivalents,
accounts receivable and accounts payable approximated fair values due to the
short-term maturities of these instruments.
NOTE 11 - LEASE OBLIGATIONS
We operate primarily in leased facilities. Lease terms generally range
up to twenty-five years for store leases and thirty years for other leased
facilities, with options to renew for additional periods. In addition, we also
lease some store equipment and trucks. The majority of the leases contain
escalation clauses relating to real estate tax increases and certain store
leases provide for increases in rentals when sales exceed specified levels.
Depending on the specific terms of the leases, our obligations are in
three forms: capital leases, operating leases and long-term real estate
liabilities.
96
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Consolidated Balance Sheets include the following capital leases:
<TABLE>
<CAPTION>
February 25, February 26,
2006 2005
----------- -----------
<S> <C> <C>
Property under capital leases $ 52,454 $ 118,011
Accumulated amortization (29,360) (78,885)
----------- -----------
Net property under capital leases $ 23,094 $ 39,126
=========== ===========
</TABLE>
During fiscal 2005, we entered into a new capital lease totaling $10
million. These capital lease amounts are non-cash transactions and, accordingly,
have been excluded from the Consolidated Statements of Cash Flows. During fiscal
2004 and fiscal 2003, we did not enter into any new capital leases. Interest
paid as part of our capital lease obligations was approximately $6.3 million in
fiscal 2005, $7.5 million in fiscal 2004 and $8.3 million in fiscal 2003.
Rent expense for operating leases during the last three fiscal years
consisted of the following:
<TABLE>
<CAPTION>
Fiscal 2005 Fiscal 2004 Fiscal 2003
----------- ----------- -----------
<S> <C> <C> <C>
Minimum rentals $ 211,779 $ 245,503 $ 264,227
Contingent rentals 3,732 5,324 5,617
----------- ----------- -----------
Total rent expense $ 215,511 $ 250,827 $ 269,844
=========== =========== ===========
</TABLE>
Future minimum annual lease payments for capital leases and
noncancelable operating leases in effect at February 25, 2006 are shown in the
table below.
<TABLE>
<CAPTION>
Operating Leases
--------------------------------------------------------------------------
Net
Future Minimum Rental Payments Future Future
------------------------------------------- Minimum Minimum
Capital Open Closed Sublease Rental
Leases Stores Sites Total Rentals Payments
----------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Fiscal
2006 $ 5,522 $ 182,282 $ 47,154 $ 229,436 $ 26,990 $ 202,446
2007 4,943 180,231 43,803 224,034 24,321 199,713
2008 4,879 172,481 38,746 211,227 19,422 191,805
2009 4,667 168,003 36,627 204,630 17,299 187,331
2010 4,377 158,354 33,075 191,429 14,733 176,696
2011 and thereafter 50,589 1,288,955 228,817 1,517,772 64,094 1,453,678
----------- ------------ ----------- ------------ ----------- ------------
Net minimum rentals 74,977 $ 2,150,306 $ 428,222 $ 2,578,528 $ 166,859 $ 2,411,669
============ =========== ============ =========== ============
Less interest portion (40,729)
------------
Present value of future
minimum rentals $ 34,248
===========
</TABLE>
Included in the future minimum rental payments of closed sites of
$428.2 million are amounts that are included in current and non-current
liabilities on our Consolidated Balance Sheets. The amounts included in our
Consolidated Balance Sheets are estimated net cash flows based on our experience
and knowledge of the market in which the closed store is located. Refer to our
discussion of Closed Store Reserves in Note 1 - Summary of Significant
Accounting Policies.
