Great Atlantic & Pacific Tea Company (GAJ)

 
Annual Reports

 
Quarterly Reports

  • 10-Q (Jan 17, 2012)
  • 10-Q (Dec 6, 2011)
  • 10-Q (Oct 28, 2011)
  • 10-Q (Aug 4, 2011)
  • 10-Q (Aug 1, 2011)
  • 10-Q (Jan 13, 2011)

 
8-K

 
Other

Great Atlantic & Pacific Tea Company 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
f10q32010.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
Mark One

T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 4, 2010

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number 1-4141

THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
(Exact name of registrant as specified in charter)

 
Maryland
 
13-1890974
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
2 Paragon Drive
 
Montvale, New Jersey 07645
 
(Address of principal executive offices)
 
 
 
 
(201) 573-9700
 
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       YES T    NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o   Accelerated filer T   Non-accelerated filer o   Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).       YES o    NO T

As of January 7, 2011, the Registrant had a total of 53,852,470 shares of common stock - $1 par value outstanding.
 
 

 
 
 
 

 

PART I – FINANCIAL INFORMATION

ITEM 1 – Financial Statements

The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except share and per share amounts)
(Unaudited)

 
 
12 Weeks Ended
 
 
40 Weeks Ended
 
 
 
Dec. 4, 2010
 
 
Dec. 5, 2009
 
 
Dec. 4, 2010
 
 
Dec. 5, 2009
 
Sales
$
1,793,805
 
 
$
1,962,692
 
 $
6,277,014
 
 
$
6,817,996
 
Cost of merchandise sold
 
(1,259,568
)
 
 
(1,372,108
)
 
(4,416,258
)
 
 
(4,759,185
)
Gross margin
 
534,237
 
 
 
590,584
 
 
1,860,756
 
 
 
2,058,811
 
Store operating, general and administrative expense
 
(635,586
)
 
 
(631,175
)
 
(2,087,826
)
 
 
(2,109,804
)
Goodwill, trademark and long-lived asset impairment
 
(42,036
)
   
(412,560
)
 
(77,684
)
   
(412,560
)
Loss from operations
 
(143,385
)
 
 
(453,151
)
 
(304,754
)
 
 
(463,553
)
Nonoperating (loss) income
 
(213
)
 
 
(15,944
)
 
10,241
 
 
 
(24,898
)
Interest expense, net
 
(40,038
)
 
 
(45,718
)
 
(147,306
)
 
 
(148,433
)
Loss from continuing operations before income taxes
 
(183,636
)
 
 
(514,813
)
 
(441,819
)
 
 
(636,884
)
Benefit from income taxes
 
2,953
 
 
 
12,375
 
 
2,708
 
 
 
13,983
 
Loss from continuing operations
 
(180,683
)
 
 
(502,438
)
 
(439,111
)
 
 
(622,901
)
Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from operations of discontinued businesses, net of tax of $0
 
(18,687
)
 
 
(57,148
)
 
(36,655
)
 
 
(82,154
)
Gain on disposal of discontinued businesses, net of tax of $0
 
-
 
 
 
-
 
 
79
 
 
 
-
 
Loss from discontinued operations
 
(18,687
)
 
 
(57,148
)
 
(36,576
)
 
 
(82,154
)
Net loss
 
$
(199,370
)
 
$
(559,586
)
 
$
(475,687
)
 
$
(705,055
)
Net loss per share – basic:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
(3.44
)
 
$
(9.43
)
 
$
(8.45
)
 
$
(11.76
)
Discontinued operations
 
 
(0.34
)
 
 
(1.07
)
 
 
(0.68
)
 
 
(1.55
)
Net loss per share – basic
 
$
(3.78
)
 
$
(10.50
)
 
$
(9.13
)
 
$
(13.31
)
Net loss per share – diluted:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
(3.44
)
 
$
(12.85
)
 
 
(32.09
)
 
$
(22.36
)
Discontinued operations
 
 
(0.34
)
 
 
(1.50
)
 
 
(2.53
)
 
 
(3.06
)
Net loss per share – diluted
 
$
(3.78
)
 
$
(14.35
)
 
$
(34.62
)
 
$
(25.42
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
53,852,470
 
 
 
53,420,248
 
 
 
53,688,540
 
 
 
53,139,840
 
Diluted
 
 
53,852,470
 
 
 
37,993,212
 
 
 
14,448,398
 
 
 
26,844,195
 

See Notes to Consolidated Financial Statements

 

 

 
 
 
 

 

The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Stockholders’ Deficit and Comprehensive Loss
(Dollars in thousands, except share amounts)
(Unaudited)

 
 
Common Stock
 
 
Additional
Paid-in
Capital
 
 
Accumulated Deficit
 
 
Accumulated
Other Comprehensive Loss
 
 
Total Stockholders’ Deficit
 
 
 
Shares
 
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
40 Weeks Ended December 4, 2010
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of 2/27/2010, as previously reported
 
 
55,868,129
 
 
$
55,868
 
 
$
498,144
 
 
$
(1,003,812
)
 
$
(79,403
)
 
$
(529,203
)
Retrospective adoption of new accounting guidance for own share-lending arrangements
   
-
     
-
 
 
 
28,277
 
 
 
(28,277
)
   
-
     
-
 
Balance as of 2/27/2010, as adjusted
 
 
55,868,129
 
 
 
55,868
 
 
 
526,421
 
 
 
(1,032,089
)
 
 
(79,403
)
 
