-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K6PAc0RcPaayAeL2mpU5CKpxr0ueA/+czXwQ4rSGHh304L6a71TU5aaDq2SwWPO3 gVumBicEfve11mHJDewgYQ== 0000043300-98-000005.txt : 19980528 0000043300-98-000005.hdr.sgml : 19980528 ACCESSION NUMBER: 0000043300-98-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980527 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREAT ATLANTIC & PACIFIC TEA CO INC CENTRAL INDEX KEY: 0000043300 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 131890974 STATE OF INCORPORATION: MD FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04141 FILM NUMBER: 98632379 BUSINESS ADDRESS: STREET 1: 2 PARAGON DR CITY: MONTVALE STATE: NJ ZIP: 07645 BUSINESS PHONE: 2015739700 MAIL ADDRESS: STREET 1: 2 PARAGON DRIVE CITY: MONTVALE STATE: NJ ZIP: 07645 10-K 1 Conformed Copy SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year Commission file number 1-4141 ended February 28, 1998 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. (Exact name of registrant as specified in its charter) MARYLAND 13-1890974 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2 Paragon Drive, Montvale, New Jersey 07645 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 201-573-9700 Securities registered pursuant to Section 12 (b) of the Act: Name of each exchange on Title of each class which registered Common Stock - $1 par value New York Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the Registrant at May 1, 1998 was $539,668,344. The number of shares of common stock outstanding at May 1, 1998 was 38,252,966. Documents Incorporated by Reference The information required by Part I, Items 1(d) and 3, and Part II, Items 5, 6, 7 and 8 are incorporated by reference from the Registrant's 1997 Annual Report to Shareholders. The Registrant has filed with the S.E.C. since the close of its last fiscal year ended February 28, 1998, a definitive proxy statement. Certain information required by Part III, Items 10, 11, 12 and 13 is incorporated by reference from the proxy statement in this Form 10-K. PART I ITEM 1. Business General The Great Atlantic & Pacific Tea Company, Inc. ("A&P" or the "Company") is engaged in the retail food business. The Company operated 936 stores averaging approximately 32,665 square feet per store as of February 28, 1998. In addition, the Company began franchising its Canadian Food Basics stores in fiscal 1995. As of February 28, 1998, the Company had 52 Food Basics Franchise stores in Canada averaging approximately 26,720 square feet per store. On the basis of reported sales for fiscal 1997, the Company believes that it is one of the ten largest retail food chains in the United States and that it had the largest market share in metropolitan New York and Detroit, and the second largest market share in the Province of Ontario, the Company's largest single markets in the United States and Canada. Operating under the trade names A&P, Super Fresh, Sav-A-Center, Farmer Jack, Kohl's, Food Emporium, Waldbaum's, Super Food Mart, Ultra Mart, Dominion, and Food Basics, the Company sells groceries, meats, fresh produce and other items commonly offered in supermarkets. In addition, many stores have bakery, delicatessen, pharmacy, floral, fresh fish and cheese departments, and on-site banking. National, regional and local brands are sold as well as private label merchandise and generic (non-branded) products. In support of its retail operations, the Company also operates two coffee roasting plants, and a bakery in Canada. Through its Compass Foods Division, the Company manufacturers and distributes a line of whole bean coffees under the Eight O'Clock, Bokar and Royale labels, both for sale through its own stores as well as other food and convenience retailers. The other private label products sold in the Company's stores are sold under the Company's own brand names which include America's Choice, Master Choice, Health Pride, Savings Plus, Equality and Jane Parker. Building upon a broad base of A&P supermarkets, the Company has expanded and diversified within the retail food business through the acquisition of other supermarket chains and the development of several alternative store types. The Company now operates its stores with merchandise, pricing and identities tailored to appeal to different segments of the market, including buyers seeking gourmet and ethnic foods, unusual produce, a wide variety of premium quality private label goods and health and beauty aids along with the array of traditional grocery products. Modernization of Facilities The Company is engaged in a continuing program of modernizing its operations and retail stores. During fiscal 1997, the Company expended approximately $268 million for capital projects which included 33 new supermarkets, 3 new liquor stores, 4 new Food Basics franchised stores and 45 remodels or enlargements. The Company's plans for fiscal 1998 anticipate capital expenditures of approximately $300 million which include the opening of 45 new supermarkets and the remodeling or expansion of 80 stores. In addition, the Company is also developing plans to open approximately 50 to 55 supermarkets per year for the next several years and remodel an average of 50 stores per year. Sources of Supply The Company obtains the merchandise sold in its stores from a variety of suppliers located primarily in the United States and Canada. The Company has long-standing and satisfactory relationships with its suppliers. The Company maintains processing facilities which produce coffee products and certain baked goods. The ingredients for coffee products are purchased principally from Brazilian and Central American sources. Other ingredients are obtained from domestic suppliers. Employees As of February 28, 1998, the Company had approximately 80,000 