97
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
During fiscal 2005 and fiscal 2004, we sold 5 and 7 properties,
respectively, and simultaneously leased them back from the purchaser. However,
due to our Company's continuing involvement with 1 and 5 of these properties,
respectively, as (i.) we receive sublease income that is more than 10% of the
fair market value of these properties, (ii.) lease contains renewal options that
extend beyond the economic useful life of the property, and (iii.) we are
obligated to repurchase the properties if certain circumstances occur, the sales
did not qualify for sale-leaseback accounting in accordance with SFAS 98,
"Accounting for Leases" but rather as long-term real estate liabilities under
the provisions of SFAS 66, "Accounting for Sales of Real Estate" ("SFAS 66"). In
accordance with SFAS 66, the carrying value of these properties of approximately
$9.0 million and $8.9 million remained on our Consolidated Balance Sheets at
February 26, 2005 and February 28, 2004, respectively, and no sale was
recognized. Instead, the sales price of these properties of $20.8 million and
$23.3 million was recorded as a long-term real estate liability with a maturity
of 20 years within "Long-term real estate liabilities" on our Consolidated
Balance Sheets at February 25, 2006 and February 26, 2005, respectively. In
addition, all lease payments are being charged to "Interest expense" in our
Consolidated Statements of Operations. Of the 1 and 5 properties sold during
fiscal 2005 and fiscal 2004, respectively, all were sold for a profit resulting
in a gain, after deducting expenses, which has been deferred and will not be
recognized until the end of the respective leases when our continuing
involvement ceases.
"Long-term real estate liabilities" on our Consolidated Balance Sheets
also include various leases in which our Company received landlord allowances to
offset the costs of structural improvements we made to the leased space. As we
had paid directly for a substantial portion of the structural improvement costs,
we were considered the owner of the building during the construction period. In
all situations upon completion of the construction, we were unable to meet the
requirements under SFAS 98, "Accounting for Leases" to qualify for
sale-leaseback treatment; thus, the landlord allowances have been recorded as
long-term real estate liabilities on our Consolidated Balance Sheets and have
been amortized over the lease term based on rent payments designated in the
lease agreements. These leases have terms ranging between 12 and 25 years and
effective annual percentage rates between 4.74% and 44.78%. The effective annual
percentage rates were implicitly calculated based upon technical accounting
guidance.
98
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The future minimum annual lease payments relating to these leases as
well as those leases for properties that we previously owned but did not qualify
for sale-leaseback treatment have been included in the table below.
<TABLE>
<CAPTION>
Long-term Real Estate Liabilities
------------------------------------------
Net
Future Future Future
Minimum Minimum Minimum
Rental Sublease Rental
Payments Rentals Payments
----------- ----------- -----------
<S> <C> <C> <C>
Fiscal
2006 $ 34,986 $ 4,446 $ 30,540
2007 35,142 3,804 31,338
2008 35,283 3,169 32,114
2009 35,500 2,770 32,730
2010 35,615 1,923 33,692
2011 and thereafter 474,509 7,166 467,343
----------- ----------- -----------
651,035 23,278 627,757
Less interest portion (353,582) - (353,582)
------------ ----------- ------------
Present value of future minimum
rental payments $ 297,453 $ 23,278 $ 274,175
=========== =========== ===========
</TABLE>
The remaining 4 and 2 properties sold and simultaneously leased them
back from the purchaser during fiscal 2005 and fiscal 2004, respectively, had a
carrying value of approximately $16.1 million and $8.6 million, respectively.
Net proceeds received related to these transactions amounted to approximately
$32.6 million and $26.3 million, respectively. These properties were sold for a
profit resulting in (i.) a gain that was immediately recognized of $5.1 million
and nil, respectively, as we are leasing back more than a minor part but less
than substantially all of the property sold in accordance with SFAS 28,
"Accounting for Sales with Leasebacks," and (ii.) a deferred gain after
deducting expenses of $11.1 million and $17.6 million, respectively, which will
be recognized as an offset to rent expense over the remaining life of the
leases.
During fiscal 2005, fiscal 2004, and fiscal 2003, we recognized gains
related to all of our sale leaseback transactions of $8.8 million, of which $5.1
million related to recognition of a portion of the gain on sale in the current
year as we are leasing back more than a minor part but less than substantially
all of the property sold as discussed above, $2.6 million, and $4.7 million, of
which $2.3 million related to the deferred gain that was recognized as a result
of the sale of the Landover coffee plant, respectively. The remaining deferred
gain at February 25, 2006 and February 26, 2005 amounted to $63.5 million and
$58.5 million, respectively.