 
(529,203
)
Net loss
                       
 
 
(475,687
)
       
 
 
(475,687
)
Beneficial conversion feature accretion on preferred stock
               
 
 
(3,703
)
               
 
 
(3,703
)
Dividends on preferred stock
 
 
 
 
 
 
 
 
 
 
(10,631
)
               
 
 
(10,631
)
Preferred stock financing fees amortization
               
 
 
(1,338
)
               
 
 
(1,338
)
Other comprehensive income
                               
 
 
543
 
 
 
543
 
Stock options exercised
 
 
4,834
 
 
 
5
 
 
 
23
 
               
 
 
28
 
Other share based awards
 
 
407,451
 
 
 
407
 
 
 
541
                 
 
 
948
 
Balance at end of period
 
 
56,280,414
 
 
$
56,280
 
 
$
511,313
 
 
$
(1,507,776
)
 
$
(78,860
)
 
$
(1,019,043
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
40 Weeks Ended December 5, 2009
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of 2/28/2009, as previously reported
 
 
57,674,799
 
 
$
57,675
 
 
$
464,679
 
 
$
(127,314
)
 
$
(105,147
)
 
$
289,893
 
Retrospective adoption of new accounting guidance for own share-lending arrangements
   
-
     
-
 
 
 
28,277
 
 
 
(28,277
)
   
-
     
-
 
Balance as of 2/28/2009, as adjusted
 
 
57,674,799
 
 
 
57,675
 
 
 
492,956
 
 
 
(155,591
)
 
 
(105,147
)
 
 
289,893
 
Net loss
                       
 
 
(705,055
)
       
 
 
(705,055
)
Other comprehensive loss
                               
 
 
(188
)
 
 
(188
)
Beneficial conversion feature related to preferred stock
               
 
 
10,246
 
               
 
 
10,246
 
Dividends on preferred stock
               
 
 
(1,599
)
               
 
 
(1,599
)
Preferred stock financing fees amortization
               
 
 
(209
)
               
 
 
(209
)
Returned shares under Share Lending Agreement
   
(1,000,000
)
   
(1,000
)
   
1,000
                     
-
 
Stock options exercised
 
 
10,380
 
 
 
10
 
 
 
33
 
 
 
 
 
 
 
 
 
 
 
43
 
Other share based awards
 
 
673,934
 
 
 
674
 
 
 
4,009
 
               
 
 
4,683
 
Balance at end of period
 
 
57,359,113
 
 
$
57,359
 
 
$
506,436
 
 
$
(860,646
)
 
$
(105,335
)
 
$
(402,186
)

Comprehensive Loss

 
 
12 Weeks Ended
 
 
40 Weeks Ended
 
 
 
Dec. 4, 2010
 
 
Dec. 5, 2009
 
 
Dec. 4, 2010
 
 
Dec. 5, 2009
 
Net loss
 
$
(199,370
)
 
$
(559,586
)
 
$
(475,687
)
 
$
(705,055
)
Net unrealized (loss) gain on marketable securities, net of tax
 
 
-
 
 
 
(95
)
 
 
-
 
 
 
543
 
Pension and other post-retirement benefits, net of tax
 
 
163
 
 
 
(1,643
)
 
 
543
 
 
 
(731
)
Other comprehensive income (loss), net of tax
 
 
163
 
 
 
(1,738
)
 
 
543
 
 
 
(188
)
Total comprehensive loss
 
$
(199,207
)
 
$
(561,324
)
 
$
(475,144
)
 
$
(705,243
)


See Notes to Consolidated Financial Statements

 

 
 
 
 

 

The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share and per share amounts)
(Unaudited)
 
 
Dec. 4, 2010
 
 
Feb. 27, 2010
 
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
92,411
 
 
$
252,426
 
Restricted cash
 
 
1,730
 
 
 
1,993
 
Accounts receivable, net of allowance for doubtful accounts of $5,759 and $8,812 at 12/4/2010 and 2/27/2010, respectively
 
 
148,340
 
 
 
166,143
 
Inventories, net
 
 
454,621
 
 
 
467,227
 
Prepaid expenses and other current assets
 
 
46,061
 
 
 
43,374
 
Total current assets
 
 
743,163
 
 
 
931,163
 
Non-current assets:
 
 
 
 
 
 
 
 
Property:
 
 
 
 
 
 
 
 
Property owned, net
 
 
1,238,831
 
 
 
1,397,971
 
Property leased under capital leases, net
 
 
65,948
 
 
 
89,599
 
Property, net
 
 
1,304,779
 
 
 
1,487,570
 
Goodwill
 
 
110,412
 
 
 
115,197
 
Intangible assets, net
 
 
126,763
 
 
 
147,713
 
Other assets
 
 
138,470
 
 
 
145,574
 
Total assets
 
$
2,423,587
 
 
$
2,827,217
 
 
 
 
 
 
 
 
 
 
LIABILITIES & STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
Current portion of long-term debt
 
$
171,467
 
 
$
191
 
Current portion of obligations under capital leases
 
 
13,653
 
 
 
13,702
 
Current portion of real estate liabilities
 
 
1,238
 
 
 
4,220
 
Accounts payable
 
 
196,322
 
 
 
227,779
 
Book overdrafts
 
 
50,922
 
 
 
60,465
 
Accrued salaries, wages and benefits
 
 
126,104
 
 
 
145,170
 
Accrued taxes
 
 
35,619
 
 
 