employees, of which 69% were employed on a part-time basis. Approximately 88% of the Company's employees are covered by union contracts. Competition The supermarket business is highly competitive throughout the marketing areas served by the Company and is generally characterized by low profit margins on sales with earnings primarily dependent upon rapid inventory turnover, effective cost controls and the ability to achieve high sales volume. The Company competes for sales and store locations with a number of national and regional chains as well as with many independent and cooperative stores and markets. Foreign Operations The information required is contained in the 1997 Annual Report to Shareholders on pages 26, 28, 29, 30 and 32 and is herein incorporated by reference. ITEM 2. Properties At February 28, 1998, the Company operated 936 retail stores and serviced 52 franchised stores. Approximately 9% of the Company's stores are owned, while the remainder are leased. These stores are geographically located as follows: Company Stores: New England States: Connecticut 52 Massachusetts 22 New Hampshire 1 Vermont 2 ---- Total 77 Middle Atlantic States: District of Columbia 1 Delaware 8 Maryland 51 New Jersey 113 New York 176 Pennsylvania 46 ---- Total 395 Mid-Western States: Michigan 101 Wisconsin 46 ---- Total 147 Southern States: Alabama 3 Georgia 45 Louisiana 24 Mississippi 4 North Carolina 4 South Carolina 4 Virginia 46 ---- Total 130 ---- Total United States 749 ---- Ontario, Canada 187 ---- Total Stores 936 ==== Franchised Stores: Ontario, Canada 52 ---- Total Franchised Stores 52 ==== The total area of all retail stores is approximately 30.6 million square feet averaging approximately 32,665 square feet per store while the total area of all franchised stores is approximately 1.4 million square feet averaging approximately 26,720 square feet per store. The 33 new supermarkets opened in fiscal 1997 had a range in size from 19,500 to 73,600 square feet, with an average size of 54,200 square feet. The stores built by the Company over the past several years and those planned for fiscal 1998, generally range in size from 50,000 to 65,000 square feet, of which approximately 70% is utilized as selling area. The Company operates two coffee roasting plants in the United States and a bakery in Canada. In addition, the Company maintains 16 warehouses which service its store network. These warehouses are geographically located as follows: Company Warehouses: Georgia 1 Indiana 1 Louisiana 1 Maryland 1 Michigan 2 New Jersey 3 New York 3 Pennsylvania 1 Wisconsin 1 ---- Total United States 14 ---- Ontario, Canada 2 ---- Total Warehouses 16 ==== The net book value of real estate pledged as collateral for all mortgage loans amounted to approximately $14 million as of February 28, 1998. ITEM 3. Legal Proceedings The information required is contained in the 1997 Annual Report to Shareholders on page 32 and is herein incorporated by reference. ITEM 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 1997. PART II ITEM 5. Market for the Registrant's Common Stock and Related Security Holder Matters The information required is contained in the 1997 Annual Report to Shareholders on pages 33 and 35 and is herein incorporated by reference. ITEM 6. Selected Financial Data The information required is contained on page 35 of the 1997 Annual Report to Shareholders and is herein incorporated by reference. ITEM 7. Management's Discussion and Analysis The information required is contained in the 1997 Annual Report to Shareholders on pages 14 through 19 and is herein incorporated by reference. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk The information required is contained in the 1997 Annual Report to Shareholders on page 19 and is herein incorporated by reference. ITEM 8. Financial Statements and Supplementary Data (a) Financial Statements: The financial statements required to be filed herein are described in Part IV, Item 14 of this report. Except for the pages included herein by reference, the Company's 1997 Annual Report to Shareholders is not deemed to be filed as part of this report. (b) Selected Quarterly Financial Data: The information required is contained on page 33 of the 1997 Annual Report to Shareholders and is herein incorporated by reference. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III ITEMS 10 and 11. Directors and Executive Officers of the Registrant and Executive Compensation Executive Officers of the Company Name Age Current Position James Wood 68 Chairman of the Board Christian W.E. Haub 33 President and Chief Executive Officer Fred Corrado 58 Vice Chairman of the Board and Chief Financial Officer Michael J. Larkin 56 Senior Executive Vice President - Chief Operating Officer Aaron Malinsky 49 Executive Vice President - Development and Strategic Planning Joseph McCaig 53 Executive Assistant to the Chief Executive Officer Peter J. O'Gorman 59 Executive Vice President - International Store and Product Development George Graham 48 Executive Vice President - Chief Merchandising Officer William Louttit 51 Chairman and Chief Executive Officer - Greater New York Operations John Dunne 59 Chairman and Co-Chief Executive Officer - The Great Atlantic & Pacific Company of Canada, Limited Brian Piwek 51 Vice Chairman and Co-Chief Executive Officer - The Great Atlantic & Pacific Company of Canada, Limited Craig C. Sturken 54 Chairman and Chief Executive Officer - Mid-West Operations Ivan K. Szathmary 61 Executive Vice President - Chief Service Officer Robert G. Ulrich 63 Senior Vice President - General Counsel Executive officers of the Company are chosen annually and serve at the pleasure of the Chief Executive Officer with the consent of the Board of Directors. Mr. Wood was elected Chairman of