NOTE 12 - INCOME TAXES
The components of income (loss) from continuing operations before
income taxes are as follows:
<TABLE>
<CAPTION>
Fiscal 2005 Fiscal 2004 Fiscal 2003
----------- ------------- -----------
<S> <C> <C> <C>
United States $ 471,149 $ (224,498) $(295,000)
Canada 48,201 41,017 51,201
----------- ------------ -----------
Total $ 519,350 $ (183,481) $ (243,799)
=========== ============ ===========
</TABLE>
99
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The (provision for) benefit from income taxes from continuing
operations consists of the following:
<TABLE>
<CAPTION>
Fiscal 2005 Fiscal 2004 Fiscal 2003
----------- ------------ -----------
<S> <C> <C> <C>
Current:
Federal $ (90,448) $ - $ -
Canadian (18,539) 2,603 (3,095)
State and local (19,238) (4,500) (4,239)
Canadian tax on dividends (702)
----------- ------------ -----------
(128,927) (1,897) (7,334)
----------- ------------ -----------
Deferred:
Federal - - 40,058
Canadian - 1,369 (8,670)
State and local - - 6,520
----------- ------------ -----------
- 1,369 37,908
----------- ------------ -----------
(Provision for) benefit from income taxes $ (128,927) $ (528) $ 30,574
============ ============= ===========
</TABLE>
The deferred income tax (provision) benefit resulted primarily from the
annual change in temporary differences between amounts of assets and liabilities
for financial reporting purposes and such amounts as measured by tax
regulations, net operating loss ("NOL") carryforwards and, in fiscal 2005,
fiscal 2004 and fiscal 2003, the U.S. valuation allowance. In accordance with
SFAS 109 "Accounting for Income Taxes", a valuation allowance is created and
offset against the net deferred tax asset if, based on existing facts and
circumstances, it is more likely than not that some portion or all of the
deferred tax asset will not be realized. In future periods, we will continue to
record a valuation allowance against net deferred tax assets that are created by
U.S. losses. The valuation allowance will be adjusted when and if, in our
opinion, significant positive evidence exists which indicates that it is more
likely than not that we will be able to realize the U.S. deferred tax asset.
During fiscal 2005, the U.S. valuation allowance was decreased by
$241.8 million.
In October 2004, the U.S. government passed the "Homeland Investment
Act" which allows companies to repatriate cash balances from their controlled
foreign subsidiaries at a reduced tax rate. This is achieved by permitting a one
time 85% dividends received deduction. As discussed in Note 2 - Divestiture of
Our Business in Canada and Stores in the Midwest, our Company completed the sale
of our Canadian subsidiary to Metro, Inc. during fiscal 2005. As a result of
this transaction, our Company repatriated $949.0 million from our foreign
subsidiaries, of which $500.0 million is intended to qualify for the 85%
dividends received deduction. Until such time as the taxing authorities have
affirmed the adequacy of our Company's Domestic Reinvestment Plan, we have
recorded a tax provision of $98.1 million for the potential disallowance of the
85% dividend received deduction. This amount was recorded in "(Provision for)
benefit from income taxes" in our Consolidated Statements of Operations for
fiscal 2005 and in "Other non-current liabilities" in our Consolidated Balance
Sheet at February 25, 2006. This amount is subject to adjustment based upon
several factors, including our Company's operating results and the availability
of foreign tax credits, which were not estimable at February 25, 2006. Our
Company intends to complete a foreign tax credit analysis during fiscal 2006.
100
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The deferred tax benefit recorded in fiscal 2004 for our Canadian
operations of approximately $1.4 million reflects temporary differences. During
fiscal 2004, the U.S. valuation allowance was increased by $89.6 million.
The deferred tax provision recorded in fiscal 2003 for our Canadian
operations of approximately $8.7 million reflects the utilization of $7.1
million of NOL carryforwards and other temporary differences. The deferred tax
benefit recorded in fiscal 2003 for our U.S. operations of approximately $46.6
million was offset by a tax provision provided on discontinued operations in
accordance with Statement of Financial Accounting Standards 109, "Accounting for
Income Taxes." During fiscal 2003, the U.S. valuation allowance was increased by
$67.7 million.