31,802
 
Other accruals
 
 
305,192
 
 
 
246,516
 
Total current liabilities
 
 
900,517
 
 
 
729,845
 
Non-current liabilities:
 
 
 
 
 
 
 
 
Long-term debt
 
 
816,830
 
 
 
990,359
 
Long-term obligations under capital leases
 
 
124,714
 
 
 
136,880
 
Long-term real estate liabilities
 
 
418,372
 
 
 
329,363
 
Deferred real estate income
 
 
86,518
 
 
 
87,061
 
Other financial liabilities
 
 
3,705
 
 
 
13,946
 
Other non-current liabilities
 
 
954,182
 
 
 
936,209
 
Total liabilities
 
 
3,304,838
 
 
 
3,223,663
 
 
 
 
 
 
 
 
 
 
Series A redeemable preferred stock – no par value, $1,000 redemption value; authorized – 700,000 shares;
               
         issued – 175,000 shares
 
 
137,792
 
 
 
132,757
 
 
 
 
 
 
 
 
 
 
Commitments and contingencies (Refer to Note 19)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders' deficit:
 
 
 
 
 
 
 
 
Common stock – $1 par value; authorized – 260,000,000 shares; issued and outstanding – 56,280,414 and 55,868,129 shares at 12/4/2010 and 2/27/2010, respectively
 
 
56,280
 
 
 
55,868
 
Additional paid-in capital
 
 
511,313
 
 
 
526,421
 
Accumulated other comprehensive loss
 
 
(78,860
)
 
 
(79,403
)
Accumulated deficit
 
 
(1,507,776
)
 
 
(1,032,089
)
Total stockholders’ deficit
 
 
(1,019,043
)
 
 
(529,203
)
Total liabilities and stockholders’ deficit
 
$
2,423,587
 
 
$
2,827,217
 

See Notes to Consolidated Financial Statements

 
 
 
 

 

The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
 
 
40 Weeks Ended
 
 
 
Dec. 4, 2010
 
 
Dec. 5, 2009
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net loss
 
$
(475,687
)
 
$
(705,055
)
Adjustments to reconcile net loss to net cash used in operating activities (see next page)
 
 
304,094
 
 
 
762,501
 
Other changes in assets and liabilities:
 
 
 
 
 
 
 
 
Decrease in receivables
 
 
17,803
 
 
 
17,946
 
Decrease (increase) in inventories
 
 
10,467
 
 
 
(19,857
)
Increase in prepaid expenses and other current assets
 
 
(12,968
)
 
 
(32,943
)
Increase in other assets
 
 
(10,203
)
 
 
(7,546
)
(Decrease) increase in accounts payable
 
 
(29,201
)
 
 
23,771
 
Decrease in accrued salaries, wages and benefits, and taxes
 
 
(28,977
)
 
 
(43,887
)
Increase in other accruals
 
 
44,128
 
 
 
16,145
 
Increase (decrease) in other non-current liabilities
 
 
1,300
 
 
 
(62,777
)
Other operating activities, net
 
 
(1,020
)
 
 
693
 
Net cash used in operating activities
 
 
(180,264
)
 
 
(51,009
)
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
Expenditures for property
 
 
(62,854
)
 
 
(71,919
)
Proceeds from disposal of property
 
 
38,186
 
 
 
3,275
 
Proceeds from flood insurance
   
6,410
     
-
 
Proceeds from sale of joint venture
 
 
-
 
 
 
5,914
 
Decrease in restricted cash
 
 
303
 
 
 
222
 
Proceeds from maturities of marketable securities
 
 
-
 
 
 
4,212
 
Net cash used in investing activities
 
 
(17,955
)
 
 
(58,296
)
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
Proceeds from issuance of long-term debt
 
 
800
 
 
 
253,201
 
Principal payments on long-term borrowings
 
 
(201
)
 
 
(234
)
Proceeds under revolving lines of credit
   
619,500
 
 
 
39,450
 
Principal payments on revolving lines of credit
   
(636,384
)
 
 
(238,333
)
Proceeds under line of credit
   
-
 
 
 
378
 
Principal payments on line of credit
   
-
 
 
 
(4,211
)
Proceeds from issuance of preferred stock
 
 
-
 
 
 
175,000
 
Proceeds from long-term real estate liabilities
   
-
 
 
 
270
 
Principal payments on long-term real estate liabilities
 
 
(980
)
 
 
(918)
 
Proceeds from sale-leaseback transaction
   
89,830
 
 
 
3,000
 
Principal payments on capital leases
 
 
(9,140
)
 
 
(8,457
)
(Decrease) increase in book overdrafts
 
 
(9,543
)
 
 
24,692
 
Deferred financing fees
 
 
(5,206
)
 
 
(26,515
)
Dividends paid on preferred stock
   
(10,500
)
 
 
(1,594
)
Proceeds from stock options exercised
 
 
28
 
 
 
43
 
Net cash provided by financing activities
 
 
38,204
 
 
 
215,772
 
 
 
 
 
 
 
 
 
 
Net (decrease) increase in cash and cash equivalents
 
 
(160,015
)
 
 
106,467
 
Cash and cash equivalents at beginning of period
 
 
252,426
 
 
 
175,375
 
Cash and cash equivalents at end of period
 
$
92,411
 
 
$
281,842
 
 
 
 
 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
 
 
 
 
 
Cash paid during the year for interest
 
$
103,640
 
 
$
92,736
 
Cash paid during the year for income taxes
 
$
214
 
 
$
3,342
 

See Notes to Consolidated Financial Statements

 
 