the Board and Chief Executive Officer on April 29, 1980. Effective May 1, 1998 Mr. Wood relinquished his Co-Chief Executive Officer title. From April 2, 1997 through April 30, 1998 Mr. Wood was Co-Chief Executive Officer along with Mr. Haub. From December 1988 to December 1993 and at other prior times he also served as President. He is Chairman of the Executive Committee of the Board of Directors. Mr. Haub was elected President and Chief Executive Officer on May 1, 1998. Prior to assuming his present position he was President and Co-Chief Executive Officer from April 2, 1997 to April 30, 1998. Prior thereto he was President and Chief Operating Officer of the Company since December 7, 1993 and served as Corporate Vice President, Development and Strategic Planning, since joining the Company in 1991. Mr. Haub has been a member of the Board of Directors of the Company since December 3, 1991 and an ex officio member of the Executive, Finance and Retirement Benefits Committees. Mr. Corrado was elected Vice Chairman of the Board on October 6, 1992. He also serves as Chief Financial Officer since joining the Company in January 1987. Mr. Corrado also served as Treasurer of the Company in 1987 and from April 18, 1989 through December 5, 1995. Mr. Corrado has been a member of the Board of Directors of the Company since December 4, 1990, and is currently the Vice Chairman of the Executive Committee and a member of the Finance and Retirement Benefits Committees. Mr. Larkin was elected Senior Executive Vice President - Chief Operating Officer on June 30, 1997. Prior to rejoining the Company, Mr. Larkin owned and operated two supermarkets in the Pennsylvania area from April 1995 through June 1997. Prior thereto and for the past five years, Mr. Larkin was Executive Vice President - Operations with the Company. Mr. Malinsky was elected Executive Vice President, Development and Strategic Planning on August 1, 1996. Prior to rejoining the Company and during the past five years, Mr. Malinsky was Chairman and President of Victory Markets, Inc. and New Almacs, Inc. Mr. McCaig was appointed Executive Assistant to the Chief Executive Officer on September 8, 1997. Prior thereto and for the past five years he was President and Chief Executive Officer of the Grand Union Company. Mr. O'Gorman was elected Executive Vice President - International Store and Product Development on June 26, 1995. During the past five years he was Executive Vice President - Development and Strategic Planning, and Executive Vice President - Development. Mr. Graham was elected Executive Vice President - Chief Merchandising Officer on August 1, 1997. Prior to assuming his present position and for the past five years, he was successively Executive Vice President - U.S. Operations, and Senior Vice President - Chief Merchandising Officer. Mr. Louttit was appointed Chairman and Chief Executive Officer - Greater Metro New York Operations on April 7, 1997. Prior thereto and for the past five years Mr. Louttit was Executive Vice President and Chief Operating Officer of the Grand Union Company. Mr. Dunne was elected by The Great Atlantic & Pacific Company of Canada, Limited as Chairman and Co-Chief Executive Officer on October 5, 1997. Prior thereto and for the past five years, Mr. Dunne was successively Chairman and Chief Executive Officer, President and Chief Operating Officer, and Vice Chairman and Chief Merchandising Officer of The Great Atlantic & Pacific Company of Canada, Limited. Mr. Dunne also served as Chairman and Chief Executive Officer of Food Basics Limited from December 1995 through September 1996. Mr. Piwek was elected by The Great Atlantic & Pacific Company of Canada, Limited as Vice Chairman and Co-Chief Executive Officer on October 2, 1997. Prior thereto and for the past five years, Mr. Piwek was President of Overwaitea Food Group, a retailer and franchisor in British Columbia and Alberta, Canada. Mr. Sturken was appointed Chairman and Chief Executive Officer - Mid-West Operations on April 7, 1997. Prior thereto and for the past five years Mr. Sturken was successively Group Vice President Michigan and Chairman and Chief Executive Officer - The Great Atlantic & Pacific Company of Canada, Limited. Dr. Szathmary was elected Executive Vice President and Chief Services Officer on July 11, 1996. Prior thereto, he was Senior Vice President and Chief Services Officer since July 1986. Effective April 11, 1998 Dr. Szathmary retired from the Company. Mr. Ulrich was elected Senior Vice President and General Counsel of the Company in April 1981. The Company has filed with the Commission since the close of its fiscal year ended February 28, 1998 a definitive proxy statement pursuant to Regulation 14A, involving the election of directors. Accordingly, the information required in Items 10 and 11, except as provided above, appears on pages 1 through 13 and is incorporated by reference from the proxy statement. ITEM 12. Security Ownership of Certain Beneficial Owners and Management The information required is contained in the Company's fiscal 1997 definitive proxy statement on pages 1 and 5 and is herein incorporated by reference. ITEM 13. Certain Relationships and Related Transactions The information required is contained in the Company's 1997 definitive proxy statement on pages 1 and 6 and is herein incorporated by reference. PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents filed as part of this report 1) Financial Statements: The financial statements required by Item 8 are included in the fiscal 1997 Annual Report to Shareholders. The following required items, appearing on pages 20 through 34 of the 1997 Annual Report to Shareholders, are herein incorporated by reference: Statements of Consolidated Operations Statements of Consolidated Shareholders' Equity Consolidated Balance Sheets Statements of Consolidated Cash Flows Notes to Consolidated Financial Statements Independent Auditors' Report 2) Financial Statement Schedules are omitted because they are not required or do not apply, or the information is included elsewhere in the financial statements or notes thereto. 