Attached files
file | filename |
---|---|
EX-31.2 - EXHIBIT 31.2 - Tops Holding LLC | c08803exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - Tops Holding LLC | c08803exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - Tops Holding LLC | c08803exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - Tops Holding LLC | c08803exv31w1.htm |
EX-99.1 - EXHIBIT 99.1 - Tops Holding LLC | c08803exv99w1.htm |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED OCTOBER 9, 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 333-168065
TOPS HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
26-1252536 (I.R.S. Employer Identification No.) |
|
6363 Main Street, Williamsville, New York 14221 |
(716) 635-5000 (Telephone Number) |
|
(Address of principal executive office, including zip 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 o No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, 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 þ
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of
the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No þ
As of November 22, 2010, 144,776 shares of common stock of the registrant were outstanding.
* | The registrant has not been subject to the filing requirements for the past 90 days. The
registrant became subject to the filing requirements on September 30, 2010. |
TOPS HOLDING CORPORATION
TABLE OF CONTENTS
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4 | ||||||||
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34 | ||||||||
34 | ||||||||
35 | ||||||||
35 | ||||||||
35 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 | ||||||||
Exhibit 99.1 |
i
Table of Contents
PART I FINANCIAL INFORMATION (Unaudited)
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
TOPS HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
(Unaudited)
October 9, 2010 | January 2, 2010 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 16,601 | $ | 19,722 | ||||
Accounts receivable, net |
57,098 | 49,457 | ||||||
Inventory, net |
121,585 | 82,272 | ||||||
Prepaid expenses and other current assets |
13,611 | 13,535 | ||||||
Income taxes refundable |
598 | 760 | ||||||
Current deferred tax assets |
5,601 | 5,986 | ||||||
Total current assets |
215,094 | 171,732 | ||||||
Property and equipment, net |
381,362 | 333,416 | ||||||
Intangible assets, net (Note 4) |
81,601 | 76,356 | ||||||
Other assets (Note 5) |
14,189 | 11,344 | ||||||
Total assets |
$ | 692,246 | $ | 592,848 | ||||
Liabilities and Shareholders Deficit |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 91,207 | $ | 68,462 | ||||
Accrued expenses and other current liabilities (Note 6) |
90,513 | 68,334 | ||||||
Current portion of capital lease obligations |
10,603 | 8,186 | ||||||
Current portion of long-term debt (Note 8) |
396 | 362 | ||||||
Total current liabilities |
192,719 | 145,344 | ||||||
Capital lease obligations |
174,044 | 175,340 | ||||||
Long-term debt (Note 8) |
350,278 | 288,194 | ||||||
Other long-term liabilities |
19,428 | 16,785 | ||||||
Non-current deferred tax liabilities |
5,601 | 5,986 | ||||||
Total liabilities |
742,070 | 631,649 | ||||||
Shareholders deficit: |
||||||||
Common shares ($0.001 par value; 300,000 authorized shares at
October 9, 2010, 200,000 authorized shares at January 2, 2010,
144,776 shares issued & outstanding at October 9, 2010, 100,000 shares
issued & outstanding at January 2, 2010) |
| | ||||||
Paid-in capital |
(2,936 | ) | (3,383 | ) | ||||
Accumulated deficit |
(47,023 | ) | (35,553 | ) | ||||
Accumulated other comprehensive income, net of tax |
135 | 135 | ||||||
Total shareholders deficit |
(49,824 | ) | (38,801 | ) | ||||
Total liabilities and shareholders deficit |
$ | 692,246 | $ | 592,848 | ||||
See notes to unaudited condensed consolidated financial statements.
1
Table of Contents
TOPS HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
12-week periods ended | 40-week periods ended | |||||||||||||||
October 9, 2010 | October 3, 2009 | October 9, 2010 | October 3, 2009 | |||||||||||||
Net sales |
$ | 519,859 | $ | 373,216 | $ | 1,726,707 | $ | 1,271,161 | ||||||||
Cost of goods sold (excluding distribution costs) |
(362,206 | ) | (260,433 | ) | (1,201,152 | ) | (884,605 | ) | ||||||||
Distribution costs |
(10,752 | ) | (7,449 | ) | (34,262 | ) | (25,462 | ) | ||||||||
Gross profit |
146,901 | 105,334 | 491,293 | 361,094 | ||||||||||||
Operating expenses: |
||||||||||||||||
Wages, salaries and benefits |
(70,871 | ) | (50,083 | ) | (238,377 | ) | (170,569 | ) | ||||||||
Selling and general expenses |
(24,381 | ) | (17,021 | ) | (80,188 | ) | (55,958 | ) | ||||||||
Administrative expenses (inclusive of
stock-based
compensation expense of $21, $153, $447
and $511) |
(19,670 | ) | (13,352 | ) | (82,172 | ) | (47,322 | ) | ||||||||
Rent expense |
(4,518 | ) | (2,997 | ) | (14,535 | ) | (9,731 | ) | ||||||||
Depreciation and amortization |
(15,090 | ) | (11,955 | ) | (48,804 | ) | (39,688 | ) | ||||||||
Advertising |
(5,923 | ) | (2,966 | ) | (18,278 | ) | (9,054 | ) | ||||||||
Total operating expenses |
(140,453 | ) | (98,374 | ) | (482,354 | ) | (332,322 | ) | ||||||||
Operating income |
6,448 | 6,960 | 8,939 | 28,772 | ||||||||||||
Bargain purchase (Note 3) |
| | 16,716 | | ||||||||||||
(Loss) gain on debt extinguishment |
(33 | ) | | (1,041 | ) | 505 | ||||||||||
Interest expense, net |
(14,368 | ) | (8,992 | ) | (46,852 | ) | (31,966 | ) | ||||||||
Loss before income taxes |
(7,953 | ) | (2,032 | ) | (22,238 | ) | (2,689 | ) | ||||||||
Income tax benefit |
397 | 1,159 | 10,768 | 1,289 | ||||||||||||
Net loss |
$ | (7,556 | ) | $ | (873 | ) | $ | (11,470 | ) | $ | (1,400 | ) | ||||
See notes to unaudited condensed consolidated financial statements.
2
Table of Contents
TOPS HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
40-week periods ended | ||||||||
October 9, 2010 | October 3, 2009 | |||||||
Cash flows provided by operating activities: |
||||||||
Net loss |
$ | (11,470 | ) | $ | (1,400 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
59,752 | 49,003 | ||||||
Bargain purchase |
(16,716 | ) | | |||||
Deferred income taxes |
(10,585 | ) | (1,289 | ) | ||||
Amortization of deferred financing costs |
1,791 | 865 | ||||||
Loss (gain) on debt extinguishment |
1,041 | (505 | ) | |||||
Stock-based compensation expense |
447 | 511 | ||||||
LIFO inventory valuation adjustment |
383 | 578 | ||||||
Interest rate swap interest paid |
| 3,143 | ||||||
Impact of interest rate swap on deferred tax assets |
| (582 | ) | |||||
Change in fair value of interest rate swap |
| (1,256 | ) | |||||
Other |
223 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Increase in accounts receivable |
(7,641 | ) | (7,278 | ) | ||||
Increase in inventories |
(7,779 | ) | (1,772 | ) | ||||
Decrease (increase) in prepaid expenses and other current assets |
2,278 | (1,774 | ) | |||||
Decrease (increase) in income taxes refundable |
162 | (790 | ) | |||||
Increase in accounts payable |
22,397 | 7,700 | ||||||
Increase (decrease) in accrued expenses and other current liabilities |
9,265 | (7,337 | ) | |||||
Increase in other long-term liabilities |
2,390 | 4,368 | ||||||
Net cash provided by operating activities |
45,938 | 42,185 | ||||||
Cash flows used in investing activities: |
||||||||
Acquisition of The Penn Traffic Company (Note 3) |
(85,023 | ) | | |||||
Cash paid for property and equipment |
(34,280 | ) | (19,336 | ) | ||||
Proceeds from sale of assets |
20,738 | | ||||||
Interest rate swap interest paid |
| (3,143 | ) | |||||
Net cash used in investing activities |
(98,565 | ) | (22,479 | ) | ||||
Cash flows provided by (used in) financing activities: |
||||||||
Proceeds from long-term debt borrowings |
112,125 | | ||||||
Repayment of long-term debt borrowings |
(36,283 | ) | (23,651 | ) | ||||
Borrowings on ABL Facility |
191,400 | | ||||||
Repayments on ABL Facility |
(205,400 | ) | | |||||
Proceeds from issuance of common stock |
30,000 | | ||||||
Dividend to shareholders |
(30,000 | ) | | |||||
Principal payments on capital leases |
(7,007 | ) | (5,518 | ) | ||||
Deferred financing costs incurred |
(5,677 | ) | (437 | ) | ||||
Change in bank overdraft position |
348 | (169 | ) | |||||
Net cash provided by (used in) financing activities |
49,506 | (29,775 | ) | |||||
Net decrease in cash and cash equivalents |
(3,121 | ) | (10,069 | ) | ||||
Cash and cash equivalents beginning of period |
19,722 | 30,319 | ||||||
Cash and cash equivalents end of period |
$ | 16,601 | $ | 20,250 | ||||
See notes to unaudited condensed consolidated financial statements.
3
Table of Contents
TOPS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE COMPANY AND BASIS OF PRESENTATION
The Company
Tops Holding Corporation (Holding or Company) was incorporated on October 5, 2007 and commenced
operations on December 1, 2007 with the sole purpose of owning and operating Tops Markets, LLC
(Tops Markets or Tops), a wholly-owned subsidiary. Holding is owned by various funds
affiliated with Morgan Stanley Private Equity, an affiliate of Morgan Stanley (Morgan Stanley),
HSBC Private Equity Partners (HSBC), two minority investors and a Company employee. Tops
operates as a food retailer in Upstate New York and Northern Pennsylvania under the banner Tops.
On January 29, 2010, the Company completed the acquisition (the Acquisition) of substantially all
assets and certain liabilities of The Penn Traffic Company (Penn Traffic) and its subsidiaries,
including Penn Traffics 79 retail supermarkets, in exchange for cash consideration of $85.0
million. These supermarkets currently operate under the banners of Tops, P&C and Quality Markets
in Upstate New York and Northern Pennsylvania. As of November 22, 2010, the Company has retained
55 supermarkets. In August 2010, the Federal Trade Commission (FTC) issued a Proposed Order that
would require Tops to sell seven of these retained supermarkets. The Proposed Order was subject to
public comment until September 7, 2010. The Company is awaiting the approval of a Final Order by
the FTC. The remaining 24 supermarkets have been closed, sold or liquidated. The Company
currently operates 127 corporate retail supermarkets with an additional five franchise
supermarkets.
Accounting Policies
The summary of significant accounting policies is included in Note 1 to the audited consolidated
financial statements of Tops Holding Corporation for the fiscal year ended January 2, 2010.
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements are unaudited and have been prepared
by the Companys management in accordance with accounting principles generally accepted in the
United States of America (GAAP) for interim financial information and accounting policies are
consistent, in all material respects, with those applied in preparing the Companys audited
consolidated financial statements for the fiscal year ended January 2, 2010. In the opinion of
management, these interim financial statements reflect all adjustments, including normal recurring
adjustments, management considers necessary for the fair presentation of the Companys financial
position, operating results and cash flows for the interim periods presented. All intercompany
transactions have been eliminated. The condensed consolidated balance sheet as of January 2, 2010
has been derived from the audited consolidated balance sheet as of that date. These condensed
consolidated financial statements should be read in conjunction with the audited consolidated
financial statements and related notes. The accompanying condensed consolidated financial
statements present results for the 12-week and 40-week periods ended October 9, 2010 and October 3,
2009. These results are not necessarily indicative of the results that may be achieved for the
52-week period ending January 1, 2011, or any other period. The Company has evaluated subsequent
events for disclosure through the date of issuance of the accompanying unaudited condensed
consolidated interim financial statements and there are no material subsequent events which require
additional disclosure.
Segments
The Company operates 127 corporate retail supermarkets with an additional five franchise
supermarkets, which offer grocery, produce, frozen, dairy, meat, floral, seafood, health and beauty
care, general merchandise, deli and bakery goods. Across all 127 retail supermarkets, the Company
operates one store format where each supermarket offers the same general mix of products with
similar pricing to similar categories of customers. The Company has concluded that each individual
supermarket is an operating segment. As of October 9, 2010, 80 of the supermarkets offer pharmacy
services and 36 fuel centers were in operation, inclusive of the franchise locations. The
Companys retail operations, which represent substantially all of the Companys consolidated sales,
earnings and total assets, are its only reportable segment.
These 127 operating segments have been aggregated into one reportable segment because, in the
Companys judgment, the operating segments have similar historical economic characteristics and are
expected to have similar economic characteristics and long-term financial performance in the
future. The principal measures and factors considered in determining whether the economic
characteristics are similar are gross margin percentage, capital expenditures, competitive risks
and employee labor agreements. In addition, each operating segment has similar products and types
of customers, similar methods of distribution and a similar regulatory environment.