 
 

 


The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Cash Flows - Continued
(Dollars in thousands)
(Unaudited)




ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:

 
 
40 Weeks Ended
 
 
 
Dec. 4, 2010
 
 
Dec. 5, 2009
 
Depreciation and amortization
 
$
171,841
 
 
$
191,385
 
Goodwill, trademark and long-lived asset impairment
   
78,828
     
417,726
 
Self insurance reserve
   
22,590
     
1,613
 
Nonoperating (income) loss
 
 
(10,241
)
 
 
24,898
 
Non-cash interest expense
 
 
27,658
 
 
 
35,101
 
Stock compensation expense
 
 
1,246
 
 
 
4,683
 
Benefit from deferred income taxes
   
(3,058
)
   
(12,013
)
Pension withdrawal costs
 
 
-
 
 
 
2,445
 
Employee benefit related costs
 
 
13,728
 
 
 
4,290
 
LIFO adjustment
 
 
2,139
 
 
 
1,185
 
Asset disposition initiatives in the normal course of business
   
-
     
(2,167
)
Asset disposition initiatives relating to discontinued operations
 
 
(117
)
 
 
59,932
 
Non-cash occupancy charges for stores closed in the normal course of business
 
 
7,024
 
 
 
38,589
 
Gain on disposal of owned property, net
 
 
(4,031
)
 
 
(1,228
)
Gain on disposal of discontinued operations
 
 
(79
)
 
 
-
 
Amortization of deferred real estate income
 
 
(3,434
)
 
 
(3,938
)
Total non-cash adjustments to net loss
 
$
304,094
 
 
$
762,501
 

See Notes to Consolidated Financial Statements


 
 
 
 

 
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)


1.
Basis of Presentation

The accompanying Consolidated Statements of Operations, Consolidated Statements of Stockholders’ Deficit and Comprehensive Loss, and Consolidated Statements of Cash Flows for the 12 and 40 weeks ended December 4, 2010 and December 5, 2009, and the Consolidated Balance Sheets at December 4, 2010 and February 27, 2010 of The Great Atlantic & Pacific Tea Company, Inc. (“we,” “our,” “us” or “our Company”) are unaudited and, in the opinion of management, contain all adjustments that are of a normal and recurring nature necessary for a fair statement of financial position and results of operations for such periods.  The consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in our Fiscal 2009 Annual Report on Form 10-K.  The year-end balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally required in the United States of America. Interim results are not necessarily indicative of results for a full year.

The consolidated financial statements include the accounts of our Company and all subsidiaries.  All intercompany accounts and transactions have been eliminated.

Certain reclassifications have been made to prior year amounts to conform to current year presentation.  Refer to Note 2 – Impact of New Accounting Pronouncements below for prior period reclassifications made upon our retrospective adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) relating to accounting for share lending agreements entered into in contemplation of a convertible debt issuance.

Bankruptcy Filing
On December 12, 2010, subsequent to our balance sheet date, our Company and all of our U.S. subsidiaries (the “Filing Subsidiaries” and, together with our Company, the “Debtors”) filed voluntary petitions for relief (the “Bankruptcy Filing”) under chapter 11 of title 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York in White Plains (the “Bankruptcy Court”), case number 10-24549.   Management's decision to make the Bankruptcy Filing was in response to, among other things, our Company’s deteriorating liquidity and management's conclusion in the third quarter that the challenges of successfully implementing additional financing initiatives and of obtaining necessary cost concessions from our Company’s business and labor partners, was negatively impacting our Company’s ability to implement our previously announced turnaround strategy.  Our Company’s non-U.S. subsidiaries, which are immaterial on a consolidated basis, were not part of the Bankruptcy Filing and will continue to operate in the ordinary course of business. See Note 21 - Subsequent Events.
 
The Debtors are currently operating pursuant to Bankruptcy Filing and continuation of our Company as a going-concern is contingent upon, among other things, the Debtors’ ability (i) to comply with the terms and conditions of the DIP Credit Agreement described in Note 21 – Subsequent Events; (ii) to develop a plan of reorganization and obtain confirmation under the Bankruptcy Code; (iii) to reduce debt and other liabilities through the bankruptcy process; (iv) to return to profitability; (v) to generate sufficient cash flow from operations; and (vi) to obtain financing sources to meet our future obligations.  The uncertainty regarding these matters raises substantial doubt about our ability to continue as a going concern.
 
Our Company was required to apply the FASB’s provisions of Reorganizations effective on December 12, 2010, which is applicable to companies in chapter 11, which generally does not change the manner in which financial statements are prepared. However, it does require that the financial statements for periods subsequent to the filing of the Bankruptcy Filing petition distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the statements of operations beginning in the year ending February 26, 2011. The balance sheet must distinguish prepetition liabilities subject to compromise from both those prepetition liabilities that are not subject to compromise and from post-petition liabilities.  As discussed in Note 8 - Indebtedness and Other Financial Liabilities, currently both the Credit Facility and Secured Senior Notes totaling $370.3 million have priority over the unsecured creditors of our Company; however our Company continues to evaluate creditors' claims for other claims that may also have priority over unsecured creditors.  Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be approved by the Bankruptcy Court, even if they may be settled for lesser amounts as a result of the plan or reorganization. In addition, cash provided by reorganization items must be disclosed separately in the statements of cash flows. The accompanying consolidated financial statements do not reflect any adjustments relating to the classification of assets or liabilities as a result of adopting the requirements of bankruptcy accounting. In addition, these accompanying consolidated financial statements do not reflect any adjustments of the carrying value of assets and liabilities which may result from any plan of reorganization adopted by our Company. 