At February 26, 2005, the undistributed earnings of our foreign
subsidiaries amounted to approximately $178.1 million. We had not recorded
deferred income taxes on the undistributed earnings of our foreign subsidiaries
since at such time our intent was to indefinitely reinvest such earnings. Upon
distribution of these earnings in the form of dividends or otherwise, we may be
subject to U.S. income taxes and foreign withholding taxes. As a result of the
sale of our Canadian operations as discussed in Note 2 - Divestiture of Our
Business in Canada and Stores in the Midwest, our undistributed earnings of our
foreign subsidiaries were reduced to $3.1 million at February 25, 2006.
The components of net deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
February 25, February 26,
2006 2005
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Insurance reserves $ 23,096 $ 24,152
Other reserves and accrued benefits 53,196 33,362
Accrued postretirement and postemployment benefits 756 2,019
Lease obligations 522 742
Pension obligations 17,868 17,956
Miscellaneous 3,397 1,949
------------- -------------
98,835 80,180
------------- -------------
CURRENT LIABILITIES:
Inventories (9,422) (13,541)
Health and welfare (405) (6,460)
Miscellaneous (1,657) (3,591)
-------------- -------------
(11,484) (23,592)
-------------- -------------
Valuation allowance (27,318) (45,899)
-------------- --------------
Deferred income taxes included in prepaid expenses and
other current assets $ 60,033 $ 10,689
============= =============
</TABLE>
101
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
February 25, February 26,
2006 2005
------------- -------------
<S> <C> <C>
NON-CURRENT ASSETS:
Alternative minimum tax credits $ 32,035 $ 31,984
Other reserves including asset disposition charges 63,123 69,489
Lease obligations 4,287 8,129
NOL carryforwards - 283,532
Insurance reserves 34,319 29,064
Accrued postretirement and postemployment benefits 17,445 23,676
Pension obligations 1,307 850
Step rents 24,877 27,634
State tax 2,082 7,325
Miscellaneous 349 3,460
------------- -------------
179,824 485,143
------------- -------------
NON-CURRENT LIABILITIES:
Depreciation (178,920) (204,547)
Pension obligations (9,933) (28,740)
Unrealized gain on derivatives - (77)
Miscellaneous (1,302) (1,733)
-------------- -------------
(190,155) (235,097)
Valuation allowance (49,702) (272,910)
-------------- --------------
Net non-current deferred income tax liability
included in Other non-current liabilities $ (60,033) $ (22,864)
============== ==============
</TABLE>
As of February 25, 2006 and February 26, 2005, we had NOL carryforwards
of nil and $675 million, respectively, from our U.S. operations. As of February
26, 2005, we had NOL carryforwards of approximately $5 million from our Canadian
operations.
Income tax payments, net of income tax refunds for fiscal 2005, 2004
and 2003 were approximately $23.8 million, $12.3 million and $4.2 million,
respectively.