3) Exhibits: Exhibit Incorporation by reference Numbers Description (If applicable) 2) Not Applicable 3) Articles of Incorporation and By-Laws a) Articles of Incorporation Exhibit 3)a) to Form 10-K as amended through for fiscal year ended July 1987 February 27, 1988 b) By-Laws as amended through Exhibit 3)b) to Form 10-K March 1989 for fiscal year ended February 25, 1989 4) Instruments defining the Exhibit A to Form 10-Q rights of security holders, for the quarter ended including indentures August 27, 1977; and Registration Statement No. 33-14624 on Form S-3 filed May 29, 1987 9) Not Applicable 10) Material Contracts a) Management Compensation Exhibit 10)b) to Form 10-K Agreements for the fiscal years ended February 25, 1989, February 24, 1990, and Exhibit 10)a) for the fiscal years ended February 26, 1994, February 25, 1995, February 22, 1997; and attached b) Supplemental Executive Exhibit 10)b) to Form 10-K Retirement Plan, amended for the fiscal year ended and restated February 27, 1993; and attached c) 1975 Stock Option Plan, Exhibit 10) to Form 10-K for as amended the fiscal year ended February 23, 1985 d) 1984 Stock Option Plan, Exhibit 10)e) to Form 10-K as amended for the fiscal year ended February 23, 1991 e) 1994 Stock Option Plan Exhibit 10)e) to Form 10-K for the fiscal year ended February 25, 1995 f) 1994 Stock Option Plan Exhibit 10)f) to Form 10-K for Non-Employee Directors for the fiscal year ended February 25, 1995 g) Competitive Advance and Exhibit 10) to Form 10-Q Revolving Credit Facilities for the quarter ended Agreement dated as of December 2, 1995, filed on December 12, 1995. Form SE. h) Directors' Deferred Exhibit 10)h) to Form 10-K Payment Plan for the fiscal year ended February 22, 1997. i) Competitive Advance and Exhibit 10) to Form 8-K Revolving Credit Facilities filed on June 12, 1997. Agreement dated as of June 10, 1997. 11) Not Applicable 12) Not Applicable 13) 1997 Annual Report to Shareholders 18) Not Applicable 21) Subsidiaries of Registrant 22) Not Applicable 23) Independent Auditors' Consent 24) Not Applicable 27) Financial Data Schedule 28) Not Applicable (b) Reports on Form 8-K Report on Form 8-K was filed on June 12, 1997 with respect to the Competitive and Revolving Credit Facilities Agreement dated June 10, 1997, among The Great Atlantic & Pacific Tea Company, Inc., The Great Atlantic & Pacific Company of Canada, Limited and The Chase Manhattan Bank as agent. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The Great Atlantic & Pacific Tea Company, Inc. (registrant) Date: May 12, 1998 By: /s/ Fred Corrado (Signature) Fred Corrado Vice Chairman of the Board and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and as of the date indicated. /s/ James Wood Chairman of the Board and Director James Wood /s/ Christian W.E. Haub President, Chief Executive Officer and Christian W.E. Haub Director /s/ Fred Corrado Vice Chairman of the Board, Fred Corrado Chief Financial Officer and Director /s/ John D. Barline Director John D. Barline /s/ Rosemarie Baumeister Director Rosemarie Baumeister /s/ Christopher F. Edley Director Christopher F. Edley /s/ Helga Haub Director Helga Haub /s/ Barbara Barnes Hauptfuhrer Director Barbara Barnes Hauptfuhrer /s/ William A. Liffers Director William A. Liffers /s/ Fritz Teelen Director Fritz Teelen /s/ R.L. "Sam" Wetzel Director R.L. "Sam" Wetzel The above-named persons signed this report on behalf of the registrant on May 26, 1998. /s/ Kenneth A. Uhl Vice President-Controller May 26, 1998 Kenneth A. Uhl Date EX-13 2 COMPARATIVE HIGHLIGHTS The Great Atlantic & Pacific Tea Company, Inc. (Dollars in thousands, except per share amounts) - ----------------------------------------------- Fiscal 1997 Fiscal 1996 Fiscal 1995 (53 weeks) (52 weeks) (52 weeks) ----------- ----------- ----------- Sales $10,262,243 $10,089,014 $10,101,356 Income from operations 155,259 169,303 151,734 Income before extraordinary item 63,586 73,032 57,224 Net income 63,042 73,032 57,224 Income per share before extraordinary item - basic and diluted 1.66 1.91 1.50 Net income per share - basic and diluted 1.65 1.91 1.50 Cash dividends per share .40 .20 .20 Expenditures for property 267,623 296,878 236,139 Depreciation and amortization 234,236 230,748 225,449 Working capital 262,097 215,374 190,967 Shareholders' equity 926,632 890,072 822,785 Debt to total capitalization .48 .49 .49 Book value per share 24.22 23.27 21.53 New store openings 40 30 30 Number of stores at year end 936 973 1,014 Number of franchised stores served at year end 52 49 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OPERATING RESULTS Fiscal 1997 Compared with 1996 Sales for fiscal 1997 were $10,262 million, a net increase of $173 million or 1.7% when compared to fiscal 1996 sales of $10,089 million. U.S. sales increased $62 million or 0.8% compared to fiscal 1996. U.S. same store sales, which include replacement stores ("same store sales" referred to herein includes replacement stores), were 2.0% below the prior year. In Canada, sales increased $111 million or 6.1% from fiscal 1996 to $1,918 million. Canada same store sales were up 0.6% from the prior year. Total Company same store sales for fiscal 1997 decreased 1.6% from the prior year. Average weekly sales per supermarket were approximately $199,400 in fiscal 1997 versus $195,200 in fiscal 1996 for a 2.2% increase. During fiscal 1997, the Company opened 33 new supermarkets, 3 new liquor