4
Table of Contents
The following table presents sales revenue by type of similar product (dollars in thousands):
12-week periods ended | 40-week periods ended | |||||||||||||||||||||||||||||||
October 9, 2010 | October 3, 2009 | October 9, 2010 | October 3, 2009 | |||||||||||||||||||||||||||||
% of | % of | % of | % of | |||||||||||||||||||||||||||||
Amount | Total | Amount | Total | Amount | Total | Amount | Total | |||||||||||||||||||||||||
Non-perishables(1) |
$ | 301,209 | 57.9 | % | $ | 209,833 | 56.2 | % | $ | 996,726 | 57.7 | % | $ | 722,604 | 56.8 | % | ||||||||||||||||
Perishables(2) |
137,610 | 26.5 | % | 95,108 | 25.5 | % | 467,757 | 27.1 | % | 332,745 | 26.2 | % | ||||||||||||||||||||
Pharmacy |
41,368 | 8.0 | % | 36,083 | 9.7 | % | 138,721 | 8.0 | % | 121,872 | 9.6 | % | ||||||||||||||||||||
Fuel |
36,339 | 7.0 | % | 29,142 | 7.8 | % | 112,221 | 6.5 | % | 83,650 | 6.6 | % | ||||||||||||||||||||
Other(3) |
3,333 | 0.6 | % | 3,050 | 0.8 | % | 11,282 | 0.7 | % | 10,290 | 0.8 | % | ||||||||||||||||||||
$ | 519,859 | 100.0 | % | $ | 373,216 | 100.0 | % | $ | 1,726,707 | 100.0 | % | $ | 1,271,161 | 100.0 | % | |||||||||||||||||
(1) | Non-perishables consist of grocery, dairy, frozen, general merchandise, health and
beauty care and other non-perishable related products. |
|
(2) | Perishables consist of produce, meat, seafood, bakery, deli, floral, prepared foods and
other perishable related products. |
|
(3) | Other primarily consists of franchise income and service commission income, such as
lottery, money orders and money transfers. |
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in the Companys
condensed consolidated financial statements and notes thereto. The most significant estimates used
by management are related to the accounting for vendor allowances, valuation of long-lived assets,
lease classification, self-insurance reserves, inventory valuation and income taxes. Actual
results could differ from these estimates.
Fair Value of Financial Instruments
The provisions of Accounting Standards Codification (ASC) 820, Fair Value Measurements and
Disclosures, establish a framework for measuring fair value and a hierarchy that categorizes and
prioritizes the sources to be used to estimate fair value as follows:
Level 1 observable inputs such as quoted prices in active markets;
Level 2 inputs include quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable for the asset or liability (interest
rates, yield curves, etc.), and inputs that are derived principally from or corroborated by
observable market data by correlation or other means (market corroborated inputs); and
Level 3 unobservable inputs that reflect the Companys determination of assumptions that
market participants would use in pricing the asset or liability. These inputs are developed
based on the best information available, including the Companys own data.
The fair value of the Companys Senior Notes is based on quoted market prices. At October 9, 2010,
the fair value of total debt excluding capital leases was $378.2 million, compared to a carrying
value of $350.7 million. At January 2, 2010, the fair value of total debt excluding capital leases
was $300.2 million, compared to a carrying value of $288.6 million.
2. RECENT ACCOUNTING PRONOUNCEMENTS
There are currently no recent accounting pronouncements which had or are expected to have a
material impact on the Companys consolidated financial statements as of the date of this Quarterly
Report on Form 10-Q (10-Q).
3. BUSINESS ACQUISITION
On January 29, 2010, the Company completed the Acquisition of substantially all assets and certain
liabilities of Penn Traffic, including Penn Traffics 79 retail supermarkets. In addition to the
cash consideration of $85.0 million paid to Penn Traffic, the Company incurred $6.2 million of
transaction costs, of which $0.4 million and $5.1 million have been recorded in administrative
expenses in the consolidated statements of operations for the 12-week and 40-week periods ended
October 9, 2010, respectively. The remaining transaction costs were incurred in Fiscal 2009. The
Acquisition is accounted for under the acquisition method of accounting in accordance with ASC 805,
Business Combinations.
5
Table of Contents
During the 40-week period ended October 9, 2010, the Company liquidated and closed 13 supermarkets
and sold an additional 11 supermarkets and certain other acquired assets to third parties for $20.5
million, of which $3.8 million and $20.5 million was received during the 12-week and 40-week
periods ended October 9, 2010, respectively.
The Company believes the Acquisition creates significant strategic value due to the complementary
nature of our supermarket bases and those of Penn Traffic. The Acquisition presented a significant
opportunity for us to acquire a large number of supermarkets in a single transaction with minimal
incremental general and administrative expenses.
As a result of the preliminary allocation of the purchase price, the assets acquired and
liabilities assumed from Penn Traffic were recorded at their respective fair values as of the
acquisition date. Due to the size and timing of the Acquisition, the preliminary allocation of the
purchase is based on managements best estimates of fair value as of the acquisition date using
information as of the date of this 10-Q and is subject to adjustments. The valuations will be
finalized within 12 months of the closing of the Acquisition. As the valuations are finalized, any
changes to the preliminary valuation of assets acquired or liabilities assumed may result in
material adjustments to the fair value of property and equipment, inventory and identifiable
intangible assets acquired and will be adjusted retrospectively.
The fair values of buildings, personal property and site improvements, all of which are included in
property and equipment below, were determined using the cost approach. The fair value of land was
determined using the market approach. The fair values of intangible assets were primarily
determined using the income approach which, for the tradenames, is based upon a present value of
the economic royalty savings associated with the tradenames and revenue projections attributed to
the tradenames. For the customer relationships, the fair value is based upon an excess earnings
approach which is equal to the present value of incremental after-tax cash flows. The amortization
period is seven to nine years and eleven years for the tradenames and customer relationships,
respectively. Tradenames are being amortized on an accelerated basis based upon a brand
obsolescence assumption, while the customer relationships are being amortized on an accelerated
basis based upon the level of expected attrition.
The following table summarizes the preliminary allocation of the purchase price to the assets
acquired and liabilities assumed as of the transaction date, and adjustments made to the estimated
fair values of these assets and liabilities (dollars in thousands):
Initial | Revised | |||||||||||
Estimate | Adjustments | Estimate | ||||||||||
Assets acquired: |
||||||||||||
Inventory |
$ | 32,792 | $ | (875 | ) | $ | 31,917 | |||||
Prepaid expenses |
2,354 | | 2,354 | |||||||||
Property and equipment |
63,878 | (9,055 | ) | 54,823 | ||||||||
Favorable/unfavorable lease rights |
6,589 | 777 | 7,366 | |||||||||
Tradenames |
4,200 | | 4,200 | |||||||||
Customer relationships |
1,100 | 600 | 1,700 | |||||||||
Assets held for sale |
22,791 | (810 | ) | 21,981 | ||||||||
Total assets acquired |
133,704 | (9,363 | ) | 124,341 | ||||||||
Liabilities assumed: |
||||||||||||
Accrued expenses and other current liabilities |
5,891 | 443 | 6,334 | |||||||||
Liabilities held for sale |
1,585 | (135 | ) | 1,450 | ||||||||
Deferred tax liability |
13,717 | (2,757 | ) | 10,960 | ||||||||
Other long-term liabilities |
253 | | 253 | |||||||||
Capital lease obligations |
6,314 | (2,709 | ) | 3,605 | ||||||||
Total liabilities assumed |
27,760 | (5,158 | ) | 22,602 | ||||||||
Bargain purchase |
(20,921 | ) | 4,205 | (16,716 | ) | |||||||
Acquisition price |
$ | 85,023 | $ | | $ | 85,023 | ||||||
The preliminary difference between the book basis and tax basis of the net assets acquired
resulted in a deferred tax liability of $11.0 million. The excess of net assets acquired over the
purchase price of $16.7 million has been recognized as a gain in the condensed consolidated
statement of operations for the 40-week period ended October 9, 2010. This bargain purchase was
attributable to the distressed status of Penn Traffic due to its historical operating results,
which led to a November 2009 bankruptcy filing.
6
Table of Contents
Unaudited Pro Forma Financial Information
The following table summarizes the Companys unaudited pro forma operating results for the 12-week
period ended October 3, 2009 and the 40-week periods ended October 9, 2010 and October 3, 2009
(dollars in thousands):
12-week period ended | 40-week periods ended | |||||||||||
October 3, 2009 | October 9, 2010 | October 3, 2009 | ||||||||||
Net sales |
$ | 516,498 | $ | 1,736,097 | $ | 1,707,106 | ||||||
Operating income |
621 | 10,575 | 7,594 | |||||||||
Net loss |
(11,417 | ) | (41,573 | ) | (33,224 | ) |
This pro forma financial information is not intended to represent or be indicative of what
would have occurred if the transactions had taken place on the dates presented and should not be
taken as representative of the Companys future consolidated results of operations or financial
position. This pro forma financial information does not contemplate the cost savings expected to
be realized from the achievement of certain synergies, including, without limitation, purchasing
savings by leveraging Tops relationships with its suppliers and the reduction of duplicative
selling, general and administrative expenses. This financial information includes pro forma
results to give effect to the Acquisition, including only the 55 supermarkets that have currently
been retained by the Company, including the seven supermarkets under Proposed Order by the FTC, as
well as the October 2009 and February 2010 refinancing activities, as if they had occurred on
December 28, 2008. Net sales and operating income related to the retained Penn Traffic
supermarkets was $133.3 million and $2.6 million during the 12-week period ended October 9, 2010,
respectively, and $387.0 million and $8.1 million during the 40-week period ended October 9, 2010,
respectively.
4. INTANGIBLE ASSETS, NET
Intangible assets, net of accumulated amortization, consist of the following (dollars in
thousands):
Weighted | ||||||||||||||||
Gross | Net | Average | ||||||||||||||
Carrying | Accumulated | Carrying | Amortization | |||||||||||||
October 9, 2010 | Amount | Amortization | Amount | Period | ||||||||||||
Acquired Penn Traffic Intangible Assets: |
||||||||||||||||
Favorable/unfavorable lease rights |
$ | 7,366 | $ | (784 | ) | $ | 6,582 | 7.4 | ||||||||
Tradenames |
4,200 | (525 | ) | 3,675 | 8.5 | |||||||||||
Customer relationships |
1,700 | (225 | ) | 1,475 | 11.0 | |||||||||||
Other Intangible Assets: |
||||||||||||||||
Tradename |
41,011 | | 41,011 | Indefinite life | ||||||||||||
Customer relationships |
26,051 | (13,775 | ) | 12,276 | 8.0 | |||||||||||
Favorable/unfavorable lease rights |
14,369 | (6,515 | ) | 7,854 | 9.3 | |||||||||||
Franchise agreements |
11,538 | (3,003 | ) | 8,535 | 11.0 | |||||||||||
Other |
407 | (214 | ) | 193 | 4.0 | |||||||||||
$ | 106,642 | $ | (25,041 | ) | $ | 81,601 | 9.0 | |||||||||
Gross | Net | |||||||||||
Carrying | Accumulated | Carrying | ||||||||||
January 2, 2010 | Amount | Amortization | Amount | |||||||||
Tradename |
$ | 41,011 | $ | | $ | 41,011 | ||||||
Customer relationships |
26,051 | (9,880 | ) | 16,171 | ||||||||
Favorable/unfavorable lease rights |
14,369 | (4,800 | ) | 9,569 | ||||||||
Franchise agreements |
11,538 | (2,196 | ) | 9,342 | ||||||||
Other |
407 | (144 | ) | 263 | ||||||||
$ | 93,376 | $ | (17,020 | ) | $ | 76,356 | ||||||
Indefinite-lived intangible assets are reviewed for impairment annually or more frequently if
impairment indicators arise. Based on the Companys assessment, no impairment indicators were
present during the 40-week periods ended October 9, 2010 and October 3, 2009.
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During the 12-week periods ended October 9, 2010 and October 3, 2009, amortization expense was
$2.7 million and $1.7 million, respectively. During the 40-week periods ended October 9, 2010 and
October 3, 2009, amortization expense was $8.0 million and $5.8 million, respectively. Such
amortization is included in depreciation and amortization expense in the condensed consolidated
statements of operations.
As of October 9, 2010, expected future amortization of intangible assets is as follows (dollars in
thousands):
2010 (remaining period) |
$ | 2,405 | ||
2011 |
8,711 | |||
2012 |
6,989 | |||
2013 |
6,145 | |||
2014 |
5,345 | |||
Thereafter |
10,995 |
5. OTHER ASSETS
Effective October 9, 2009, the Company issued $275.0 million of 10.125% Senior Secured Notes (the
Senior Notes) due in 2015, and entered into a $70.0 million asset based lending facility (the
ABL Facility) (see Note 8). The proceeds from the Senior Notes and the ABL Facility were
utilized to repay the outstanding debt related to the Companys previous first lien credit
agreement and warehouse mortgage, pay a dividend to the Companys owners, settle the Companys
outstanding interest rate swap arrangement, and pay fees and expenses related to the financing
transactions. Costs associated with the Senior Notes of $9.9 million were capitalized and are
being amortized over the term of the agreement using the effective interest method. Costs
associated with the ABL Facility of $1.8 million were capitalized and are being amortized on a
straight-line basis over the term of the agreement.
On January 29, 2010, the Company entered into a $25.0 million bridge loan facility (the Bridge
Loan) with Morgan Stanley Senior Funding, Inc., and Banc of America Bridge LLC. Additionally, the
Companys ABL Facility was amended on January 29, 2010 to increase its borrowing capacity by up to
$41.0 million, consisting of an increase in the amount available under the revolving credit
facility of $30.0 million and a new term loan facility (the Term Loan) of $11.0 million. Costs
associated with the Bridge Loan and Term Loan of $0.7 million and $0.4 million, respectively, were
initially capitalized and were being amortized over the terms of the agreements using the effective
interest method. As the Bridge Loan and Term Loan were both repaid in full on February 12, 2010,
unamortized costs of $0.7 million and $0.3 million, respectively, have been recorded as a loss on
debt extinguishment in the condensed consolidated statement of operations for the 40-week period
ended October 9, 2010. Costs associated with the $30.0 million increase in the revolving ABL
Facility of $0.8 million were capitalized and are being amortized on a straight-line basis over the
term of the agreement.
On February 12, 2010 the Company issued an additional $75.0 million of Senior Notes under the same
terms of the October 9, 2009 issuance. Costs associated with the additional Senior Notes of
$3.9 million were capitalized and are being amortized over the term of the agreement using the
effective interest method.
Amortization of deferred financing costs is included in interest expense in the consolidated
statements of operations and amounted to $0.6 million and $0.3 million for the 12-week periods
ended October 9, 2010 and October 3, 2009, respectively. In the 40-week periods ended October 9,
2010 and October 3, 2009, amortization expense was approximately $1.8 million and $0.9 million,
respectively. At October 9, 2010, other assets include deferred financing costs, net of
accumulated amortization of $2.2 million, totaling $14.2 million. At January 2, 2010, other assets
include deferred financing costs, net of accumulated amortization of $0.4 million, totaling $11.3
million.