A reconciliation of income taxes from continuing operations at the 35%
federal statutory income tax rate for fiscal 2005, 2004 and 2003 to income taxes
as reported is as follows:
<TABLE>
<CAPTION>
Fiscal 2005 Fiscal 2004 Fiscal 2003
---------------- --------------- ---------------
<S> <C> <C> <C>
Income tax (provision) benefit from continuing
operations computed at federal
statutory income tax rate $ (181,773) $ 64,218 $ 85,330
State and local income taxes, net of
federal tax benefit (12,505) (2,925) 1,482
Tax rate differential relating to Canadian
operations (2,271) 2,358 (2,282)
Permanent difference relating to the sale of
Canadian assets (129,096) - -
Permanent differences (399) (527) (440)
Permanent difference relating to purchase
of Canadian franchisees - (8,590) -
Change in estimate of balance sheet items - 16,265 -
U.S. valuation allowance 197,117 (71,327) (53,516)
------------- ------------ -------------
Income tax (provision) benefit, as reported $ (128,927) $ (528) $ 30,574
============== ============ ============
</TABLE>
102
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For fiscal 2005, our effective income tax rate of 24.8% changed from
the effective income tax rate of 0.3% for fiscal 2004. For fiscal 2004, our
effective income tax rate benefit of 0.3% changed from the effective income tax
rate provision of (12.5%) in fiscal 2003. Refer to table below:
<TABLE>
<CAPTION>
Fiscal 2005 Fiscal 2004 Fiscal 2003
--------------------------------- --------------------------------- ---------------------------------
Effective Tax (Provision) Effective Tax Benefit Effective
Tax (Provision) Tax Rate Benefit Tax Rate (Provision) Tax Rate
---------------- --------------- ---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
United States $ (110,388) 21.3% $ (4,500) 2.5% $ 42,339 (17.3%)
Canada (18,539) 3.5% 3,972 (2.2%) (11,765) 4.8%
-------------- --------------- ---------------- --------------- ---------------- ---------------
$ (128,927) 24.8% $ (528) 0.3% $ 30,574 (12.5%)
============== =============== ================ ================================= ===============
</TABLE>
Fiscal 2005 as compared to Fiscal 2004
The change in our effective tax rate was primarily due to the tax
provisions we recorded in the U.S. in connection with (i.) our Company's
Domestic Reinvestment Plan as discussed above and (ii.) the sale of our Canadian
operations that occurred during fiscal 2005.
Fiscal 2004 as compared to Fiscal 2003
The change in our effective tax rate was primarily due to the absence
of a tax benefit recorded on losses from continuing operations that was limited
to the tax provision recorded on income from discontinued operations in
accordance with SFAS 109. A benefit of $46.6 million was recognized for fiscal
2003 as compared to fiscal 2004, where no benefit was recognized. The remaining
provisions recorded in the U.S. of $4.5 million and $4.3 million for fiscal 2004
and fiscal 2003, respectively, represent state and local taxes. In addition, the
change in our effective tax rate was partially offset by the impact of the lower
mix of Canadian income from continuing operations as a percentage of our
Company's loss from continuing operations for fiscal 2004 as compared to fiscal
2003.
NOTE 13 - RETIREMENT PLANS AND BENEFITS
DEFINED BENEFIT PLANS
We provide retirement benefits to certain non-union and union employees
under various defined benefit plans. Our defined benefit pension plans are
non-contributory and benefits under these plans are generally determined based
upon years of service and, for salaried employees, compensation. We fund these
plans in amounts consistent with the statutory funding requirements.
103
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The components of net pension cost (income) were as follows:
<TABLE>
<CAPTION>
2005 2004 2003
---------------------- --------------------- ---------------------
U.S. Canada U.S. Canada U.S. Canada
--------- ---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 5,998 $ 4,576 $ 5,671 $ 8,861 $ 3,276 $ 6,954
Interest cost 11,887 6,519 12,016 13,192 9,138 11,783
Expected return on plan assets (13,423) (8,369) (13,861) (16,996) (10,337) (15,138)
Amortization of unrecognized
net asset - - (12) - (13) (442)
Amortization of unrecognized
net prior service cost (294) 286 95 560 147 335
Amortization of unrecognized net
actuarial loss (gain) 58 900 (131) 1,928 (74) 584
Curtailments and settlements - - 70 - (1,696) -
Special termination benefits 936 - - - - -
Administrative expenses and other * - 138 2,373 278 - 253
--------- ---------- -------- -------- --------- ---------
Net pension cost (income) $ 5,162 $ 4,050 6,221 $ 7,823 $ 441 $ 4,329