stores and 4 new Food Basics franchised stores, remodeled or expanded 45 stores, and closed 74 stores, of which 11 in the Carolina market were sold. The sales increase of $173 million from last year was mainly the result of new store openings and an extra week of sales in fiscal 1997. The Company opened 36 stores, excluding 32 stores that replaced 32 older, outmoded stores, since the beginning of fiscal 1996 which increased sales by approximately $262 million or 2.6% in fiscal 1997. In addition, wholesale sales to the Food Basics franchised stores increased $135 million or 66% to $340 million for fiscal 1997, which increased total Company sales by 1.3%. In fiscal 1997, sales increased $174 million or 1.7% as a result of an extra week sales during this 53 week year compared to a 52 week year in fiscal 1996. These increases were partially offset by the closure of 114 stores, excluding replacement stores, since the beginning of fiscal 1996, of which 11 were sold in the Carolina market reducing total sales by approximately $218 million or 2.1% in fiscal 1997. The store closures include 24 stores that were subsequently converted to Food Basics franchised stores. The 1.6% decrease in same store sales resulted in a sales decrease of $153 million in fiscal 1997, while a lower Canadian exchange rate resulted in a sales decrease of $45 million in fiscal 1997. Gross margin as a percent of sales decreased 0.4% to 28.6% from 29.0% for the prior year resulting primarily from the increase of the lower margin wholesale sales from 2.0% to 3.3% of total Company sales in fiscal 1997, partially offset by an increase in the retail supermarket margin rate in the U.S. The gross margin percentage in the retail stores remained flat from the prior year. The gross margin dollar increase of $13 million is primarily the result of an increase in sales volume which had an impact of increasing margin by $66 million, partially offset by a decrease in gross margin rates of $40 million and a lower Canadian exchange rate which decreased margin by $13 million. The U.S. gross margin increased $24 million principally as a result of an increase in sales volume which had an impact of increasing margin by $19 million and an increase in gross margin rates of $5 million. The Canadian operations gross margin decreased $11 million which was primarily the result of the wholesale sales increase from the prior year. Store operating, general and administrative expense of $2,780 million in fiscal 1997 increased by approximately $27 million from fiscal 1996. As a percent of sales, store operating, general and administrative expense for fiscal 1997 decreased to 27.1% from 27.3% for the prior year. U.S. expenses increased $36 million, principally as a result of increased store labor and occupancy costs on the new superstores opened in fiscal 1997. In addition, store closing costs increased by $8 million which was offset by gains on sales of real estate of $11 million. Canadian expenses decreased $9 million, principally as a result of reduced store labor and occupancy costs due to converting 24 stores to Food Basics franchised stores. Interest expense increased $7 million from the previous year, primarily due to an increase in average debt of approximately $95 million. The increase in debt is mainly the result of the Company issuing $300 million 10 year notes in April 1997 to refinance 10 year notes that were becoming due in January 1998. The debt outstanding in April 1997 subsequent to the issuance of the $300 million 10 year notes was approximately $862 million, which was reduced to $712 million at February 28, 1998. Interest income increased $3 million from the previous year, primarily due to interest income on equipment leases relating to the Food Basics franchise business and higher interest income on short-term investments. The interest income on short-term investments was mainly the result of the Company investing a portion of the proceeds from the $300 million 10 year notes in April 1997 prior to the use of the cash to refinance the bonds due in January 1998. PAGE 14 Income before taxes and extraordinary item for fiscal 1997 was $83 million as compared to $101 million in fiscal 1996 for a decrease of $18 million or 18%. Income before taxes for U.S. operations decreased $23 million from $68 million in fiscal 1996 to $45 million in fiscal 1997. The U.S. decrease was partially offset by an increase in Canadian operations income before taxes of $5 million to $37 million in fiscal 1997 from $32 million in fiscal 1996. The effective tax rate for fiscal 1997 was 23.3% as compared to an effective tax rate of 27.4% in fiscal 1996. During fiscal 1997, since the Canadian operations generated pretax earnings, the Company reversed approximately $17 million of the valuation allowance, which was an increase of $3 million from the fiscal 1996 reversal of $14 million. Accordingly, the decrease in the effective tax rate is mainly attributable to the change in the Canadian income tax valuation allowance. The Company is reversing the income tax valuation allowance to the extent that its Canadian operations generate taxable income. Although Canada generated pretax earnings in fiscal 1997 of $37 million and $32 million in fiscal 1996, the Company was unable to conclude that the Canadian deferred tax assets were more likely than not to be realized. This conclusion was based in part on Management's assessment of the competitive Canadian marketplace and the level of the Canadian earnings. Accordingly, at February 28, 1998 the Company is continuing to fully reserve its Canadian net deferred tax asset. The valuation allowance will be adjusted when and if, in the opinion of Management, significant positive evidence exists which indicates that it is more likely than