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6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (dollars in thousands):
October 9, 2010 | January 2, 2010 | |||||||
Interest payable |
$ | 17,281 | $ | 6,936 | ||||
Wages, taxes and benefits |
16,312 | 15,813 | ||||||
Lottery |
10,267 | 7,565 | ||||||
Property and equipment expenditures |
8,434 | 2,349 | ||||||
Union medical, pension and 401(k) |
5,540 | 3,029 | ||||||
Sales and use tax |
4,479 | 1,117 | ||||||
Money orders |
3,330 | 4,855 | ||||||
Professional and legal fees |
3,250 | 1,741 | ||||||
Utilities |
3,221 | 2,378 | ||||||
Vacation |
2,744 | 4,873 | ||||||
Gift cards |
2,287 | 3,685 | ||||||
Advertising |
1,737 | 874 | ||||||
Repairs and maintenance |
1,710 | 984 | ||||||
Real estate taxes |
1,473 | 901 | ||||||
Self-insurance reserves |
1,406 | 1,406 | ||||||
Retirement obligations |
879 | 879 | ||||||
Financed insurance policies |
| 2,220 | ||||||
Other |
6,163 | 6,729 | ||||||
$ | 90,513 | $ | 68,334 | |||||
7. LEASES
The Company has a number of leases in effect for supermarket properties and equipment. The initial
lease terms generally range up to twenty-five years and will expire at various times through 2026,
with options to renew for additional periods. The majority of the supermarket leases provide for
base rental, plus real estate taxes, insurance, common area maintenance and other operating
expenses applicable to the leased premises. Some leases contain escalation clauses for future
rents and contingent rents based on sales volumes.
During the 12-week periods ended October 9, 2010 and October 3, 2009, the Company incurred rental
expense related to operating leases recorded in rent expense of $5.7 million and $3.7 million,
offset by sublease rental income of $1.2 million and $0.7 million, respectively. In addition, the
Company incurred rental expense related to equipment rent recorded in selling and general expenses
of $0.2 million during each of the 12-week periods ended October 9, 2010 and October 3, 2009,
respectively, and equipment and office rent recorded in administrative expenses of $0.6 million and
$0.4 million during the 12-week periods ended October 9, 2010 and October 3, 2009, respectively.
During the 40-week periods ended October 9, 2010 and October 3, 2009, the Company incurred rental
expense related to operating leases recorded in rent expense of $18.9 million and $12.3 million,
offset by sublease rental income of $4.4 and $2.6 million, respectively. In addition, the Company
incurred rental expense related to equipment rent recorded in selling and general expenses of $0.5
million during each of the 40-week periods ended October 9, 2010 and October 3, 2009 and equipment
and office rent recorded in administrative expenses of $1.6 million and $1.3 million during the
40-week periods ended October 9, 2010 and October 3, 2009, respectively.
8. DEBT
Long-term debt consists of the following (dollars in thousands):
October 9, 2010 | January 2, 2010 | |||||||
Senior Secured Notes |
$ | 350,000 | $ | 275,000 | ||||
Discount on Senior Secured Notes, net |
(2,998 | ) | (4,399 | ) | ||||
ABL Facility |
| 14,000 | ||||||
Other loans |
2,438 | 2,565 | ||||||
Mortgage note payable |
1,234 | 1,390 | ||||||
Total debt |
350,674 | 288,556 | ||||||
Current portion |
(396 | ) | (362 | ) | ||||
Total long-term debt |
$ | 350,278 | $ | 288,194 | ||||
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On October 9, 2009, the Company issued $275.0 million of Senior Notes, bearing interest of
10.125%. The Company received proceeds from the Senior Notes issuance, net of a $4.5 million
original issue discount, of $270.5 million. The Senior Notes mature October 15, 2015 and require
semi-annual interest payments beginning April 15, 2010. The Senior Notes are collateralized by
(i) first-priority interests, subject to certain exceptions, in the Companys warehouse
distribution facility in Lancaster, New York, certain owned real property acquired by the Company,
Tops Markets and the guarantors, Tops PT, LLC and Tops Gift Card Company, LLC, following the issue
date of the Senior Notes, intellectual property, equipment, stock of subsidiaries and substantially
all other assets of the Company, Tops Markets and the guarantors (other than leasehold interests in
real property), other than assets securing the ABL Facility (as defined below) on a first priority
basis (collectively, the Notes Priority Collateral), and (ii) second-priority interests, subject
to certain exceptions and permitted liens, in the assets of the Company, Tops Markets and the
guarantors that secure the ABL Facility on a
first-priority basis, including present and future receivables, inventory, prescription lists,
deposit accounts and certain related rights and proceeds relating thereto (collectively, the ABL
Priority Collateral).
Also effective October 9, 2009, the Company entered into a revolving ABL Facility that expires on
October 9, 2013. The ABL Facility allowed a maximum borrowing capacity of $70.0 million, including
a sub-limit for the issuance of letters of credit, subject to a borrowing base calculation. The
Companys ABL Facility was amended on January 29, 2010 to increase its borrowing capacity by up to
$41.0 million, consisting of an increase in the amount available under the revolving credit
facility of $30.0 million and a Term Loan of $11.0 million, in each case subject to a borrowing
base calculation. The Term Loan was repaid in full with the proceeds from the $75.0 million of
Senior Notes issued on February 12, 2010. Based upon the borrowing base calculation as of October
9, 2010, the unused commitment under the ABL Facility was $79.2 million, after giving effect to
$12.8 million of letters of credit outstanding thereunder. Revolving loans under the ABL Facility
will, at the Companys option, bear interest at either i) LIBOR plus a margin of 350 to 400 basis
points, determined based on levels of borrowing availability, or ii) the prime rate plus a margin
of 250 to 300 basis points, determined based on levels of borrowing availability. The ABL Facility
is collateralized primarily by (i) first-priority interests, subject to certain exceptions, in the
ABL Priority Collateral and (ii) second-priority interests, subject to certain exceptions, in the
Notes Priority Collateral.
On January 29, 2010, the Company entered into a $25.0 million Bridge Loan with Morgan Stanley
Senior Funding, Inc. and Banc of America Bridge LLC. The Bridge Loan was repaid in full with the
proceeds from the $75.0 million of Senior Notes issued on February 12, 2010.
On February 12, 2010, the Company issued an additional $75.0 million of Senior Notes on the same
terms as the October 2009 issuance. The Company received proceeds of $76.1 million from the
additional Senior Notes issuance, including a $1.1 million original issue premium. The Company has
incurred $4.7 million of financing costs, primarily related to the additional Senior Notes
issuance, which are capitalized in other assets in the Companys consolidated balance sheet.
The Senior Notes and ABL Facility contain customary affirmative and negative covenants, including
restrictions on indebtedness, liens, type of business, acquisitions, investments, sale or transfer
of assets, payment of dividends, transactions involving affiliates, change in control and other
matters customarily restricted in such agreements. Failure to meet any of these covenants would be
an event of default. As of October 9, 2010, the Company was in compliance with all such covenants.
9. DERIVATIVE INSTRUMENTS
In order to reduce the Companys exposure to fluctuations in interest rates, Holding entered into
an interest rate swap agreement effective December 28, 2007. This agreement was intended to
convert a portion of the Companys floating-rate debt to fixed-rate debt. Such agreement involved
the exchange of fixed-rate and floating-rate payments over the life of the agreement without the
exchange of the underlying principal amounts.
In accordance with the provisions of ASC 815, Derivatives and Hedging, through November 16, 2008,
the Company had designated and accounted for its interest rate swap agreement as a cash flow
hedge. On November 17, 2008, the Company calculated its effectiveness test and determined that the
interest rate swap was no longer highly effective. As a result, the Company discontinued the use
of hedge accounting. Subsequent to the discontinuance of hedge accounting, this agreement was
marked-to-market and the change in the fair value of the interest rate swap subsequent to
November 17, 2008 was recorded within interest expense in the Companys consolidated statements of
operations. The interest rate swap was settled on October 9, 2009.
During the 12-week period ended October 3, 2009, the increase in the negative fair value of the
interest rate swap of $1.1 million was recorded within interest expense. The pre-tax amount
previously recognized in accumulated other comprehensive income (AOCI), totaling $5.2 million at
November 17, 2008, was amortized as an increase to interest expense over the remaining term of the
interest rate swap agreement. Such amortization recognized during the 12-week period ended October
3, 2009 was $0.6 million.
During the 40-week period ended October 3, 2009, the decrease in the negative fair value of the
interest rate swap of $1.3 million was recorded within interest expense. The amortization of the
pre-tax amount previously recognized in AOCI during the 40-week period ended October 3, 2009 was
$1.7 million.
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10. INCOME TAXES
The income tax benefit for the 12-week and 40-week periods ended October 9, 2010 and
October 3, 2009 consisted of the following (dollars in thousands):
12-week periods ended | 40-week periods ended | |||||||||||||||
October 9, 2010 | October 3, 2009 | October 9, 2010 | October 3, 2009 | |||||||||||||
Current |
$ | 397 | $ | | $ | 183 | $ | | ||||||||
Deferred |
| 1,159 | 10,585 | 1,289 |
The
income tax benefit for the 12-week period ended October 9, 2010 reflects a $0.4 million reduction in the Companys liability
related to unrecognized tax benefits based upon the finalization of the examination of the
Companys U.S. federal income tax returns for tax years 2007 and 2008 by the Internal Revenue
Service (IRS). The overall effective tax rate for the 12-week period ended October 9, 2010 was
5.0%. The effective tax rate would have been 39.8% without the impact of adjustments to the
valuation allowance and discrete charges. The income tax benefit
for the 12-week period ended October 3, 2009 was primarily attributable to the pre-tax loss and the
impact of permanent tax items. The overall effective rate for the 12-week period ended October 3,
2009 was 57.0%.
The income tax benefit for the 40-week period ended October 9, 2010 primarily reflects net
valuation allowance adjustments representing an $11.0 million reversal of valuation allowance that
was established in Fiscal 2009 as a result of the recognition of a deferred tax liability that
resulted from the bargain purchase associated with the Acquisition. The timing of taxable income
resulting from the amortization of the gain for tax purposes provides sufficient future taxable
income to support the future deductibility of the Companys deferred tax assets. Additionally, the
income tax benefit reflects a $0.4 million reduction in the Companys liability related to
unrecognized tax benefits based upon the finalization of the examination of the Companys U.S.
federal income tax returns for tax years 2007 and 2008 by the IRS. The overall effective rate for
the 40-week period ended October 9, 2010 was 48.4%. The effective tax rate would have been 40.0%
without the impact of adjustments to the valuation allowance, bargain purchase and discrete
charges. The income tax benefit for the 40-week period ended October 3, 2009 was primarily
attributable to the pre-tax loss and the impact of permanent tax items. The overall effective rate
for the 40-week period ended October 3, 2009 was 47.9%.
The Company files U.S. federal income tax returns and income tax returns in various state
jurisdictions. The Companys U.S. federal income tax return for tax year 2009 remains subject to
examination by the IRS. State returns remain subject to examination for tax years 2007 and beyond
depending on each states statute of limitation.
11. SHAREHOLDERS DEFICIT
Effective January 27, 2010, Holdings Board of Directors increased the number of common stock
shares that Holding has the authority to issue from 200,000 shares to 300,000 shares. On
January 29, 2010, the Company received $30.0 million of proceeds from the issuance of 44,776 shares
of common stock to certain shareholders of Holding. On July 26, 2010, the Company paid a dividend
to its shareholders totaling $30.0 million, or $207.22 per share of common stock outstanding.
On October 5, 2010, the Board of Directors of the Company approved an amendment to the Companys
2007 Stock Incentive Plan, which increased the number of shares of common stock of the Company
reserved for issuance under the Plan to 13,600 shares.
Comprehensive loss, net of related tax effects, consists of the following (dollars in thousands):
12-week periods ended | 40-week periods ended | |||||||||||||||
October 9, 2010 | October 3, 2009 | October 9, 2010 | October 3, 2009 | |||||||||||||
Net loss |
$ | (7,556 | ) | $ | (873 | ) | $ | (11,470 | ) | $ | (1,400 | ) | ||||
Other comprehensive income: |
||||||||||||||||
Reclassification adjustment on
interest rate swap |
| 354 | | 1,043 | ||||||||||||
Total other comprehensive income |
| 354 | | 1,043 | ||||||||||||
Total comprehensive loss |
$ | (7,556 | ) | $ | (519 | ) | $ | (11,470 | ) | $ | (357 | ) | ||||
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12. RETIREMENT PLANS
The Company contributes to various multi-employer pension plans under collective bargaining
agreements and provides certain health care benefits to eligible retirees and their dependents.
For each of the 12-week periods ended October 9, 2010 and October 3, 2009, the Company made
contributions to multi-employer pension plans of $1.3 million. During the 40-week periods ended
October 9, 2010 and October 3, 2009, the Company made contributions to multi-employer pension plans
of $5.8 million and $4.3 million, respectively. Contributions for the 12-week and 40-week periods
ended October 9, 2010 included $0.4 million and $1.2 million, respectively, attributable to
employees of the acquired Penn Traffic supermarkets.
13. COMMITMENTS
In November 2009, the Company entered into a supply contract with C&S Wholesale Grocers, Inc.
(C&S) whereby C&S provides warehousing, logistics, procurement and purchasing services in support
of the majority of the Companys supply chain. The agreement expires on September 24, 2016. The
agreement provides that the actual costs of performing the services shall be reimbursed to C&S on
an open-book or cost-plus basis, whereby the parties will negotiate annual budgets that will be
reconciled against actual costs on a periodic basis. The parties will also annually negotiate
services specifications and performance standards that will govern warehouse operations. The
agreement defines the parties respective responsibilities for the procurement and purchase of
merchandise intended for use or resale at the Companys supermarkets, as well as the parties
respective remuneration for warehousing and procurement/purchasing activities. In consideration
for the services it provides under the agreement, C&S is paid an annual fee and has incentive
income opportunities based upon Tops cost savings and increases in retail sales volume.