========= ========== ======== ======== ========= =========
</TABLE>
Our U.S. and Canadian defined benefit pension plans use December 31 as
their measurement date. The following tables set forth the change in benefit
obligations, the change in plan assets, and the accumulated benefit obligation
for fiscal 2005 and 2004 for our defined benefit plans:
<TABLE>
<CAPTION>
2005 2004
--------------------------- ---------------------------
CHANGE IN BENEFIT OBLIGATION U.S. Canada U.S. Canada
---------------------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Benefit obligation - beginning of year $ 213,051 - $ 147,617 $ 213,931
Service cost 5,998 - 5,671 8,861
Interest cost 11,887 - 12,016 13,192
Actuarial (gain) loss (3,746) - 5,460 4,821
Benefits paid (17,055) - (17,764) (12,079)
Amendments 1,160 - - 3,731
Special termination benefits 936 - - -
Other * - - 60,051 -
Effect of exchange rate - - - 17,289
---------- --------- ----------- -----------
Benefit obligation - end of year $ 212,231 $ - $ 213,051 $ 249,746
========== ========= =========== ===========
CHANGE IN PLAN ASSETS
Plan assets at fair value - beginning of year $ 205,644 - $ 148,567 $ 228,797
Actual return on plan assets 4,160 - 12,770 25,985
Company contributions 4,358 - 4,846 3,699
Benefits paid (17,055) - (17,764) (12,079)
Settlements - - - -
Other * - - 57,225 -
Effect of exchange rate - - - 18,409
---------- --------- ----------- -----------
Plan assets at fair value - end of year $ 197,107 $ - $ 205,644 $ 264,811
========== ========= =========== ===========
ACCUMULATED BENEFIT OBLIGATION $ 209,793 $ - $ 211,045 $ 240,358
------------------------------ ========== ========= =========== ===========
</TABLE>
104
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
* During fiscal 2004, it came to our attention that one of our Taft-Hartley U.S.
defined benefit pension plans that was previously recorded off balance sheet as
a multiemployer plan was entirely sponsored by our Company. In accordance with
SFAS 87, "Employers' Accounting for Pensions" ("SFAS 87"), the funded status of
single employer defined benefit plans is to be recorded on balance sheet with
net pension income or cost recorded each quarter since the adoption of SFAS 87.
Given (i.) the lack of employee data needed to calculate the funded status of
the plan at each balance sheet date since the adoption of SFAS 87, (ii.) the
inability to determine if the plan would have had unrecognized actuarial gains
and losses during the past several years in question, and (iii.) as the
difference between actual net pension cost recognized in our Consolidated
Statements of Operations and net pension cost that should have been recorded per
SFAS 87 was not significant to each of the past three years, an adjustment of
$2.4 million was made to record the plan's funded status (i.e., net liability)
at the latest measurement date on our Consolidated Balance Sheet at February 26,
2005. The impact of this adjustment was not significant to the individual
quarters in fiscal 2004 as well as to the prior periods to which it relates.
Plans with accumulated benefit obligation in excess of plan assets
consisted of the following and only relate to U.S. plans:
<TABLE>
<CAPTION>
2005 2004
------------- -------------
<S> <C> <C>
Accumulated benefit obligation $ 93,401 $ 92,524
Projected benefit obligation $ 93,529 $ 92,716
Plan assets at fair value $ 61,507 $ 60,544
</TABLE>
Amounts recognized on our Consolidated Balance Sheets consisted of the
following:
<TABLE>
<CAPTION>
2005 2004
--------------------------- ---------------------------
U.S. Canada U.S. Canada
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Plan assets (less than) in excess of projected
benefit obligation $ (15,124) $ - $ (7,407) $ 15,065
Unrecognized net transition asset - - - -
Unrecognized prior service cost 1,689 - 237 4,793
Unrecognized net actuarial (gain) loss (1,635) - (7,094) 34,996
---------- --------- ----------- -----------
Total recognized on the Consolidated
Balance Sheets $ (15,070) $ - $ (14,264) $ 54,854
========== ========= =========== ===========
Prepaid benefit cost $ 23,668 $ - $ 21,480 $ 54,854
Accrued benefit liability (44,518) - (42,144) -
Intangible asset 874 - - -
Accumulated other comprehensive income 4,906 - 6,400 -
----------- --------- ----------- -----------
Total recognized on the Consolidated
Balance Sheets $ (15,070) $ - $ (14,264) $ 54,854
========== ========= ============ ===========
</TABLE>
The prepaid pension asset is included in "Other assets" on the
Consolidated Balance Sheets while the pension liability is included in "Accrued
salaries, wages and benefits" and "Other non-current liabilities".