Significant Accounting Policies
A summary of our significant accounting policies may be found in our Annual Report on Form 10-K for the year ended February 27, 2010.  There have been no significant changes in these policies during the 40 weeks ended December 4, 2010.

2.
Impact of New Accounting Pronouncements

Newly Adopted Accounting Pronouncements
Share Lending Arrangements.  In June 2009, the FASB issued new guidance on accounting for one’s own-share lending arrangements entered into in contemplation of a convertible debt issuance or other financing, which requires share lending arrangements to be measured at fair value and recognized as a debt issuance cost, and amortized using the effective interest method over the life of the financing arrangement as interest cost.  The loaned shares are excluded from basic and diluted earnings per share, unless a default occurs.

When a default becomes probable, an expense equal to the fair value of the unreturned loaned shares, net of any probable recoveries, must be recognized.  This guidance was effective beginning with our fiscal 2010, with retrospective application required.  The fair values of our share lending agreements with the Bank of America and Lehman Brothers International Europe (“Lehman Europe”) were immaterial at inception.  Our share lending arrangement with Lehman Europe, who is a party to a 3,206,058 share lending agreement with our Company, is subject to this default provision guidance as a result of their September 15, 2008 bankruptcy filing.  In connection with Lehman Europe’s default, during the first quarter of fiscal 2010, we recorded a retrospective adjustment of $28.3 million to our third quarter of fiscal 2008 financial statements by charging “Store operating, general and administrative expense” and crediting “Additional paid-in-capital”, which represents the fair value of the unreturned shares at September 15, 2008.  This expense is reflected in our Consolidated Balance Sheets as of February 27, 2010 and December 4, 2010 as an adjustment to opening “Accumulated deficit” and “Additional paid-in capital”.  We have been including the loaned shares in our Company’s basic and diluted earnings per share since September 15, 2008. As of January 3, 2011, there were no shares outstanding under our share lending agreements.

Variable Interest Entities.  In June 2009, the FASB issued new accounting guidance relating to consolidation of variable interest entities (“VIEs”), which amends the current accounting guidance for determining whether an entity is a VIE and defining the primary beneficiary.  This guidance also requires additional disclosures relating to involvement with a VIE. We adopted this guidance during the first quarter of our fiscal 2010.  The adoption of this guidance did not have a material effect on our Consolidated Financial Statements and disclosures.

Fair Value Measurements.  In January 2010, the FASB issued new accounting guidance requiring additional disclosures about the different classes of assets and liabilities measured at fair value, valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1 and 2.  It also clarified guidance around disaggregation and disclosures of inputs and valuation techniques for Level 2 and Level 3 fair value measurements.  The current guidance is effective beginning with the first quarter of our fiscal 2010, except for the new disclosures relating to the Level 3 reconciliation, which are effective for the first quarter of our fiscal 2011.  Refer to Note 4 – Fair Value Measurements for our Company’s fair value measurements and disclosures.

3.
Goodwill and Other Intangible Assets

The carrying values of our finite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable.  Our intangible assets that have finite useful lives are amortized over their estimated useful lives. Goodwill and other intangibles with indefinite useful lives that are not subject to amortization are tested for impairment in the fourth quarter of each fiscal year, or more frequently whenever events or changes in circumstances indicate that impairment may have occurred.  The latest impairment assessment of goodwill and indefinite lived intangible assets was completed in the fourth quarter of fiscal 2009 for the reporting units within our Gourmet and Other reportable segments and in the first quarter of fiscal 2010 for the reportable units in our Fresh reportable segment.  These assessments concluded that there was no impairment.

As we worked through our turnaround plan, we experienced significant impediments to lowering our operating costs, leading to revised projections and triggering a requirement for an interim impairment analysis for our quarter ended December 4, 2010.

Goodwill
We performed the first step of goodwill impairment testing by estimating the fair value of the reporting units using a net present value methodology, which is dependent on significant assumptions related to estimated future discounted cash flows, discount rates and tax rates.  Assumptions included a decline in revenues of approximately 10% and 1% in fiscals 2011 and 2012, respectively, with revenues remaining flat for fiscal years thereafter.  We assumed that the costs of disruption to our business resulting from the Bankruptcy Filing will be offset in fiscal 2011 by expected improvements in supply, logistics and labor costs expected to be realized through ongoing negotiations with our strategic business partners.  We assumed costs for disruptions to our business resulting from the Bankruptcy Filing would cease toward the end of fiscal 2011 with a continuation of improved costs in fiscal 2012.  We assumed a perpetual growth rate for cash flow in the terminal year of 1.5%, a market-based weighted average cost of capital of 11.0% to discount cash flows and a blended tax rate of 42.0%.  Our analysis showed the goodwill was not impaired. As of December 4, 2010, Goodwill for our Fresh segment was $92.3 million, of which $64.5 million was attributed to A&P and $27.8 million was attributed to Waldbaum’s. The fair value of the A&P and The Food Emporium reporting units exceeded their carrying values by an excess of 50%.  The fair value of the Waldbaum’s, FoodBasics and Beer, Wine & Spirits reporting units exceeded their carrying values by an excess of 25%.