In February 2008, the Company entered into a three-year supply contract with McKesson Corporation
(McKesson) for the supply of substantially all prescription drugs and other health and beauty
care products requirements. The Company is required to purchase a minimum of $360.0 million of
product during the contract term. Tops purchased approximately $34.7 million and $34.0 million of
product from McKesson during the 12-week periods ended October 9, 2010 and October 3, 2009,
respectively. Tops purchased approximately $116.1 million and $104.4 million of products from
McKesson during the 40-week periods ended October 9, 2010 and October 3, 2009, respectively.
Effective July 24, 2010, Tops extended its existing IT outsourcing agreement with HP Enterprise
Services, LLC (HP) (formerly known as Electronic Data Systems, LLC) through December 31, 2017 to
provide a wide range of information systems services. Under the agreement, HP provides data center
operations, mainframe processing, business applications and systems development to enhance the
Companys customer service and efficiency. The charges under this agreement are based upon the
services requested at predetermined rates. The costs of these future purchase commitments are not
reflected in the Companys condensed consolidated balance sheets.
14. RELATED PARTY TRANSACTIONS
Effective November 30, 2007, Holding entered into a Transaction and Monitoring Fee Agreement with
an affiliate of Morgan Stanley and HSBC. In consideration of certain services provided to Holding
under this agreement, Holding pays an annual monitoring fee of $0.8 million to Morgan Stanleys
parent and $0.2 million to HSBC, payable on a quarterly basis. During each of the 12-week periods
ended October 9, 2010 and October 3, 2009, the Company paid $0.2 million and $0.3 million,
respectively, related to this agreement. For each of the 40-week periods ended October 9, 2010 and
October 3, 2009, the Company paid $0.7 million related to this agreement. These fees are included
in administrative expenses in the condensed consolidated statements of operations.
During
the 40-week period ended October 9, 2010, the Company entered
into a $25.0 million Bridge Loan and received a
$30.0 million equity infusion from related parties, as discussed
in Notes 8 and 11, respectively.
Tops Markets made a five-year loan to an executive for $0.2 million in connection with the
executives relocation. During March 2010, the loan balance and related accrued interest was
forgiven upon approval by the Companys Board of Directors. Additionally, during July 2010, Tops
reimbursed the executive for the personal tax impact of the loan forgiveness. This loan
forgiveness and related tax reimbursement are included in administrative expenses in the condensed
consolidated statement of operations for the 40-week period ended October 9, 2010.
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15. GUARANTOR FINANCIAL STATEMENTS
The obligations of Holding and Tops Markets under the Senior Notes (the Guaranteed Notes) are
jointly and severally, fully and unconditionally guaranteed by Tops Gift Card Company, LLC as of
January 2, 2010 and both Tops Gift Card Company, LLC and Tops PT, LLC (Guarantor Subsidiaries),
as of October 9, 2010, both of which are wholly-owned subsidiaries of Tops Markets. Tops Gift Card
Company, LLC was established in October 2008, while Tops PT, LLC was established in January 2010.
Tops Markets is a joint issuer of the notes and 100% owned by Holding. Separate financial
statements of Holding, Tops Markets and of the Guarantor Subsidiaries are not presented as the
guarantees are full and
unconditional and the Guarantor Subsidiaries are jointly and severally liable. The Company
believes that separate financial statements and other disclosures concerning the Guarantor
Subsidiaries would not be material to investors.
The following supplemental financial information sets forth on a condensed consolidating basis,
balance sheets as of October 9, 2010 and January 2, 2010 for Holding and Tops Markets, the
Guarantor Subsidiaries and for the Company, the related statements of operations for the 12-week
and 40-week periods ended October 9, 2010 and October 3, 2009 and statements of cash flows for the
40-week periods ended October 9, 2010 and October 3, 2009.
For purposes of the guarantor financial statements, the Company and its subsidiaries determine the
applicable tax provision for each entity generally using the separate return method. Under this
method, current and deferred taxes are allocated to each reporting entity as if it were to file a
separate tax return. The rules followed by the reporting entity in computing its tax obligation or
refund, including the effects of the alternative minimum tax, would be the same as those followed
in filing a separate return with the Internal Revenue Service. However, for purposes of evaluating
an entitys ability to realize its tax attributes, the Company assesses whether it is more likely
than not that those assets will be realized at the consolidated level. Any differences in the
total of the income tax provision for Holding only and the Guarantor Subsidiaries, as calculated on
the separate return method, and the consolidated income tax provision are eliminated in
consolidation.
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TOPS HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
OCTOBER 9, 2010
(Dollars in thousands)
Tops Holding | Guarantor | |||||||||||||||||||
Corporation | Tops Markets, LLC | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 15,947 | $ | 654 | $ | | $ | 16,601 | ||||||||||
Accounts receivable, net |
| 43,760 | 13,338 | | 57,098 | |||||||||||||||
Intercompany receivables |
| 2,613 | 18,324 | (20,937 | ) | | ||||||||||||||
Inventory, net |
| 82,865 | 38,720 | | 121,585 | |||||||||||||||
Prepaid expenses and other
current assets |
| 11,026 | 2,585 | | 13,611 | |||||||||||||||
Income taxes refundable |
| 598 | | | 598 | |||||||||||||||
Current deferred tax assets |
15,680 | | | (10,079 | ) | 5,601 | ||||||||||||||
Total current assets |
15,680 | 156,809 | 73,621 | (31,016 | ) | 215,094 | ||||||||||||||
Property and equipment, net |
| 318,790 | 62,572 | | 381,362 | |||||||||||||||
Intangible assets, net |
| 69,869 | 11,732 | | 81,601 | |||||||||||||||
Other assets |
| 14,189 | 3,041 | (3,041 | ) | 14,189 | ||||||||||||||
Investment in subsidiaries |
(62,492 | ) | 104,814 | | (42,322 | ) | | |||||||||||||
Total assets |
$ | (46,812 | ) | $ | 664,471 | $ | 150,966 | $ | (76,379 | ) | $ | 692,246 | ||||||||
Liabilities and Shareholders
(Deficit) Equity |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | | $ | 67,198 | $ | 24,009 | $ | | $ | 91,207 | ||||||||||
Intercompany payables |
2,613 | 18,324 | | (20,937 | ) | | ||||||||||||||
Accrued expenses and other
current liabilities |
399 | 75,002 | 15,857 | (745 | ) | 90,513 | ||||||||||||||
Current portion of capital lease
obligations |
| 10,289 | 314 | | 10,603 | |||||||||||||||
Current portion of long-term debt |
| 396 | | | 396 | |||||||||||||||
Current deferred tax liabilities |
| 9,327 | | (9,327 | ) | | ||||||||||||||
Total current liabilities |
3,012 | 180,536 | 40,180 | (31,009 | ) | 192,719 | ||||||||||||||
Capital lease obligations |
| 170,810 | 3,234 | | 174,044 | |||||||||||||||
Long-term debt |
| 353,319 | | (3,041 | ) | 350,278 | ||||||||||||||
Other long-term liabilities |
| 16,690 | 2,738 | | 19,428 | |||||||||||||||
Non-current deferred tax liabilities |
| 5,601 | | | 5,601 | |||||||||||||||
Total liabilities |
3,012 | 726,956 | 46,152 | (34,050 | ) | 742,070 | ||||||||||||||
Total shareholders (deficit) equity |
(49,824 | ) | (62,485 | ) | 104,814 | (42,329 | ) | (49,824 | ) | |||||||||||
Total liabilities and shareholders
(deficit) equity |
$ | (46,812 | ) | $ | 664,471 | $ | 150,966 | $ | (76,379 | ) | $ | 692,246 | ||||||||
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TOPS HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
JANUARY 2, 2010
(Dollars in thousands)
Tops Holding | Guarantor | |||||||||||||||||||
Corporation | Tops Markets, LLC | Subsidiary | Eliminations | Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 19,712 | $ | 10 | $ | | $ | 19,722 | ||||||||||
Accounts receivable, net |
| 49,457 | | | 49,457 | |||||||||||||||
Intercompany receivables |
| 1,900 | 2,306 | (4,206 | ) | | ||||||||||||||
Inventory, net |
| 82,272 | | | 82,272 | |||||||||||||||
Prepaid expenses |
| 13,535 | | | 13,535 | |||||||||||||||
Income taxes refundable |
| 760 | | | 760 | |||||||||||||||
Current deferred tax assets |
751 | 5,805 | | (570 | ) | 5,986 | ||||||||||||||
Total current assets |
751 | 173,441 | 2,316 | (4,776 | ) | 171,732 | ||||||||||||||
Property and equipment, net |
| 333,416 | | | 333,416 | |||||||||||||||
Intangible assets, net |
| 76,356 | | | 76,356 | |||||||||||||||
Other assets |
| 11,344 | 3,041 | (3,041 | ) | 11,344 | ||||||||||||||
Investment in subsidiaries |
(37,652 | ) | 1,145 | | 36,507 | | ||||||||||||||
Total assets |
$ | (36,901 | ) | $ | 595,702 | $ | 5,357 | $ | 28,690 | $ | 592,848 | |||||||||
Liabilities and Shareholders
(Deficit) Equity |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | | $ | 68,462 | $ | | $ | | $ | 68,462 | ||||||||||
Intercompany payables |
1,900 | 2,306 | | (4,206 | ) | | ||||||||||||||
Accrued expenses and other
current liabilities |
| 64,866 | 4,212 | (744 | ) | 68,334 | ||||||||||||||
Current portion of capital lease
obligations |
| 8,186 | | | 8,186 | |||||||||||||||
Current portion of long-term debt |
| 362 | | | 362 | |||||||||||||||
Total current liabilities |
1,900 | 144,182 | 4,212 | (4,950 | ) | 145,344 | ||||||||||||||
Capital lease obligations |
| 175,340 | | | 175,340 | |||||||||||||||
Long-term debt |
| 291,235 | | (3,041 | ) | 288,194 | ||||||||||||||
Other long-term liabilities |
| 16,785 | | | 16,785 | |||||||||||||||
Noncurrent deferred tax liabilities |
| 5,986 | | | 5,986 | |||||||||||||||
Total liabilities |
1,900 | 633,528 | 4,212 | (7,991 | ) | 631,649 | ||||||||||||||
Total shareholders (deficit) equity |
(38,801 | ) | (37,826 | ) | 1,145 | 36,681 | (38,801 | ) | ||||||||||||
Total liabilities and shareholders
(deficit) equity |
$ | (36,901 | ) | $ | 595,702 | $ | 5,357 | $ | 28,690 | $ | 592,848 | |||||||||
15
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TOPS HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE 12-WEEK PERIOD ENDED OCTOBER 9, 2010
(Dollars in thousands)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE 12-WEEK PERIOD ENDED OCTOBER 9, 2010
(Dollars in thousands)
Tops Holding | Guarantor | |||||||||||||||||||
Corporation | Tops Markets, LLC | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 386,600 | $ | 133,444 | $ | (185 | ) | $ | 519,859 | |||||||||
Cost of goods sold (excluding
distribution costs) |
| (273,878 | ) | (88,328 | ) | | (362,206 | ) | ||||||||||||
Distribution costs |
| (7,584 | ) | (3,168 | ) | | (10,752 | ) | ||||||||||||
Gross profit |
| 105,138 | 41,948 | (185 | ) | 146,901 | ||||||||||||||
Operating expenses: |
||||||||||||||||||||
Wages, salaries and benefits |
| (50,811 | ) | (20,060 | ) | | (70,871 | ) | ||||||||||||
Selling and general expenses |
| (16,133 | ) | (8,433 | ) | 185 | (24,381 | ) | ||||||||||||
Administrative expenses |
(293 | ) | (14,979 | ) | (4,398 | ) | | (19,670 | ) | |||||||||||
Rent expense |
| (2,355 | ) | (2,163 | ) | | (4,518 | ) | ||||||||||||
Depreciation and amortization |
| (13,172 | ) | (1,918 | ) | | (15,090 | ) | ||||||||||||
Advertising |
| (3,454 | ) | (2,469 | ) | | (5,923 | ) | ||||||||||||
Total operating expenses |
(293 | ) | (100,904 | ) | (39,441 | ) | 185 | (140,453 | ) | |||||||||||
Operating (loss) income |
(293 | ) | 4,234 | 2,507 | | 6,448 | ||||||||||||||
Loss on debt extinguishment |
| (33 | ) | | | (33 | ) | |||||||||||||
Interest expense, net |
| (14,284 | ) | (84 | ) | | (14,368 | ) | ||||||||||||
Earnings from equity method investees |
(7,263 | ) | 2,423 | | 4,840 | | ||||||||||||||
(Loss) income before income taxes |
(7,556 | ) | (7,660 | ) | 2,423 | 4,840 | (7,953 | ) | ||||||||||||
Income tax benefit |
| 397 | | | 397 | |||||||||||||||
Net (loss)
income |
$ | (7,556 | ) | $ | (7,263 | ) | $ | 2,423 | $ | 4,840 | $ | (7,556 | ) | |||||||
16