not that the Company will be able to realize the Canadian net deferred tax asset. The positive evidence that Management believes is necessary in order to reverse some or all of the Canadian deferred tax asset valuation allowance is a trend in earnings to a level which would allow Management to conclude that it is more likely than not that a portion or all of the deferred tax assets would be realized. The Canadian pretax income for financial statement purposes are higher than the taxable income for tax purposes due to certain differences between the financial statement and income tax treatment of certain items. This is of further significance since the largest portion of the Canadian deferred tax asset relates to net operating loss carryforwards which expire between fiscal 1999 and fiscal 2002 (see "Income Taxes" footnote for further discussion). In the second quarter of fiscal 1997, the Company recorded an extraordinary charge of $0.5 million, net of a tax benefit of $0.4 million relating to the early extinguishment of debt which amounted to $.01 per share - - basic and diluted. The Company retired at a premium approximately $20 million in mortgages with a weighted average interest rate of 9.4%. Net income for fiscal 1997 after recording an extraordinary charge of $.01 per share - basic and diluted, was $63 million or $1.65 per share - basic and diluted, as compared to $73 million or $1.91 per share - basic and diluted, for fiscal 1996. The decrease in net income is the result of higher store operating, general and administrative expenses of $27 million, partially offset by higher gross margins of $13 million coupled with a lower effective income tax rate. Fiscal 1996 Compared with 1995 Sales for fiscal 1996 were $10,089 million, a net decrease of $12 million or 0.1% when compared to fiscal 1995 sales of $10,101 million. U.S. sales decreased $83 million or 1.0% compared to fiscal 1995. U.S. same store sales were down 0.7% from the prior year. In Canada, sales increased $71 million or 4.1% from fiscal 1995 to $1,807 million. Canada same store sales were up 0.5% from the prior year. Total Company same store sales for fiscal 1996 decreased 0.5% from the prior year. Average weekly sales per supermarket were approximately $195,200 in fiscal 1996 versus $183,300 in fiscal 1995 for a 6.5% increase. During fiscal 1996, the Company opened 27 new supermarkets and 3 new liquor stores, remodeled or expanded 72 stores, and closed 71 stores, of which 23 were converted to Food Basics franchised stores in Canada. The sales decrease of $12 million from last year was mainly the result of store closings. The Company closed 171 stores, excluding replacement stores, since the beginning of fiscal 1995 which reduced comparative sales by approximately $443 million or 4.4% in fiscal 1996. The store closures include 41 stores that were subsequently converted to Food Basics franchised stores. The lost sales of the store closures were offset by the opening of 35 new stores, excluding 25 stores that replaced 27 older, outmoded stores, since the beginning of fiscal 1995 which increased sales by approximately $276 million or 2.7% in fiscal 1996. In addition, the opening and conversion of 42 Food Basics franchised stores in fiscal 1996 increased wholesale sales to the Franchisees by $199 million to sales of $205 million in fiscal 1996, from sales of only $6 million in fiscal 1995. PAGE 15 Gross margin as a percent of sales decreased 0.1% to 29.0% for the current year from 29.1% for the prior year resulting primarily from lower margins on wholesale sales to the Food Basics franchised stores, partially offset by an increase in the retail supermarket margin in both the U.S. and Canada. The gross margin dollar decrease of $14 million is primarily the result of a decrease in gross margin rates of $10 million, a decrease in sales volume which had an impact of decreasing margin by $6 million, partially offset by a higher Canadian exchange rate resulting in an increase of $2 million. The U.S. gross margin increased $16 million principally as a result of increased gross margin rates of $40 million, partially offset by a decrease in sales volume which had an impact of decreasing margin by $24 million. In Canada, gross margin decreased $30 million, primarily resulting from the effect of a decrease in gross margin rates of $50 million, partially offset by sales volume increases which impacted margins by $18 million, and a higher Canadian exchange rate resulting in an increase of $2 million. Store operating, general and administrative expense of $2,752 million in fiscal 1996 declined by approximately $31 million from fiscal 1995. As a percent of sales, store operating, general and administrative expense for fiscal 1996 decreased to 27.3% from 27.6% for the prior year. U.S. expenses increased $19 million, principally as a result of increased store labor and rental costs on the new superstores opened in fiscal 1996. Canadian expenses decreased $50 million, principally as a result of reduced store labor and occupancy costs as a result of converting 41 stores to Food Basics franchised stores. Interest expense increased $0.1 million from the previous year, primarily due to increased average borrowings in the U.S. partially offset by lower average interest rates. Interest income increased $2 million from the previous year, primarily due to interest income on equipment leases and inventory notes relating to the Food Basics franchise business. Income before taxes for fiscal 1996 was $101 million as compared to $81 million in fiscal 1995 for an increase of $20 million or 24%. Income before taxes increased due to improvements in the results of the Canadian operations of $24 million from $8 million in fiscal 1995 to $32 million in fiscal 