At February 25, 2006 and February 26, 2005, our additional minimum
pension liability for our defined benefit plans exceeded the aggregate of the
unrecognized prior service costs and the net transition obligation. Accordingly,
stockholders' equity was increased by $1.5 million and reduced by $3.2 million,
respectively.
105
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The weighted average assumptions in the following table represent the
rates used to develop the actuarial present value of projected benefit
obligation for the year listed and also the net periodic benefit cost for the
following year:
<TABLE>
<CAPTION>
2005 2004 2003
----------------------- ----------------------- -----------------------
U.S. Canada U.S. Canada U.S. Canada
--------- ----------- -------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Weighted average discount
rate 5.50% - 5.75% 5.75% 6.00% 6.00%
Weighted average rate of
compensation increase 2.50% - 2.75% 3.50% 3.00% 3.50%
Expected long-term rate of
return on plan assets 6.50% - 6.75% 7.50% 7.00% 7.50%
</TABLE>
The expected long-term rate of return on plan assets for fiscal 2006 is
6.50% for the US and represents the weighted average of expected returns for
each asset category. We determine our expected long-term rate of return based on
historical performance, adjusted for current trends.
Our defined benefit pension plan weighted average asset allocations by
asset category were as follows:
<TABLE>
<CAPTION>
Actual Allocation at December 31,
Target 2005 2004
----------------------- -----------------------
Allocation U.S. Canada U.S. Canada
----------------------- -------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Equities 50 - 60% 61% - 62% 61%
Bonds 30 - 40% 28% - 31% 36%
Cash 5 - 10% 11% - 7% 3%
-------- ----------- --------- -----------
Total 100% - 100% 100%
======== =========== ========= ===========
</TABLE>
Our defined benefit pension plan has target asset allocation ranges of
30% - 60% for equity and fixed income securities. The Plan's assets are held in
trust funds and are actively managed by external fund managers. Equity security
investments consist of a broad range of publicly traded securities, ranging from
small to large capitalization stocks and are diversified in both growth and
value orientated strategies as well as diverse industry sectors. Fixed income
securities consist of a broad range of investments including U.S. government
securities, corporate debt securities, mortgages and other asset backed
obligations. The Plan does not allow for direct investments in the publicly
traded securities of our Company and investments in derivatives for speculative
purposes.
Estimated future defined benefit payments expected to be paid from the
U.S. plan is as follows:
2006 $ 12,972
2007 13,535
2008 14,233
2009 13,217
2010 13,563
Years 2011 - 2015 69,850
We also expect to contribute $5.2 million in cash to our defined
benefit pension plans in fiscal 2006.
106
<PAGE>
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DEFINED CONTRIBUTION PLANS
We maintain a defined contribution retirement plan to which we
contribute an amount equal to 4% of eligible participants' salaries and a
savings plan to which eligible participants may contribute a percentage of
eligible salary. We contribute to the savings plan based on specified
percentages of the participants' eligible contributions. Participants become
fully vested in our contributions after 5 years of service. Our contributions
charged to operations for both plans were approximately $9.3 million, $10.5
million and $11.8 million in fiscal years 2005, 2004 and 2003, respectively.
MULTI-EMPLOYER UNION PENSION PLANS
We participate in various multi-employer union pension plans which are
administered jointly by management and union representatives and which sponsor
most full-time and certain part-time union employees who are not covered by our
other pension plans. The pension expense for these plans approximated $37.8
million, $44.4 million and $43.2 million in fiscal 2005, 2004 and 2003,
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 our Company. As of
the balance sheet 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.
POSTRETIREMENT BENEFITS
We provide postretirement health care and life insurance benefits to
certain union and non-union employees. We recognize the cost of providing
postretirement benefits during employees' active service periods. We use a
December 31 measurement date for both our U.S. and Canadian postretirement
benefits.
The components of net postretirement benefits (income) cost are as
follows:
<TABLE>
<CAPTION>
52 Weeks Ended
----------------------------------------------------
December 31, December 31, December 31,
U.S. PLANS 2005 2004 2003
---------- ----------------- ---------------- -----------------
<S> <C> <C> <C>