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TOPS HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE 12-WEEK PERIOD ENDED OCTOBER 3, 2009
(Dollars in thousands)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE 12-WEEK PERIOD ENDED OCTOBER 3, 2009
(Dollars in thousands)
Tops Holding | Guarantor | |||||||||||||||||||
Corporation | Tops Markets, LLC | Subsidiary | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 373,278 | $ | 58 | $ | (120 | ) | $ | 373,216 | |||||||||
Cost of goods sold (excluding
distribution costs) |
| (260,433 | ) | | | (260,433 | ) | |||||||||||||
Distribution costs |
| (7,449 | ) | | | (7,449 | ) | |||||||||||||
Gross profit |
| 105,396 | 58 | (120 | ) | 105,334 | ||||||||||||||
Operating expenses: |
||||||||||||||||||||
Wages, salaries and benefits |
| (50,083 | ) | | | (50,083 | ) | |||||||||||||
Selling and general expenses |
| (17,115 | ) | (26 | ) | 120 | (17,021 | ) | ||||||||||||
Administrative expenses |
(391 | ) | (12,948 | ) | (13 | ) | | (13,352 | ) | |||||||||||
Rent expense |
| (2,997 | ) | | | (2,997 | ) | |||||||||||||
Depreciation and amortization |
| (11,955 | ) | | | (11,955 | ) | |||||||||||||
Advertising |
| (2,966 | ) | | | (2,966 | ) | |||||||||||||
Total operating expenses |
(391 | ) | (98,064 | ) | (39 | ) | 120 | (98,374 | ) | |||||||||||
Operating (loss) income |
(391 | ) | 7,332 | 19 | | 6,960 | ||||||||||||||
Interest (expense) income, net |
| (9,049 | ) | 57 | | (8,992 | ) | |||||||||||||
Earnings from equity method investees |
(576 | ) | 46 | | 530 | | ||||||||||||||
(Loss) income before income taxes |
(967 | ) | (1,671 | ) | 76 | 530 | (2,032 | ) | ||||||||||||
Income tax benefit (expense) |
94 | 1,095 | (30 | ) | | 1,159 | ||||||||||||||
Net (loss) income |
$ | (873 | ) | $ | (576 | ) | $ | 46 | $ | 530 | $ | (873 | ) | |||||||
17
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TOPS HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE 40-WEEK PERIOD ENDED OCTOBER 9, 2010
(Dollars in thousands)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE 40-WEEK PERIOD ENDED OCTOBER 9, 2010
(Dollars in thousands)
Tops Holding | Guarantor | |||||||||||||||||||
Corporation | Tops Markets, LLC | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 1,306,007 | $ | 421,394 | $ | (694 | ) | $ | 1,726,707 | |||||||||
Cost of goods sold (excluding
distribution costs) |
| (920,963 | ) | (280,189 | ) | | (1,201,152 | ) | ||||||||||||
Distribution costs |
| (24,340 | ) | (9,922 | ) | | (34,262 | ) | ||||||||||||
Gross profit |
| 360,704 | 131,283 | (694 | ) | 491,293 | ||||||||||||||
Operating expenses: |
||||||||||||||||||||
Wages, salaries and benefits |
| (171,811 | ) | (66,566 | ) | | (238,377 | ) | ||||||||||||
Selling and general expenses |
| (54,537 | ) | (26,345 | ) | 694 | (80,188 | ) | ||||||||||||
Administrative expenses |
(1,558 | ) | (66,127 | ) | (14,487 | ) | | (82,172 | ) | |||||||||||
Rent expense |
| (7,380 | ) | (7,155 | ) | | (14,535 | ) | ||||||||||||
Depreciation and amortization |
| (43,377 | ) | (5,427 | ) | | (48,804 | ) | ||||||||||||
Advertising |
| (12,825 | ) | (5,453 | ) | | (18,278 | ) | ||||||||||||
Total operating expenses |
(1,558 | ) | (356,057 | ) | (125,433 | ) | 694 | (482,354 | ) | |||||||||||
Operating (loss) income |
(1,558 | ) | 4,647 | 5,850 | | 8,939 | ||||||||||||||
Bargain purchase |
| | 16,716 | | 16,716 | |||||||||||||||
Loss on debt extinguishment |
| (1,041 | ) | | | (1,041 | ) | |||||||||||||
Interest (expense) income, net |
| (46,900 | ) | 48 | | (46,852 | ) | |||||||||||||
Earnings from equity method investees |
(24,840 | ) | 18,646 | | 6,194 | | ||||||||||||||
(Loss) income before income taxes |
(26,398 | ) | (24,648 | ) | 22,614 | 6,194 | (22,238 | ) | ||||||||||||
Income tax benefit (expense) |
14,928 | (192 | ) | (3,968 | ) | | 10,768 | |||||||||||||
Net (loss) income |
$ | (11,470 | ) | $ | (24,840 | ) | $ | 18,646 | $ | 6,194 | $ | (11,470 | ) | |||||||
18
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TOPS HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE 40-WEEK PERIOD ENDED OCTOBER 3, 2009
(Dollars in thousands)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE 40-WEEK PERIOD ENDED OCTOBER 3, 2009
(Dollars in thousands)
Tops Holding | Guarantor | |||||||||||||||||||
Corporation | Tops Markets, LLC | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 1,271,391 | $ | 321 | $ | (551 | ) | $ | 1,271,161 | |||||||||
Cots of goods sold (excluding
distribution costs) |
| (884,605 | ) | | | (884,605 | ) | |||||||||||||
Distribution costs |
| (25,462 | ) | | | (25,462 | ) | |||||||||||||
Gross profit |
| 361,324 | 321 | (551 | ) | 361,094 | ||||||||||||||
Operating expenses: |
||||||||||||||||||||
Wages, salaries and benefits |
| (170,569 | ) | | | (170,569 | ) | |||||||||||||
Selling and general expenses |
| (56,314 | ) | (195 | ) | 551 | (55,958 | ) | ||||||||||||
Administrative expenses |
(1,224 | ) | (46,056 | ) | (42 | ) | | (47,322 | ) | |||||||||||
Rent expense |
| (9,731 | ) | | | (9,731 | ) | |||||||||||||
Depreciation and amortization |
| (39,688 | ) | | | (39,688 | ) | |||||||||||||
Advertising |
| (9,054 | ) | | | (9,054 | ) | |||||||||||||
Total operating expenses |
(1,224 | ) | (331,412 | ) | (237 | ) | 551 | (332,322 | ) | |||||||||||
Operating (loss) income |
(1,224 | ) | 29,912 | 84 | | 28,772 | ||||||||||||||
Gain on debt extinguishment |
| 505 | | | 505 | |||||||||||||||
Interest (expense) income, net |
| (32,155 | ) | 189 | | (31,966 | ) | |||||||||||||
Earnings from equity method investees |
(458 | ) | 165 | | 293 | | ||||||||||||||
(Loss) income before income taxes |
(1,682 | ) | (1,573 | ) | 273 | 293 | (2,689 | ) | ||||||||||||
Income tax benefit (expense) |
282 | 1,115 | (108 | ) | | 1,289 | ||||||||||||||
Net (loss) income |
$ | (1,400 | ) | $ | (458 | ) | $ | 165 | $ | 293 | $ | (1,400 | ) | |||||||
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TOPS HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE 40-WEEK PERIOD ENDED OCTOBER 9, 2010
(Dollars in thousands)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE 40-WEEK PERIOD ENDED OCTOBER 9, 2010
(Dollars in thousands)
Tops Holding | Guarantor | |||||||||||||||||||
Corporation | Tops Markets, LLC | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net cash (used in) provided by
operating activities |
$ | (713 | ) | $ | 37,812 | $ | 8,839 | $ | | $ | 45,938 | |||||||||
Cash flows used in investing activities: |
||||||||||||||||||||
Acquisition of the Penn Traffic
Company |
| | (85,023 | ) | | (85,023 | ) | |||||||||||||
Cash paid for property and
equipment |
| (21,585 | ) | (12,695 | ) | | (34,280 | ) | ||||||||||||
Proceeds from sale of assets |
| | 20,738 | | 20,738 | |||||||||||||||
Investment in subsidiaries |
| (85,023 | ) | | 85,023 | | ||||||||||||||
Change in intercompany
receivables position |
| (713 | ) | (16,018 | ) | 16,731 | | |||||||||||||
Net cash used in
investing activities |
| (107,321 | ) | (92,998 | ) | 101,754 | (98,565 | ) | ||||||||||||
Cash flows provided by
financing activities: |
||||||||||||||||||||
Proceeds from long-term debt
borrowings |
| 112,125 | | | 112,125 | |||||||||||||||
Repayments of long-term debt
borrowings |
| (36,283 | ) | | | (36,283 | ) | |||||||||||||
Borrowings on ABL Facility |
| 191,400 | | | 191,400 | |||||||||||||||
Repayments on ABL Facility |
| (205,400 | ) | | | (205,400 | ) | |||||||||||||
Proceeds from issuance of
common stock |
30,000 | 30,000 | | (30,000 | ) | 30,000 | ||||||||||||||
Dividend to shareholders |
(30,000 | ) | (30,000 | ) | | 30,000 | (30,000 | ) | ||||||||||||
Principal payments on capital
leases |
| (6,787 | ) | (220 | ) | | (7,007 | ) | ||||||||||||
Deferred financing costs incurred |
| (5,677 | ) | | | (5,677 | ) | |||||||||||||
Capital contribution |
| | 85,023 | (85,023 | ) | | ||||||||||||||
Change in intercompany
payables position |
713 | 16,018 | | (16,731 | ) | | ||||||||||||||
Change in bank overdraft position |
| 348 | | | 348 | |||||||||||||||
Net cash provided by
financing activities |
713 | 65,744 | 84,803 | (101,754 | ) | 49,506 | ||||||||||||||
Net (decrease) increase in cash and
cash equivalents |
| (3,765 | ) | 644 | | (3,121 | ) | |||||||||||||
Cash and cash equivalents beginning
of period |
| 19,712 | 10 | | 19,722 | |||||||||||||||
Cash and cash equivalents end of
period |
$ | | $ | 15,947 | $ | 654 | $ | | $ | 16,601 | ||||||||||
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TOPS HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE 40-WEEK PERIOD ENDED OCTOBER 3, 2009
(Dollars in thousands)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE 40-WEEK PERIOD ENDED OCTOBER 3, 2009
(Dollars in thousands)
Tops Holding | Guarantor | |||||||||||||||||||
Corporation | Tops Markets, LLC | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net cash (used in) provided by
operating activities |
$ | (713 | ) | $ | 44,703 | $ | (1,805 | ) | $ | | $ | 42,185 | ||||||||
Cash flows (used in) provided by
investing activities: |
||||||||||||||||||||
Cash paid for property and
equipment |
| (19,336 | ) | | | (19,336 | ) | |||||||||||||
Interest rate swap interest paid |
| (3,143 | ) | | | (3,143 | ) | |||||||||||||
Change in intercompany
receivables position |
| (713 | ) | 1,805 | (1,092 | ) | | |||||||||||||
Net cash (used in) provided by
investing activities |
| (23,192 | ) | 1,805 | (1,092 | ) | (22,479 | ) | ||||||||||||
Cash flows provided by (used in)
financing activities: |
||||||||||||||||||||
Repayments of long-term debt
borrowings |
| (23,651 | ) | | | (23,651 | ) | |||||||||||||
Principal payments on capital
leases |
| (5,518 | ) | | | (5,518 | ) | |||||||||||||
Change in intercompany
payables position |
713 | (1,805 | ) | | 1,092 | | ||||||||||||||
Deferred financing costs incurred |
| (437 | ) | | | (437 | ) | |||||||||||||
Change in bank overdraft position |
| (169 | ) | | | (169 | ) | |||||||||||||
Net cash provided by (used in)
financing activities |
713 | (31,580 | ) | | 1,092 | (29,775 | ) | |||||||||||||
Net decrease in cash and
cash equivalents |
| (10,069 | ) | | | (10,069 | ) | |||||||||||||
Cash and cash equivalents beginning
of period |
| 30,309 | 10 | | 30,319 | |||||||||||||||
Cash and cash equivalents end of
period |
$ | | $ | 20,240 | $ | 10 | $ | | $ | 20,250 | ||||||||||
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Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited consolidated financial
statements and related notes and other financial information appearing elsewhere in this 10-Q.
This 10-Q contains forward looking statements that involve risks and uncertainties. Our actual
results may differ from those indicated in the forward looking statements. See Forward-Looking
Statements below and Risk Factors under Item 1A in Part II of this 10-Q. The following does
not include any discussion on the results of operations or financial condition of Penn Traffic and
its subsidiaries.
Company Overview
We are a leading supermarket retailer in the Upstate New York and Northern Pennsylvania markets.
Introduced in 1962, our Tops brand is widely recognized as a strong retail supermarket brand name
in our markets supported by strong customer loyalty and attractive supermarket locations. We are
headquartered in Williamsville, New York and have approximately 12,700 associates.
The terms we, our, us and the Company refer to Tops Holding Corporation and each of its
consolidated subsidiaries, including its wholly owned subsidiary Tops Markets, LLC.
On January 29, 2010, we completed the acquisition (the Acquisition) of substantially all assets
and certain specified liabilities of The Penn Traffic Company (Penn Traffic) and its
subsidiaries, including its 79 retail supermarkets. These supermarkets now operate under the
banners of Tops, P&C and Quality Markets in Upstate New York and Northern Pennsylvania. As of
November 22, 2010, we have retained 55 supermarkets from the Acquisition. In August 2010, the
Federal Trade Commission (FTC) issued a Proposed Order that would require Tops to sell seven of
these retained supermarkets. The Proposed Order was subject to public comment until September 7,
2010. We are awaiting the approval of a Final Order by the FTC. The remaining 24 supermarkets
have been closed, sold or liquidated. We currently operate 127 corporate retail supermarkets with
an additional five franchise supermarkets.