1996. The Canadian increase was partially offset by a decrease in U.S. income before taxes from $73 million in fiscal 1995 to $69 million in fiscal 1996. The effective tax rate for fiscal 1996 was 27.4% as compared to an effective tax rate of 29.4% in fiscal 1995. Included in the fiscal 1995 tax provision is a $6.5 million or $0.17 per share - basic and diluted, credit relating to a refund of previously paid taxes in Canada. Excluding the $6.5 million credit, the fiscal 1995 income tax provision would have been $30.4 million resulting in an effective tax rate of 37.4%. The decrease in the effective tax rate, after giving effect to this credit is mainly attributable to the change in the Canadian income tax valuation allowance. The Company is reversing the income tax valuation allowance to the extent that its Canadian operations generate taxable income. During fiscal 1996, since the Canadian operations generated pretax earnings, the Company reversed approximately $14 million of the valuation allowance. Although Canada generated pretax earnings in fiscal 1996 of $32 million and $8 million in fiscal 1995, the Company was unable to conclude that the Canadian deferred tax assets were more likely than not to be realized. Accordingly, at February 22, 1997 the Company continued to fully reserve its Canadian net deferred tax assets. The valuation allowance will be adjusted when and if, in the opinion of Management, significant positive evidence exists which indicates that it is more likely than not that the Company will be able to realize the Canadian deferred tax assets (see "Income Taxes" footnote for further discussion). Net income for fiscal 1996 was $73 million or $1.91 per share - basic and diluted as compared to $57 million or $1.50 per share - basic and diluted for fiscal 1995. Excluding the $6.5 million or $0.17 per share - basic and diluted Canadian tax refund, fiscal 1995 net income would have been $51 million or $1.33 per share - basic and diluted. Accordingly, excluding the effect of such refund, net income increased $22 million or $0.58 per share - basic and diluted. The increase in net income is the result of lower store operating, general and administrative expenses of $31 million, coupled with a lower effective income tax rate, partially offset by lower gross margins of $14 million. PAGE 16 LIQUIDITY AND CAPITAL RESOURCES The Company ended the 1997 fiscal year with working capital of $262 million compared to $215 million and $191 million at February 22, 1997 and February 24, 1996, respectively. The Company had cash and short-term investments aggregating $71 million at the end of fiscal 1997 compared to $99 million and $100 million at the end of fiscal 1996 and 1995, respectively. On June 10, 1997, the Company executed an unsecured five year $465 million U.S. credit agreement and a five year C$50 million Canadian credit agreement (the "1997 Credit Agreement") with a syndicate of banks, enabling it to borrow funds on a revolving basis sufficient to refinance short-term borrowings. This 1997 Credit Agreement replaced a previous five year $400 million U.S. revolving credit agreement and a C$100 million revolving credit agreement dated December 12, 1995. The 1997 Credit Agreement resulted in the Company obtaining a lower cost of borrowing, reduced facility fees, and extended the maturity to June 2002. The Company pays a facility fee ranging from 3/16% to 1/2% per annum on the total commitment of the U.S. and Canadian revolving credit facilities. Borrowings under the U.S. revolving credit agreement were $90 million and $95 million at February 28, 1998 and February 22, 1997, respectively. The Canadian subsidiary had no outstanding borrowings at February 28, 1998 and $59 million at February 22, 1997. As of February 28, 1998, the Company had available $375 million under its U.S. credit agreement and C$50 million (U.S. $35 million at February 28, 1998) under the Canadian credit agreement. As of February 22, 1997, the Company had available $305 million under its U.S. revolver and C$19 million (U.S. $14 million at February 22, 1997) under the Canadian credit agreement. In addition, the U.S. has uncommitted lines of credit with various banks amounting to $149 million and $145 million as of February 28, 1998 and February 22, 1997, respectively. Borrowings under these uncommitted lines of credit amounted to $38 million and $52 million as of February 28, 1998 and February 22, 1997, respectively. As of February 28, 1998, the Company had outstanding a total of $575 million of unsecured, non-callable public debt securities in the form of $75 million 7.78% Notes due November 1, 2000, $200 million 7.70% Notes due January 15, 2004 and $300 million 7.75% Notes due April 15, 2007. As of February 28, 1998, the Company had $410 million available under the 1997 Credit Agreement and $111 million in uncommitted lines of credit. On April 15, 1997, the Company issued $300 million 7.75% 10 year Notes due April 15, 2007. The Company used the net proceeds to reduce bank borrowings under the U.S. and Canadian revolving credit facilities, prepay other indebtedness and for general corporate purposes. The Company borrowed funds available under the U.S. credit facility to repay at maturity, indebtedness owing in respect of the Company's 9 1/8% Notes due January 15, 1998. On June 12, 1997, the Company offered to exchange its 7.75% 10 year Notes due April 15, 2007, which were registered under the Securities Act, for outstanding 7.75% 10 year Notes due April 15, 2007, which had not been so registered. The exchange offer expired on July 10, 1997 with all outstanding unregistered 10 year Notes exchanged for registered 10 year Notes. On October 17, 1995, the Company's Canadian subsidiary, The Great Atlantic & Pacific Company of