We believe that our estimates are appropriate based on our current trends and our expectations of negotiations resulting from the Bankruptcy Filing.  However, we can provide no assurance that we will not be required to make adjustments to goodwill in the future due to market conditions or other factors related to our performance, including a decline in our forecasted results resulting from changes in projected on-going profitability, our capital investment budgets, changes in our interest rates, or favorable contract re-negotiations or expectations assumed in projections due to the Bankruptcy Filing that may not occur.


 
 
 
 

 


The carrying amount of our goodwill was $110.4 million and $115.2 million at December 4, 2010 and February 27, 2010, respectively.  Our goodwill allocation by segment at December 4, 2010 and February 27, 2010 was as follows:


 
 
Fresh
 
 
Pathmark
 
 
Gourmet
 
 
Other
 
 
Total
 
Goodwill
 
$
120,817
 
 
$
321,840
 
 
$
12,110
 
 
$
5,974
 
 
$
460,741
 
Accumulated impairment losses
 
 
(23,704
)
 
 
(321,840
)
   
-
     
-
 
 
 
(345,544
)
  Goodwill at February 27, 2010
 
$
97,113
 
 
$
-
 
 
$
12,110
 
 
$
5,974
 
 
$
115,197
 
Disposition of Assets*
   
(4,785
)
   
-
 
   
-
 
   
-
 
   
(4,785
)
  Goodwill at December 4, 2010
 
$
92,328
   
$
-
 
 
$
12,110
   
$
5,974
   
$
110,412
 
*  Relates to the sale of seven stores in Connecticut. Refer to Note 17 – Disposition of Assets

Intangible Assets, net
Intangible assets acquired as part of our acquisition of Pathmark in December 2007 consisted of the following:

 
 
Weighted Average Amortization Period (years)
 
 
Gross Carrying Amount
 
 
Accumulated Amortization
at Dec. 4, 2010
 
 
Accumulated Amortization
at Feb. 27, 2010
 
Pathmark trademark
 
Indefinite
 
 
$
48,200
 
 
$
-
 
 
$
-
 
Loyalty card customer relationships
 
 
5
 
 
 
19,200
 
 
 
10,842
 
 
 
7,595
 
In-store advertiser relationships
 
 
20
 
 
 
14,720
 
 
 
2,208
 
 
 
1,642
 
Pharmacy payor relationships
 
 
13
 
 
 
75,000
 
 
 
17,307
 
 
 
12,870
 
Total
 
 
 
 
 
$
157,120
 
 
$
30,357
 
 
$
22,107
 

As noted above, we determined that there was an interim triggering event requiring us to evaluate the intangible assets of the Pathmark reporting unit for possible impairment.

We evaluated the fair value of the Pathmark trademark using the relief-from-royalty method.  As a result of lowered revenue expectations, the carrying value exceeded the indicated fair value of the Pathmark trademark, resulting in an impairment of $12.7 million, which we recorded this quarter within “Goodwill, trademark, and long-lived asset impairment” in our Consolidated Statements of Operations.  Our estimates assumed a decline in revenues of approximately 10% and 1% in fiscals 2011 and 2012, respectively, with revenues remaining flat for fiscal years thereafter, and an annual pre-tax royalty savings rate of 20 basis points. If revenues in the future decline in excess of our assumptions, we may be required to record impairment charges.  During our fourth quarter of fiscal 2010, we will perform our annual trademark impairment testing as required by the accounting standards.  
 
During the third quarter of fiscal 2010, we also determined that we had a triggering event requiring us to evaluate the recoverability of our amortizable intangible assets for possible impairment.  We evaluated the expected undiscounted cash flows of the Pathmark reporting unit compared to the book value of all long-lived assets, including intangible assets other than goodwill, noting no impairment of our amortizable intangible assets.  Assumptions included a decline in revenues of approximately 10% and 1% in fiscals 2011 and 2012, respectively, with revenues remaining flat for fiscal years thereafter.  We assumed that the costs of disruption to our business resulting from our Bankruptcy Filing will be offset in fiscal 2011 by expected improvements with a continuation of improved costs in fiscal 2012 and thereafter. We assumed a growth rate for cash flow beginning in 2016 of 1.5%. Additionally, we assumed a terminal sale value for the Pathmark reporting unit at the end of the life of the primary asset. Future impairment charges could be required if our operating results in future periods differ from our current assumptions. The fair value of the Pathmark reporting unit exceeded its carrying values by an excess of 30%.

Amortization expense relating to our intangible assets for the 12 weeks ended December 4, 2010 and December 5, 2009 was $2.5 million during each period.  Amortization expense for the 40 weeks ended December 4, 2010 and December 5, 2009 was $8.3 million during each period.

The following table summarizes the estimated future amortization expense for our finite-lived intangible assets:

2010
 
$
2,475
 
2011
 
 
10,725
 
2012
 
 
9,670
 
2013
 
 
6,505
 
2014
 
 
6,505
 
Thereafter
 
 
42,683
 

4.
Fair Value Measurements

The accounting guidance for fair value measurement defines and establishes a framework for measuring fair value.  Inputs used to measure fair value are classified based on the following three-tier fair value hierarchy:

Level 1 – Quoted prices in active markets for identical assets or liabilities.
 
Level 2 – Directly or indirectly observable inputs other than Level 1 quoted prices in active markets. Our Level 2 liabilities include warrants, which are valued using the Black Scholes pricing model with inputs that are observable or can be derived from or corroborated by observable market data.  In addition, our investments in money market funds, which are considered cash equivalents, are classified as Level 2, as they are valued based on their reported Net Asset Value (NAV).