Forward-Looking Statements
This 10-Q includes forward-looking statements about future events. Generally, the words believe,
expect, intend, estimate, anticipate, project, will and similar expressions identify
forward- looking statements, which generally are not historical in nature. Important assumptions
relating to these forward-looking statements include, among others, assumptions regarding:
| our ability to successfully integrate the acquisition of the assets of Penn Traffic; |
| the severity of the current economic conditions and the impact on consumer demand and
spending and our pricing strategy; |
| pricing, market strategies, the expansion, consolidation and other activities of
competitors, and our ability to respond to the promotional practices of competitors; |
| our ability to effectively increase or maintain our profit margins; |
| the success of our expansion and renovation plans; |
| fluctuations in utility, fuel and commodity prices, which could impact consumer spending
and buying habits and the cost of doing business; |
| our exposure to the local economy and other adverse conditions due to our geographic
concentration; |
| risks of natural disasters and severe weather conditions; |
| supply problems with our suppliers and vendors; |
| our relationships with unions and unionized employees, and the terms of future
collective bargaining agreements or labor strikes; |
| increased operating costs resulting from rising employee benefit costs or pension
funding obligations; |
| changes in, or the failure or inability to comply with, laws and governmental
regulations, applicable to the operation of our pharmacy and other businesses; |
22
Table of Contents
| the adequacy of our insurance coverage against claims of our consumers in connection
with our pharmacy services; |
| estimates of the amount and timing of payments under our self-insurance policies; |
| risks of liability under environmental laws and regulations; |
| risks inherent in our motor fuel operations; |
| events that give rise to actual or potential food contamination, drug contamination or
food-borne illness or any adverse publicity relating to these types of concerns, whether or
not valid; |
| our ability to retain key personnel; |
| our ability to maintain and improve our information technology systems; |
| litigation claims or legal proceedings against us; |
| decisions by our controlling shareholders that may conflict with the interests of the
holders of our equity and debt; |
| our ability to divest unwanted assets acquired in the acquisition of the assets of Penn
Traffic; and |
| other factors discussed under Risk Factors and elsewhere in this 10-Q. |
Forward-looking statements reflect our current expectations, based on currently available
information, and are not guarantees of performance. Although we believe that the expectations
reflected in such forward-looking statements are reasonable, these expectations could prove
inaccurate as such statements involve risks and uncertainties, many of which are beyond our ability
to control or predict. Should one or more of these risks or uncertainties, or other risks or
uncertainties not currently known to us or that we currently deem to be immaterial, materialize, or
should underlying assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. Important factors relating to these risks and uncertainties
include, but are not limited to, those described in Risk Factors under Item 1A in Part II of this
10-Q. We caution that one should not place undue reliance on forward-looking statements, which
speak only as of the date on which they are made. We disclaim any intention, obligation or duty to
update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law.
Basis of Presentation
We operate on a 52/53 week fiscal year ending on the Saturday closest to December 31. Our fiscal
years include 13 four-week reporting periods, with an additional week in the thirteenth reporting
period for 53 week fiscal years. Our first quarter of each fiscal year includes four reporting
periods, while the remaining quarters include three reporting periods.
The summary condensed consolidated information for the 12-week and 40-week periods ended October 9,
2010 and October 3, 2009 has been derived from our unaudited condensed consolidated financial
statements. Our condensed consolidated financial statements for the 12-week and 40-week periods
ended October 9, 2010 and October 3, 2009 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.
Recent and Future Events Affecting Our Results of Operations and the Comparability of Reported
Results of Operations
Acquisition of Penn Traffic
On January 29, 2010, we completed the acquisition of Penn Traffic, including Penn Traffics 79
retail supermarkets. As of November 22, 2010, we have retained 55 supermarkets from the
Acquisition. In August 2010, the FTC issued a Proposed Order that would require Tops to sell seven
of these retained supermarkets. The Proposed Order was subject to public comment until September
7, 2010. We are awaiting the approval of a Final Order by the FTC. Net sales and operating income
for the seven supermarkets were $13.6 million and $0.2 million, respectively, for the 12-week
period ended October 9, 2010, and $41.1 million and $0.9 million, respectively, for the 40-week
period ended October 9, 2010. As of May 2010, the remaining 24
supermarkets had been closed, sold or liquidated.
Net sales and operating loss for these 24 supermarkets were $33.9 million and $2.6 million,
respectively, during the 40-week period ended October 9, 2010. Also included in our results during
the 12-week and 40-week periods ended October 9, 2010 were integration costs of $4.6 million and
$21.1 million, respectively, and one-time legal and professional fees related to the Acquisition of
$0.4 million and $5.1 million, respectively. Additionally, we incurred $2.1 million of legal
expenses associated with the FTCs review of the acquired supermarkets during the 40-week period
ended October 9, 2010. Additional depreciation and amortization of $2.1 million and $6.1 million
was incurred during the 12-week and 40-week periods ended October 9, 2010, respectively, associated
with acquired property, equipment and intangible assets.
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As a result of the preliminary allocation of the purchase price, the assets acquired and
liabilities assumed from Penn Traffic were recorded at their respective fair values as of the
acquisition date. Due to the size and timing of the Acquisition, the preliminary allocation of the
purchase price is based on managements best estimates of fair value as of the date of this 10-Q
and is subject to adjustments. The valuations will be finalized within 12 months of the closing of
the Acquisition. As the valuations are finalized, any changes to the preliminary valuation of
assets acquired or liabilities assumed may result in material adjustments to the fair value of
property and equipment, inventory and identifiable intangible assets acquired and will be adjusted
retrospectively.
The excess of net assets acquired over the purchase price of $16.7 million has been recognized as a
bargain purchase in the condensed consolidated statement of operations for the 40-week period ended
October 9, 2010. This bargain purchase was attributable to the distressed status of Penn Traffic
due to historical operating results, which led to a November 2009 bankruptcy filing.
Debt Refinancing
On October 9, 2009, we issued $275.0 million of senior secured notes, bearing annual interest of
10.125%. We received proceeds from the senior secured notes issuance, net of a $4.5 million
original issue discount, of $270.5 million. The senior secured notes mature on October 15, 2015
and require semi-annual interest payments beginning April 15, 2010. The proceeds from the senior
secured notes issued were utilized to repay the outstanding debt related to our previous first lien
credit agreement and warehouse mortgage, pay a dividend to our owners, settle our outstanding
interest rate swap arrangement, and pay fees and expenses related to the financing transactions.
On February 12, 2010, we issued an additional $75.0 million of senior secured notes under the same
terms of the October 2009 issuance. We received proceeds of $76.1 million from this issuance,
including a $1.1 million original issue premium. The proceeds were used, in part, to repay in full
short-term borrowings that were entered into in order to finance the Acquisition.
Dividend
On July 26, 2010, we paid a dividend to our shareholders totaling $30.0 million, or $207.22 per
share of common stock outstanding.
General Economic Conditions
The United States economy and financial markets have declined and experienced volatility due to
uncertainties related to energy prices, availability of credit, difficulties in the banking and
financial services sectors, the decline in the housing market, falling consumer confidence and
rising unemployment rates. As a result, consumers are more cautious, possibly leading to
additional reductions in consumer spending, to consumers trading down to a less expensive mix of
products, or to consumers trading down to discounts for grocery items, all of which may affect our
financial condition and results of operations.
Furthermore, because of economic conditions, we may experience reductions in traffic in our
supermarkets or limitations on the prices we can charge for our products, either of which may
reduce our sales and profit margins and have a material adverse affect on our financial condition
and results of operations. Other economic factors, energy costs, increased transportation costs,
higher costs of labor, insurance and healthcare, and changes in other laws and regulations may
increase our costs of sales and our operating expenses, and otherwise adversely affect our
financial condition and results of operations. Thus far in 2010, in the 53-week period ended
January 2, 2010 (Fiscal 2009) and in the 52-week period ended December 27, 2008 (Fiscal 2008),
we have experienced the effects of some of these economic factors.
Results of Operations
12-Week Period Ended October 9, 2010 Compared with 12-Week Period Ended October 3, 2009
Executive Summary
The results of operations during the 12-week period ended October 9, 2010 when compared with the
12-week period ended October 3, 2009 were impacted primarily by the Acquisition. Fifty-five of the
supermarkets acquired in the Acquisition had been retained and operated through October 9, 2010.
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Net Sales
The following table includes a comparison of the components of our net sales for the 12-week
periods ended October 9, 2010 and October 3, 2009.
(Dollars in thousands)
12-week periods ended | ||||||||||||||||
October 9, 2010 | October 3, 2009 | $ Change | % Change | |||||||||||||
Inside sales |
$ | 483,520 | $ | 344,074 | $ | 139,446 | 40.5 | % | ||||||||
Gasoline sales |
36,339 | 29,142 | 7,197 | 24.7 | % | |||||||||||
Net sales |
$ | 519,859 | $ | 373,216 | $ | 146,643 | 39.3 | % | ||||||||
Inside sales increased 40.5% in the 12-week period ended October 9, 2010 compared with the 12-week
period ended October 3, 2009 due to sales of $133.3 million related to the acquired Penn Traffic
supermarkets, combined with a 1.0% increase in same store sales.
Gasoline sales increased 24.7% in the 12-week period ended October 9, 2010 compared with the
12-week period ended October 3, 2009 due to a 21.1% increase in the number of gallons sold,
primarily due to the addition of five new fuel stations since October 3, 2009, as well as a 3.0%
increase in the retail price per gallon.
Gross Profit
The following table includes a comparison of cost of goods sold, distribution costs and gross
profit for the 12-week periods ended October 9, 2010 and October 3, 2009.
(Dollars in thousands)
12-week | 12-week | |||||||||||||||||||||||
period ended | % of | period ended | % of | $ | % | |||||||||||||||||||
October 9, 2010 | Net Sales | October 3, 2009 | Net Sales | Change | Change | |||||||||||||||||||
Cost of goods sold |
$ | (362,206 | ) | 69.7 | % | $ | (260,433 | ) | 69.8 | % | $ | 101,773 | 39.1 | % | ||||||||||
Distribution costs |
(10,752 | ) | 2.1 | % | (7,449 | ) | 2.0 | % | 3,303 | 44.3 | % | |||||||||||||
Gross profit |
$ | 146,901 | 28.3 | % | $ | 105,334 | 28.2 | % | $ | 41,567 | 39.5 | % | ||||||||||||
As a percentage of net sales, cost of goods sold decreased for the 12-week period ended October 9,
2010 compared with the 12-week period ended October 3, 2009 primarily due to a higher proportion of
inside sales versus gasoline sales, where gasoline sales generally occur at lower margin rates.
The lower proportion of gasoline sales is attributable to the absence of fuel stations at the
acquired Penn Traffic supermarkets. The increase in distribution costs as a percentage of net
sales is due to a $0.7 million cost sharing incentive adjustment paid to our logistics provider
during the 12-week period ended October 9, 2010. Gross profit as a percentage of net sales
increased due to the aforementioned change in sales mix.
Operating Expenses
The following table includes a comparison of operating expenses for the 12-week periods ended
October 9, 2010 and October 3, 2009.
(Dollars in thousands)
12-week | 12-week | |||||||||||||||||||||||
period ended | % of | period ended | % of | $ | % | |||||||||||||||||||
October 3, 2010 | Net Sales | October 3, 2009 | Net Sales | Change | Change | |||||||||||||||||||
Wages, salaries and benefits |
$ | 70,871 | 13.6 | % | $ | 50,083 | 13.4 | % | $ | 20,788 | 41.5 | % | ||||||||||||
Selling and general expenses |
24,381 | 4.7 | % | 17,021 | 4.6 | % | 7,360 | 43.2 | % | |||||||||||||||
Administrative expenses |
19,670 | 3.8 | % | 13,352 | 3.6 | % | 6,318 | 47.3 | % | |||||||||||||||
Rent expense |
4,518 | 0.9 | % | 2,997 | 0.8 | % | 1,521 | 50.8 | % | |||||||||||||||
Depreciation and amortization |
15,090 | 2.9 | % | 11,955 | 3.2 | % | 3,135 | 26.2 | % | |||||||||||||||
Advertising |
5,923 | 1.1 | % | 2,966 | 0.8 | % | 2,957 | 99.7 | % | |||||||||||||||
Total |
$ | 140,453 | 27.0 | % | $ | 98,374 | 26.4 | % | 42,079 | 42.8 | % | |||||||||||||
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Wages, Salaries and Benefits
As a percentage of net sales, the increase in wages, salaries and benefits for the 12-week period
ended October 9, 2010 compared with the 12-week period ended October 3, 2009 is attributable to
investments in labor during the rebannering and grand re-openings of the retained Penn Traffic
supermarkets. As the inside sales related to these supermarkets are expected to continue on a
positive trend, we expect a similar leveraging of labor expenses in the future as compared to our
legacy supermarkets. Additionally, the comparative percentage is impacted by the fact that none of
the acquired Penn Traffic supermarkets have fuel stations, for which related sales require less
labor expense than inside sales. We have also experienced a 10% year-over-year increase in pension
and health and welfare costs, as dictated by our collective bargaining agreements (CBAs). We
expect an additional 10% increase in pension and health and welfare costs in 2011.
Selling and General Expenses
As a percentage of net sales, selling and general expenses increased for the 12-week period ended
October 9, 2010 compared with the 12-week period ended October 3, 2009 due to a $0.6 million
increase in general liability self-insurance expense related to a favorable adjustment during the
12-week period ended October 3, 2009 based upon actuarial results. The increase is also
attributable to $0.4 million of integration costs included in selling and general expenses during
the 12-week period ended October 9, 2010, as well as an increase in electricity costs due to the
warmer temperatures in 2010 and higher commodity prices. These factors were partially offset by a
$1.3 million increase in handling cost reimbursements related to recyclable bottle returns.
Administrative Expenses
The increase in administrative expenses for the 12-week period ended October 9, 2010 compared with
the 12-week period ended October 3, 2009 was primarily attributable to $1.6 million of integration
costs and one-time legal and professional fees related to the Acquisition, as well as $3.3 million
of increased labor expense due to incremental head count associated with increased corporate
activities following the Acquisition and normal wage rate increases.
Rent Expense
Rent expense reflects our rental expense for our supermarkets under operating lease arrangements,
net of income we receive from various entities that rent space in our supermarkets under subleasing
arrangements. As a percentage of net sales, rent expense increased slightly for the 12-week period
ended October 9, 2010 compared with the 12-week period ended October 3, 2009 due a higher
proportion of the acquired Penn Traffic supermarkets lease agreements being accounted for as
operating leases.
Depreciation and Amortization
The increase in depreciation and amortization from the 12-week period ended October 9, 2010
compared with the 12-week period ended October 3, 2009 was largely attributable to $2.1 million
associated with the Acquisition, as well as Fiscal 2010 and Fiscal 2009 capital expenditures.
Advertising
The increase in advertising expenses for the 12-week period ended October 9, 2010 compared with the
12-week period ended October 3, 2009 was primarily attributable to $3.0 million in costs associated
with the communication of the Acquisition to our customers and the promotion of the re-bannered
supermarkets.
Interest Expense, Net
The $5.4 million increase in interest expense during the 12-week period ended October 9, 2010
compared with the 12-week period ended October 3, 2009 reflects a $5.4 million increase in interest
on our outstanding indebtedness as a result of our October 2009 and February 2010 financing
activities, as well as an increase of $0.4 million attributable to deferred financing fees and bond
discount amortization (net of premium amortization). These factors were partially offset by a
$0.5 million decrease in interest expense related to our interest rate swap that was settled in
October 2009.
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Income Tax Benefit
The income tax benefit for the 12-week period ended October 9, 2010
reflects $0.4 million reduction in our liability related to unrecognized tax
benefits based upon the finalization of the examination of our U.S. federal income tax returns for
tax years 2007 and 2008 by the Internal Revenue Service (IRS). The overall effective tax rate
for the 12-week period ended October 9, 2010 was 5.0%. The effective tax rate would have been
39.8% without the impact of adjustments to the valuation allowance and discrete charges. The income tax benefit for the 12-week period ended October 3, 2009 was
primarily attributable to the pre-tax loss and the impact of permanent tax items. The overall
effective rate for the 12-week period ended October 3, 2009 was 57.0%.
Net Loss
Our net loss of $7.6 million for the 12-week period ended October 9, 2010 represented an increase
from our net loss of $0.9 million for the 12-week period ended October 3, 2009. The increase in
net loss was attributable to the factors discussed above.
40-Week Period Ended October 9, 2010 Compared with 40-Week Period Ended October 3, 2009
Executive Summary
The results of operations during the 40-week period ended October 9, 2010 when compared with the
40-week period ended October 3, 2009 were impacted primarily by the Acquisition. Fifty-five
supermarkets acquired in the Acquisition had been retained and operated through October 9, 2010.
Net Sales
The following table includes a comparison of the components of our net sales for the 40-week
periods ended October 9, 2010 and October 3, 2009.
(Dollars in thousands)
40-week periods ended | ||||||||||||||||
October 9, 2010 | October 3, 2009 | $ Change | % Change | |||||||||||||
Inside sales |
$ | 1,614,486 | $ | 1,187,511 | $ | 426,975 | 36.0 | % | ||||||||
Gasoline sales |
112,221 | 83,650 | 28,571 | 34.2 | % | |||||||||||
Net sales |
$ | 1,726,707 | $ | 1,271,161 | $ | 455,546 | 35.8 | % | ||||||||
Inside sales increased 36.0% in the 40-week period ended October 9, 2010 compared with the 40-week
period ended October 3, 2009, primarily attributable to net sales of $420.9 million related to the
acquired Penn Traffic supermarkets, combined with a 0.3% increase in same store sales. Net sales
for the 24 supermarkets which have been closed, sold or liquidated were $33.9 million during the
40-week period ended October 9, 2010.
Gasoline sales increased 34.2% in the 40-week period ended October 9, 2010 compared with the
40-week period ended October 3, 2009 due to a 22.2% increase in the retail price per gallon. The
number of gallons sold increased 9.7%, primarily due to the addition of five new fuel stations
since October 3, 2009.
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Gross Profit
The following table includes a comparison of cost of goods sold, distribution costs and gross
profit for the 40-week periods ended October 9, 2010 and October 3, 2009.
(Dollars in thousands)
40-week | 40-week | |||||||||||||||||||||||
period ended | % of | period ended | % of | $ | % | |||||||||||||||||||
October 9, 2010 | Net Sales | October 3, 2009 | Net Sales | Change | Change | |||||||||||||||||||
Cost of goods sold |
$ | (1,201,152 | ) | 69.6 | % | $ | (884,605 | ) | 69.6 | % | $ | 316,547 | 35.8 | % | ||||||||||
Distribution costs |
(34,262 | ) | 2.0 | % | (25,462 | ) | 2.0 | % | 8,800 | 34.6 | % | |||||||||||||
Gross profit |
$ | 491,293 | 28.5 | % | $ | 361,094 | 28.4 | % | $ | 130,199 | 36.1 | % | ||||||||||||
As a percentage of net sales, cost of goods sold, distribution costs and gross profit remained
consistent for the 40-week period ended October 9, 2010 compared with the 40-week period ended
October 3, 2009.
Operating Expenses
The following table includes a comparison of operating expenses for the 40-week periods ended
October 9, 2010 and October 3, 2009.
(Dollars in thousands)
40-week | 40-week | |||||||||||||||||||||||
period ended | % of | period ended | % of | $ | % | |||||||||||||||||||
October 9, 2010 | Net Sales | October 3, 2009 | Net Sales | Change | Change | |||||||||||||||||||
Wages, salaries and benefits |
$ | 238,377 | 13.8 | % | $ | 170,569 | 13.4 | % | $ | 67,808 | 39.8 | % | ||||||||||||
Selling and general expenses |
80,188 | 4.6 | % | 55,958 | 4.4 | % | 24,230 | 43.3 | % | |||||||||||||||
Administrative expenses |
82,172 | 4.8 | % | 47,322 | 3.7 | % | 34,850 | 73.6 | % | |||||||||||||||
Rent expense |
14,535 | 0.8 | % | 9,731 | 0.8 | % | 4,804 | 49.4 | % | |||||||||||||||
Depreciation and amortization |
48,804 | 2.8 | % | 39,688 | 3.1 | % | 9,116 | 23.0 | % | |||||||||||||||
Advertising |
18,278 | 1.1 | % | 9,054 | 0.7 | % | 9,224 | 101.9 | % | |||||||||||||||
Total |
$ | 482,354 | 27.9 | % | $ | 332,322 | 26.1 | % | $ | 150,032 | 45.1 | % | ||||||||||||
Wages, Salaries and Benefits
As a percentage of net sales, the increase in wages, salaries and benefits for the 40-week period
ended October 9, 2010 compared with the 40-week period ended October 3, 2009 is attributable to
investments in labor during the rebannering and grand re-openings of the retained Penn Traffic
supermarkets. As the inside sales related to these supermarkets is expected to continue on a
positive trend, we expect a similar leveraging of labor expenses in the future as compared to our
legacy supermarkets. Additionally, the comparative percentage is impacted by the fact that none of
the acquired Penn Traffic supermarkets have fuel stations, for which related sales require less
labor expense than inside sales. We have also experienced a 10% year-over-year increase in pension
and health and welfare costs, as dictated by our CBAs. We expect an additional 10% increase in
pension and health and welfare costs in 2011.
Selling and General Expenses
As a percentage of net sales, selling and general expenses increased for the 40-week period ended
October 9, 2010 compared with the 40-week period ended October 3, 2009 due to $0.7 million of
integration costs included in selling and general expenses during the 40-week period ended October
9, 2010, as well as an increase in electricity costs due to the warmer temperatures in 2010 and
higher commodity prices.
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Administrative Expenses
The increase in administrative expenses for the 40-week period ended October 9, 2010 compared with
the 40-week period ended October 3, 2009 was primarily attributable to $22.3 million of integration
costs, one-time legal and professional fees related to the Acquisition and legal expenses
associated with the FTCs review of the acquired supermarkets, combined with $10.9 million related
to incremental head count associated with increased corporate activities following the Acquisition
and normal wage rate increases.
Rent Expense
Rent expense reflects our rental expense for our supermarkets under operating lease arrangements,
net of income we receive from various entities that rent space in our supermarkets under subleasing
arrangements. As a percentage of net sales, rent expense remained relatively consistent for the
40-week period ended October 9, 2010 compared with the 40-week period ended October 3, 2009.
Depreciation and Amortization
The increase in depreciation and amortization from the 40-week period ended October 9, 2010
compared with the 40-week period ended October 3, 2009 was largely attributable to $6.1 million
associated with the Acquisition, as well as Fiscal 2010 and Fiscal 2009 capital expenditures.
Advertising
The increase in advertising expenses for the 40-week period ended October 9, 2010 compared with the
40-week period ended October 3, 2009 was primarily attributable to $4.5 million in costs associated
with the communication of the Acquisition to our customers and the promotion of the re-bannered
supermarkets. Additionally, we incurred increased circular costs of $3.9 million due to
enhancements made to our circulars, our increased store base and expanded geographic area, as well
as duplicative costs of producing circulars under the P&C, Quality Markets and Bi-Lo banners
subsequent to the Acquisition. In early Fiscal 2010, we incurred costs of $1.7 million associated
with our Monopoly® promotion.
Bargain Purchase
The excess of the estimated fair value of Penn Traffic net assets acquired over the purchase price
of $16.7 million has been recognized as a gain in the condensed consolidated statement of
operations for the 40-week period ended October 9, 2010. This bargain purchase was attributable to
the distressed status of Penn Traffic due to historical operating results, which led to a
November 2009 bankruptcy filing.
(Loss) Gain on Debt Extinguishment
On January 29, 2010, we entered into a $25.0 million bridge loan and an $11.0 million term loan and
capitalized related financing costs. As both the bridge loan and term loan were repaid in full on
February 12, 2010 with the proceeds from the issuance of the additional $75.0 million of senior
secured notes, unamortized costs of $0.7 and $0.3 million, respectively, were recorded as a loss on
debt extinguishment in our condensed consolidated statement of operations for the 40-week period
ended October 9, 2010.
During the 40-week period ended October 3, 2009, we prepaid $20.0 million of long-term debt under
our previous senior secured credit facility, which triggered the forgiveness of an additional $0.8
million of indebtedness under this agreement. This gain, net of the write-off of deferred
financing fees of $0.3 million related to the repaid debt, has been recognized as a gain on debt
extinguishment in the condensed consolidated statement of operations.
Interest Expense, Net
The $14.9 million increase in interest expense during the 40-week period ended October 9, 2010
compared with the 40-week period ended October 3, 2009 reflects a $17.2 million increase in
interest on our outstanding indebtedness as a result of our October 2009 and February 2010
financing activities, as well as an increase of $1.1 million attributable to deferred financing
fees and bond discount amortization (net of premium amortization). These factors were partially
offset by a $3.5 million decrease in interest expense related to our interest rate swap that was
settled on October 9, 2009.
Income Tax Benefit
The income tax benefit for the 40-week period ended October 9, 2010 primarily reflects net
valuation allowance adjustments representing an $11.0 million reversal of valuation allowance that
was established in Fiscal 2009 as a result of the recognition of a deferred tax liability that
resulted from the bargain purchase gain associated with the Acquisition. The timing of taxable
income resulting from the amortization of the gain for tax purposes provides sufficient future
taxable income to support the future deductibility of our deferred tax assets. Additionally, the
income tax benefit reflects a $0.4 million reduction in our liability related to unrecognized tax
benefits based upon the finalization of the examination of our U.S. federal income tax returns for
tax years 2007 and 2008 by the IRS. The overall effective rate for the 40-week period ended
October 9, 2010 was 48.4%. The effective tax rate would have been 40.0% without the impact of
adjustments to the valuation allowance, bargain purchase gain and discrete charges. The income tax
benefit for the 40-week period ended October 3, 2009 was primarily attributable to the pre-tax loss
and the impact of permanent tax items. The overall effective rate for the 40-week period ended
October 3, 2009 was 47.9%.
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Net Loss
Our net loss of $11.5 million for the 40-week period ended October 9, 2010 represented an increase
from the net loss of $1.4 million for the 40-week period ended October 9, 2009. The increase in
net loss was attributable to the factors discussed above.
Liquidity and Capital Resources
On October 9, 2009, we issued $275.0 million of senior secured notes, bearing annual interest of
10.125%. We received proceeds from the senior secured notes issuance, net of a $4.5 million
original issue discount, of $270.5 million. The senior secured notes mature October 15, 2015 and
require semi-annual interest payments beginning April 15, 2010. The senior secured notes are
collateralized by (i) first-priority interests, subject to certain exceptions, in our warehouse
distribution facility in Lancaster, New York, certain owned real property acquired by us following
the issue date of the senior secured notes, intellectual property, equipment, stock of subsidiaries
and substantially all of our other assets (other than leasehold interests in real property), other
than assets securing the ABL Facility (as defined below) on a first priority basis (collectively,
the Notes Priority Collateral), and (ii) second-priority interests, subject to certain exceptions
and permitted liens, in our assets that secure the ABL Facility on a first-priority basis,
including present and future receivables, inventory, prescription lists, deposit accounts and
certain related rights and proceeds relating thereto (collectively, the ABL Priority Collateral).
Also effective October 9, 2009, we entered into a revolving asset-based facility that expires on
October 9, 2013 (the ABL Facility). The ABL Facility allowed a maximum borrowing capacity of
$70.0 million, including a sub-limit for the issuance of letters of credit, subject to a borrowing
base calculation. The ABL Facility was amended on January 29, 2010 to increase the maximum
borrowing capacity to $100.0 million. As of October 9, 2010, the unused commitment under the ABL
facility was $79.2 million, after giving effect to $12.8 million of letters of credit outstanding
thereunder. Revolving loans under the ABL Facility will, at our option, bear interest at either i)
LIBOR plus a margin of 350 to 400 basis points, determined based on levels of borrowing
availability, or ii) the prime rate plus a margin of 250 to 300 basis points, determined based on
levels of borrowing availability. The ABL Facility is collateralized primarily by
(i) first-priority interests, subject to certain exceptions, in the ABL Priority Collateral and
(ii) second-priority interests, subject to certain exceptions, in the Notes Priority Collateral.
On January 29, 2010, we completed the acquisition of substantially all assets and certain
liabilities of Penn Traffic and its subsidiaries, including Penn Traffics 79 retail supermarkets.
In addition to cash consideration of $85.0 million paid to Penn Traffic, the Company recorded $21.1
million of integration costs, $2.1 million of legal expenses associated with the FTCs review of
the acquired supermarkets, and $5.1 million and $1.1 million of transaction costs during the
40-week period ended October 9, 2010 and Fiscal 2009, respectively. Of these combined expenses,
$28.8 million were paid during the 40-week period ended October 9, 2010. As of the date of this
10-Q, the Company has sold certain of the acquired assets for $20.5 million, of which $3.8 million
and $20.5 million was received during the 12-week and 40-week periods ended October 9, 2010,
respectively.