Level 3 – Unobservable inputs that are supported by little or no market activity whose value is determined using pricing models, discounted cash flows, or similar methodologies, as well as instruments for which the determination of fair value requires significant judgment or estimation.

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.


 
 
 
 

 


The following table provides the assets and liabilities carried at fair value measured on a recurring basis at December 4, 2010 and February 27, 2010:

 
 
 
 
 
Fair Value Measurements at December 4, 2010 Using
 
 
 
Total Carrying Value at
Dec. 4, 2010
 
 
Quoted
Prices in
 Active
Markets
(Level 1)
 
 
Significant
Other Observable Inputs
(Level 2)
 
 
Significant Unobservable 
Inputs
(Level 3)
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
$
1,592
 
 
$
-
 
 
$
1,592
 
 
$
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series B Warrant
 
$
3,705
 
 
$
-
 
 
$
3,705
 
 
$
-
 

 
 
 
 
 
Fair Value Measurements at February 27, 2010 Using
 
 
 
Total
Carrying
 Value at
Feb. 27, 2010
 
 
Quoted
 Prices in
Active
 Markets
(Level 1)
 
 
Significant
 Other Observable Inputs
(Level 2)
 
 
Significant Unobservable
 Inputs
(Level 3)
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
$
158,695
 
 
$
-
 
 
$
158,695
 
 
$
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series B Warrant
 
$
13,946
 
 
$
-
 
 
$
13,946
 
 
$
-
 

There were no transfers in and out of Level 1 and Level 2 fair value measurements during the 40 weeks ended December 4, 2010.

Level 3 Valuations
We did not have any financial assets or liabilities classified as Level 3 within the fair value hierarchy at December 4, 2010 and February 27, 2010.

Nonfinancial Assets and Liabilities Measured on a Nonrecurring Basis.  Fair value measurements of our nonfinancial assets and nonfinancial liabilities on a nonrecurring basis using Level 3 inputs are primarily used in the impairment analyses of our goodwill and other indefinite-lived intangible assets, our long-lived assets and closed store occupancy costs.  Refer to Note 3 – Goodwill and Other Intangible Assets for further information relating to the carrying value of our goodwill and other intangible assets.  Long-lived assets and closed store occupancy costs were measured at fair value on a nonrecurring basis using Level 3 inputs, as unobservable inputs were used to measure their fair value.  Refer to Note 5 – Valuation of Long-Lived Assets, Note 14 – Discontinued Operations and Note 15 – Asset Disposition Initiatives for more information relating to the valuation of these assets and liabilities.

Long-Term Debt
The following table provides the carrying values recorded on our balance sheet and the estimated fair values of financial instruments at December 4, 2010 and February 27, 2010:

 
 
At December 4, 2010
 
 
At February 27, 2010
 
 
 
Carrying Amount
 
 
Fair Value
 
 
Carrying Amount
 
 
Fair Value
 
Current portion of long-term debt
 
$
171,467
 
 
$
146,194
 
 
$
191
 
 
$
191
 
Long-term debt, net of related discount
 
 
816,830
 
 
 
619,152
 
 
 
990,359
 
 
 
962,040
 

Our long-term debt includes borrowings under our line of credit, credit agreement, related party promissory note and our other notes.  The fair value of our debt securities is determined based on quoted market prices for such notes in non-active markets.


5.
Valuation of Long-Lived Assets

We review the carrying values of our long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable.

Impairments due to closure or conversion in the normal course of business
We review assets in stores planned for closure or conversion for impairment upon determination that such assets will not be used for their intended useful life.  During the 12 and 40 weeks ended December 4, 2010, we recorded impairment losses on long-lived assets of nil and $1.1 million, respectively, related to stores that were closed or converted in the normal course of business, as compared to $1.5 million and $5.2 million in impairment losses recorded during the 12 and 40 weeks ended December 5, 2009.  These amounts were recorded within “Store operating, general and administrative expense” in our Consolidated Statements of Operations.

Impairments due to store closures
In August 2010, our Company announced a plan to close 25 stores in five states as we began the implementation and execution phase of our comprehensive turnaround. The affected stores include locations in close proximity to other Company stores, those facing real estate and cost issues, and underperforming non-core stores. As a result, we recorded an impairment charge of $23.7 million during the prior quarter. The store closures were completed in our Company’s third fiscal quarter. During the 12 weeks ended December 4, 2010, we recorded an additional impairment charge of $1.1 million. This amount was recorded within “Goodwill, trademark, and long-lived asset impairment” in our Consolidated Statements of Operations. There were no such closures during the 12 and 40 weeks ended December 5, 2009.

Impairments due to unrecoverable assets
As a result of experiencing cash flow losses at certain stores, we determined that a triggering event had occurred that required us to test the related long-lived assets for potential impairment.  We recorded an impairment charge of $28.2 million and $40.2 million during the 12 and 40 weeks ended December 4, 2010, respectively, to partially write down these stores’ long-lived assets, which consist of favorable leases, capital leases, and land and buildings, with a carrying amount of $63.0 million to their fair value of $34.8 million for the 12 weeks ended December 4, 2010.  The impairment charge of $28.2 million during the 12 weeks ended December 4, 2010 all related to Pathmark. The impairment charge of $40.2 million recorded during the 40 weeks ended December 4, 2010 all related to Pathmark with the exception of $0.9 million which related to SuperFresh. During the 12 weeks ended December 5, 2009, we recorded an impairment charge of $40.8 million related to Pathmark. These amounts were recorded within “Long-lived asset impairment” in our Consolidated Statements of Operations.