On February 12, 2010, we issued an additional $75.0 million of senior secured notes on the same
terms as the October 2009 issuance. We received proceeds of $76.1 million from the additional
senior secured notes issuance, including a $1.1 million original issue premium. The proceeds were
used, in part, to repay in full short-term borrowings that were entered into in order to finance
the Acquisition. We incurred $4.7 million of financing costs, primarily related to the additional
senior secured notes issuance, which were capitalized in other assets in our condensed consolidated
balance sheet during 2010.
The senior secured notes and ABL Facility contain customary affirmative and negative covenants,
including restrictions on indebtedness, liens, type of business, acquisitions, investments, sale or
transfer of assets, payment of dividends, transactions involving affiliates, change in control and
other matters customarily restricted in such agreements. Failure to meet any of these covenants
would be an event of default. As of October 9, 2010, we were in compliance with all such
covenants.
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On July 26, 2010, we paid a dividend to our shareholders totaling $30.0 million, or $207.22 per
share of common stock outstanding. The payment of this dividend did not result in any borrowings
under our ABL Facility outside of the normal course of business.
Our primary sources of cash are cash flows generated from our operations and borrowings under our
ABL Facility. We believe that these sources will be sufficient to meet working capital
requirements, anticipated capital expenditures and scheduled debt payments for at least the next
twelve months. Our ability to satisfy debt service obligations, to fund planned capital
expenditures and to make acquisitions will depend upon our future operating performance, which will
be affected by prevailing economic conditions in the grocery industry and financial, business, and
other factors, some of which are beyond our control. See Risk Factors under Item 1A in Part II
of this 10-Q.
Cash Flow Information
The following is a summary of cash provided by or used in each of the indicated types of
activities:
(Dollars in thousands)
40-week periods ended | ||||||||
October 9, 2010 | October 3, 2009 | |||||||
Cash provided by (used in): |
||||||||
Operating activities |
$ | 45,938 | $ | 42,185 | ||||
Investing activities |
(98,565 | ) | (22,479 | ) | ||||
Financing activities |
49,506 | (29,775 | ) |
Cash provided by operating activities for the 40-week period ended October 9, 2010 increased
$3.8 million compared with the 40-week period ended October 3, 2009 due to a $28.0 million
improvement in the use of cash related to changes in operating assets and liabilities due to the
more effective management of working capital, despite incremental working capital investment
requirements related to the acquired Penn Traffic supermarkets. Our operating cash flows for the
40-week period ended October 9, 2010 include cash expenditures of $28.8 million related to
integration efforts, legal expenses associated with the FTCs review of the acquired supermarkets
and other one-time legal and professional fees related to the Acquisition. These expenses were
partially offset by incremental cash flows generated by the acquired Penn Traffic supermarkets.
Cash used in investing activities for the 40-week period ended October 9, 2010 increased
$76.1 million compared with the 40-week period ended October 3, 2009, primarily due to cash
consideration paid as part of the Acquisition, net of proceeds from the subsequent divestiture of
certain acquired assets. Cash paid for property and equipment totaled $34.3 million and
$19.3 million during the 40-week periods ended October 9, 2010 and October 3, 2009, respectively.
We expect to invest $40 million to $50 million in total in capital expenditures during the next
twelve months.
Cash provided by (used in) financing activities for the 40-week period ended October 9, 2010
changed $79.3 million compared with the 40-week period ended October 3, 2009 as a result of the
issuance of an additional $75.0 million of senior secured notes and proceeds of $30.0 million from
the issuance of additional shares of common stock during the 40-week period ended October 9, 2010,
as well as prepayments made on our previous senior secured credit facility during the 40-week
period ended October 3, 2009. These factors were partially offset by a dividend to our
shareholders totaling $30.0 million, net repayments related to our ABL Facility and financing costs
incurred in connection with our financing activities during the 40-week period ended October 9,
2010.
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Contractual Obligations
The following table sets forth a summary of our significant contractual obligations as of October
9, 2010:
(Dollars in thousands)
Payments due by period | ||||||||||||||||||||||||||||
Remainder | ||||||||||||||||||||||||||||
of 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | ||||||||||||||||||||||
Long-term debt: |
||||||||||||||||||||||||||||
Notes(1) |
$ | | $ | | $ | | $ | | $ | | $ | 350,000 | $ | 350,000 | ||||||||||||||
Other long-term debt |
95 | 404 | 434 | 2,295 | 280 | 164 | 3,672 | |||||||||||||||||||||
Interest(2) |
21,255 | 55,632 | 53,614 | 51,455 | 49,339 | 75,483 | 306,778 | |||||||||||||||||||||
Operating leases(3) |
5,715 | 22,737 | 20,850 | 17,164 | 11,573 | 30,553 | 108,592 | |||||||||||||||||||||
Capital leases(3) |
2,286 | 11,044 | 12,860 | 14,015 | 12,486 | 131,956 | 184,647 | |||||||||||||||||||||
Purchase obligations(4) |
32,343 | 29,621 | 14,516 | 14,881 | 15,328 | 45,067 | 151,756 | |||||||||||||||||||||
Other liabilities(5) |
13,004 | 56,707 | 797 | 774 | 744 | 2,987 | 75,013 | |||||||||||||||||||||
Total |
$ | 74,698 | $ | 176,145 | $ | 103,071 | $ | 100,584 | $ | 89,750 | $ | 636,210 | $ | 1,180,458 | ||||||||||||||
(1) | No principal amounts are due on the senior secured notes until October 15, 2015. Assumes
aggregate principal amount of $350.0 million of notes are outstanding until maturity. |
|
(2) | Amount primarily includes contractual interest payments related to the senior secured notes,
capital leases and other long-term debt. |
|
(3) | Some of our lease agreements provide us with an option to renew. We have not included
renewal options in our future minimum lease amounts for renewals that are not reasonably
assured. Our future operating lease obligations will change if we exercise these renewal
options and if we enter into additional operating or capital lease agreements. |
|
(4) | In addition to the purchase obligations reflected in the table above, we enter into supply
contracts to purchase products for resale in the ordinary course of business. This category
of contracts covers a broad spectrum of products and sometimes includes specific merchandising
obligations relative to those products. These supply contracts typically include either a
volume commitment or a fixed expiration date, pricing terms based on the vendors published
list price, termination provisions, and other standard contractual considerations. Our
obligation related to these contracts is typically limited to return of unearned allowances
and therefore no amounts have been included above. Purchase obligations above relate to the
outsourcing of a major portion of our information system functions and pharmacy inventory
procurement through long-term agreements, as noted below: |
| In May 2008, we entered into an outsourcing agreement with HP to provide a wide
range of information systems services. Under the agreement, HP provides data center
operations, mainframe processing, business applications and systems development to
enhance our customer service and efficiency. The charges under this agreement are
based upon the services requested at predetermined rates. We may terminate this
agreement with a payment of a specified termination charge. Effective July 24,
2010, we extended this relationship through December 2017, which has resulted in
lower contractually required annual payments. |
| In February 2008, we entered into a three-year supply contract with McKesson for
the supply of substantially all prescription drugs and other health and beauty care
products requirements. We are required to purchase a minimum of $360.0 million of
product during the contract term. |
(5) | Other liabilities include health and welfare benefits and multiemployer pension plan
contributions under collective bargaining agreements, as well as other pension and
post-retirement benefits. |
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Multiemployer Pension Plans
We contribute to the United Food and Commercial Workers (UFCW) Plan, a defined benefit
multiemployer pension plan, under our collective bargaining agreements with the UFCW. This UFCW
Plan generally provides retirement benefits to participants based on their service to contributing
employers. During the 40-week periods ended October 9, 2010 and October 3, 2009, we made
contributions of $5.8 million and $4.3 million, respectively, to the UFCW Plan.
Our current collective bargaining agreements began in the first half of 2008 and will be in effect
until the first half of 2011. In an effort to help improve the funded status of the UFCW Plan, and
to comply with certain regulatory requirements governing the funded status of the multiemployer
pension plans, the existing collective bargaining agreements stipulate that contributing employers
must increase their annual pension contributions by 10 percent in calendar years 2009, 2010 and
2011. Barring our withdrawal from the pension plan, no additional pension contribution increases
are required by the current collective bargaining agreements during their term. In addition, due
to the completion of the Acquisition, we have an obligation to contribute to the UFCW Plan with
respect to the Penn Traffic supermarkets located in the UFCWs jurisdiction through at least
April 2011, to the extent these supermarkets remain open and are not sold. We are also
contingently liable for the withdrawal liability for these acquired supermarkets in the event that
we withdraw from the UFCW Plan. In accordance with applicable accounting rules, this contingent
withdrawal liability is not includable in our consolidated financial statements.
In addition, at the time our supply arrangement was entered into with C&S, certain of our warehouse
personnel became employees of C&S, with C&S assuming our obligations under several multiemployer
pension plans. Although we are not a sponsoring employer of, and make no contribution payments to
any of these other multiemployer pension plans, we have certain contractual indemnification
obligations for withdrawal liability that may arise in the event of C&Ss withdrawal from such
plans. According to estimates of the actuary for the multiemployer plan for which we indemnify
C&S, the withdrawal liability for a withdrawal from such plan in 2010 would be $107.8 million.
Off-Balance Sheet Arrangements
Other than the operating leases and multiemployer pension liabilities previously discussed, we are
not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a
current or future material effect on our financial condition, net sales, expenses, results of
operations, liquidity, capital expenditures or capital resources.
Inflation
Our product cost inflation could vary from our estimates due to general economic conditions,
weather, availability of raw materials and ingredients in the products that we sell and their
packaging, and other factors beyond our control.
Critical Accounting Policies
Our condensed consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP), which requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reported periods. Our audited consolidated financial
statements as of January 2, 2010 include a description of certain critical accounting policies,
including those related to vendor allowances, inventory valuation, impairment of long-lived assets,
leases, insurance programs and income taxes.
Recent Accounting Pronouncements
There are currently no recent accounting pronouncements which had or are expected to have a
material impact on our condensed consolidated financial statements as of the date of this 10-Q.
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Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We use derivative financial instruments from time to time primarily to manage our exposure to
fluctuations in interest rates and, to a lesser extent, adverse fluctuations in commodity prices
and other market risks. We do not enter into derivative financial instruments for trading or other
speculative purposes. As a matter of policy, all of our derivative positions are intended to
reduce risk by hedging an underlying economic exposure. Because of the high correlation between
the hedging instrument and the underlying exposure, fluctuations in the value of the instruments
generally are offset by reciprocal changes in the value of the underlying exposure. The interest
rate derivatives we use are straightforward instruments with liquid markets.
We manage our exposure to interest rates and changes in the fair value of our debt instruments
primarily through the strategic use of variable and fixed rate debt, and interest rate swaps. As
of October 9, 2010, we did not have any outstanding interest rate swaps designated as fair value or
cash flow hedges.
The table below provides information about our underlying debt portfolio as of October 9, 2010.
The amounts shown for each year represent the contractual maturities of long-term debt, excluding
capital leases, as of October 9, 2010. Interest rates reflect the weighted average rate for the
outstanding instruments. The Fair Value column includes the fair value of our debt instruments as
of October 9, 2010. Refer to Note 1 of our condensed consolidated financial statements.
(Dollars in thousands)
Expected Fiscal Year of Maturity | ||||||||||||||||||||||||||||
Remainder | ||||||||||||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Fair Value | ||||||||||||||||||||||
Debt |
||||||||||||||||||||||||||||
Fixed rate |
$ | 95 | $ | 404 | $ | 434 | $ | 2,295 | $ | 280 | $ | 350,164 | $ | 378,201 | ||||||||||||||
Average interest rate |
10.1 | % | 10.1 | % | 10.1 | % | 10.1 | % | 10.1 | % | 10.1 | % |
Commodity Price Risk
We purchase products that are impacted by commodity prices and are therefore subject to price
volatility caused by weather, market conditions and other factors, which are not considered
predictable or within our control.
Item 4. CONTROLS AND PROCEDURES
The management of the Company, with the participation of the Companys Chief Executive Officer and
Chief Operating Officer and Chief Financial Officer, evaluated the effectiveness of the design and
operation of the Companys disclosure controls and procedures, as defined in Rule 15d 15(e) of
the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on that evaluation,
the Companys Chief Executive Officer and Chief Operating Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures as of October 9, 2010 (the end of
the period covered by this Report) have been designed and are functioning effectively to provide
reasonable assurance that information required to be disclosed by it in reports filed or submitted
by it under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms and that such
information is accumulated and communicated to the Companys management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
There were no changes to the Companys internal control over financial reporting identified that
occurred during the 12-week period ended October 9, 2010 that have materially affected or are
reasonably likely to materially affect the Companys internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are subject to various legal proceedings and claims, either asserted or unasserted, which arise
in the ordinary course of business. We are also subject to certain environmental claims. While
the outcome of these claims cannot be predicted with certainty, management does not believe that
the outcome of any of these legal matters will have a material adverse effect on our consolidated
results of operations, financial position or cash flows.
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Item 1A. RISK FACTORS
The risks described under Risk FactorsRisks Related to Our Business in Amendment No. 1 to our
Registration Statement on Form S-1 filed on October 29, 2010, incorporated herein by reference and
attached hereto as Exhibit 99.1, could materially and adversely affect our business, financial
condition and results of operations, but may not be the only risks we face. Additional risks that
we do not yet know of or that we currently think are immaterial may also impair our business
operations. You should carefully consider these risk factors and all other information contained
in this 10-Q. If any of the events or circumstances described in the risk factors actually occurs,
our business, financial condition or results of operations could suffer.
Item 6. EXHIBITS
Exhibit No. | ||||
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certification of Chief Operating Officer and Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
|||
32.2 | Certification of the Chief Operating Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|||
99.1 | Risk Factors Contained in Amendment No. 1 to the Companys Registration Statement on Form S-1 filed October 29,
2010 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TOPS HOLDING CORPORATION |
||||
By: | /s/ Kevin Darrington | |||
Kevin Darrington | ||||
Chief Operating Officer and Chief Financial Officer | ||||
November 22, 2010 |
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