The effects of changes in estimates of useful lives were not material to ongoing depreciation expense.  If current operating levels do not improve, there may be a need to take further actions which may result in additional future impairments on long-lived assets, including the potential for impairment of assets that are held and used.


 
 
 
 

 


6.
Other Accruals

Other accruals at December 4, 2010 and February 27, 2010 were comprised of the following:

 
 
At
Dec. 4, 2010
 
 
At
Feb. 27, 2010
 
Self-insurance reserves
 
$
73,902
 
 
$
74,221
 
Deferred taxes
 
 
11,078
 
 
 
3,295
 
Closed store and warehouse reserves
 
 
96,663
 
 
 
62,189
 
Pension withdrawal liabilities
 
 
10,461
 
 
 
10,461
 
GHI Contractual Liability
 
 
8,104
 
 
 
8,066
 
Accrued occupancy related costs for open stores
 
 
26,713
 
 
 
26,952
 
Deferred income
 
 
28,066
 
 
 
26,534
 
Deferred real estate income
 
 
2,539
 
 
 
2,775
 
Accrued audit, legal and other
 
 
10,118
 
 
 
8,758
 
Accrued interest
 
 
26,727
 
 
 
12,509
 
Other postretirement and postemployment benefits
 
 
2,674
 
 
 
2,674
 
Accrued advertising
 
 
861
 
 
 
1,911
 
Dividends payable on preferred stock
 
 
3,113
 
 
 
2,982
 
Other share-based awards
   
298
     
-
 
Other
 
 
3,875
 
 
 
3,189
 
Total
 
$
305,192
 
 
$
246,516
 

7.
Other Non-Current Liabilities

Other non-current liabilities at December 4, 2010 and February 27, 2010 were comprised of the following:

 
 
At
Dec. 4, 2010
 
 
At
Feb. 27, 2010
 
Deferred taxes
 
$
526
 
 
$
11,367
 
Self-insurance Reserves
 
 
227,051
 
 
 
208,419
 
Closed Store and Warehouse Reserves
 
 
213,525
 
 
 
187,911
 
Pension Withdrawal Liabilities
 
 
85,153
 
 
 
89,495
 
GHI Contractual Liability for Employee Benefits
 
 
85,923
 
 
 
87,703
 
Pension Plan Benefits
 
 
113,620
 
 
 
109,549
 
Other Postretirement and Postemployment Benefits
 
 
36,577
 
 
 
36,091
 
Corporate Owned Life Insurance Liability
 
 
63,078
 
 
 
60,436
 
Deferred Rent Liabilities
 
 
56,719
 
 
 
57,963
 
Deferred Income
 
 
56,051
 
 
 
68,250
 
Unfavorable Lease Liabilities
 
 
4,411
 
 
 
5,391
 
Other
 
 
11,548
 
 
 
13,634
 
Total
 
$
954,182
 
 
$
936,209
 


 
 
 
 

 


8.
Indebtedness and Other Financial Liabilities

Our debt obligations at December 4, 2010 and February 27, 2010 consisted of the following:

 
 
At
Dec. 4, 2010
 
 
At
Feb. 27, 2010
 
5.125% Convertible Senior Notes, due June 15, 2011
 
$
161,192
 
 
$
155,333
 
Related Party Promissory Note, due August 18, 2011
 
 
10,000
 
 
 
10,000
 
9.125% Senior Notes, due December 15, 2011
 
 
12,840
 
 
 
12,840
 
6.750% Convertible Senior Notes, due December 15, 2012
 
 
231,342
 
 
 
223,838
 
11.375% Senior Secured Notes, due August 4, 2015
 
 
254,337
 
 
 
253,668
 
9.375% Notes, due August 1, 2039
 
 
200,000
 
 
 
200,000
 
Borrowings under Credit Agreement
 
 
116,017
 
 
 
132,900
 
Other
 
 
2,569
 
 
 
1,971
 
 
 
 
988,297
 
 
 
990,550
 
Less current portion of long-term debt
 
 
(171,467
)*
 
 
(191
)
Long-term debt
 
$
816,830
 
 
$
990,359
 

* Primarily represents our obligation relating to the $165.0 million 5.125% Convertible Senior Notes, due June 15, 2011, which is recorded at a discount.

Credit Agreement
On July 23, 2009, we entered into a Second Amendment to Amended and Restated Credit Agreement (the “Second Amendment”) amending the Amended and Restated Credit Agreement dated as of December 27, 2007 by and among our Company, its subsidiaries party thereto, Banc of America, N.A., as the administrative agent and collateral agent, the lenders party thereto and the other financial institutions party thereto (as amended by a First Amendment dated as of April 4, 2008 and as further amended by the Second Amendment, the (“Credit Agreement”) in connection with our private offering of senior secured notes and the sale of preferred stock.  The stated maturity date under the Credit Agreement was December 3, 2012.  Subject to borrowing base requirements, the Credit Agreement provided for a term loan of $82.9 million, a tranche A-2 term loan of $50.0 million and a two tranche revolving credit facility of $522.1 million enabling us to borrow funds and issue letters of credit on a revolving basis.  The Credit Agreement also provided for an increase in commitments of up to an additional $100.0 million, subject to agreement of new a