Canada, Ltd. ("A&P Canada"), issued U.S. $75 million of unsecured, non-callable 7.78% Notes due November 1, 2000 guaranteed by the Company. The net proceeds from the issuance of these Notes were used to repay indebtedness under the Canadian subsidiary's revolving credit facility. In conjunction with the issuance of the U.S. $75 million Notes, A&P Canada entered into a five year cross-currency swap agreement expiring November 1, 2000. The cross-currency swap was executed for protection against the effect of a decrease in Canadian exchange rates on both the semi-annual interest payments and the final principal payment due to the Company's U.S. bondholders. The cross-currency swap enables the Company to pay in Canadian dollars a fixed rate of interest of 9.23% on a notional amount of C$100 million for the $75 million 7.78% Notes denominated in U.S. dollars. The cost of the cross-currency swap of 1.45% is charged to interest expense. The Company records an asset or liability to the extent that an eventual transaction gain or loss is expected to be recorded upon the settlement of the notional amount of the underlying debt. Accordingly, the Company has recorded in other assets the receivable due from the counterparty amounting to approximately $4.5 million and $1.4 million as of February 28, 1998 and February 22, 1997, respectively. The fair value of the cross-currency swap was favorable to the Company by $1 million as of February 28, 1998 and unfavorable to the Company by $5.4 million as of February 22, 1997. The Company is exposed to credit losses in the event of nonperformance by the counterparty to its currency swap. However, the Company anticipates that the counterparty will be able to fully satisfy its obligations under the contracts. PAGE 17 On April 15, 1997, the Company's Canadian subsidiary entered into an interest rate swap agreement with a notional amount of C$100 million where the Company receives a fixed rate of interest and pays a variable rate of interest. The fair value of the interest rate swap was favorable to the Company by $1.4 million as of February 28, 1998. This interest rate swap agreement has the same counterparty as the cross-currency swap agreement. The Company's loan agreements and certain of its notes contain various financial covenants which require, among other things, minimum net worth and maximum levels of indebtedness and lease commitments. The Company was in compliance with all such financial covenants as of February 28, 1998, and believes that it will continue to be in compliance. During fiscal 1997, the Company funded its capital expenditures, debt repayments and cash dividends through internally generated funds combined with proceeds from bank borrowings. U.S. bank borrowings were $128 million at February 28, 1998 as compared to $147 million at February 22, 1997. U.S. bank borrowings during fiscal 1997 were at an average interest rate of 6.0% compared to 5.8% in fiscal 1996. Canada had no bank borrowings at February 28, 1998 and $59 million at February 22, 1997. Canadian bank and commercial paper borrowings during fiscal 1996 were at an average interest rate of 5.3%. Pursuant to a Shelf Registration Statement dated January 23, 1998, the Company may offer up to $500 million of debt and equity securities at terms determined by market conditions at the time of sale. Capital expenditures totaled $268 million during fiscal 1997, which included 33 new supermarkets, 3 new liquor stores, 4 new Food Basics franchised stores, and 45 remodels and enlargements. For fiscal 1998, the Company has planned capital expenditures of approximately $300 million and plans to open 45 new supermarkets and remodel or expand 80 stores. It has been the Company's experience over the past several years that it typically takes 12 to 15 months after opening for a new store to recoup its opening costs and become profitable thereafter. Risks inherent in retail real estate investments are primarily associated with competitive pressures in the marketplace. Beginning in fiscal 1998 through fiscal 2000, the Company intends to improve the use of technology to improve customer service, store operations, warehousing/distribution and merchandising and to intensify advertising and promotions. The Company currently expects to close approximately 60 stores in fiscal year 1998. The Company plans to open approximately 50 new supermarkets in fiscal 1999 and approximately 55 new supermarkets per year thereafter for several years, with an attendant increase in square footage of approximately 3% per year, and to remodel an average of 50 stores per year. The Company's concentration will be on larger stores in the 50,000 to 65,000 square foot range. Costs of each project will vary significantly based upon size, marketing format, geographic area and development involvement required from the Company. The planned costs of these projects approximate $4 million for a new store and $1 million for a remodel or enlargement. Traditionally, the Company leases real estate and expends capital on leasehold improvements and store fixtures and fittings. Consistent with the Company's history, most new store activity will be directed into those areas where the Company achieves its best profitability. Remodeling and enlargement programs are normally undertaken based upon competitive opportunities and usually involve updating a store to a more modern and competitive format. The fiscal 1997 quarterly dividend was $0.10 per share and amounted to $15.3 million. The Company expects to maintain the same dividend amount for fiscal 1998. At fiscal year end, the Company's existing senior debt rating was Baa3 with Moody's Investors Service and BBB- with Standard & Poor's Ratings Group. A change in either of these ratings could affect the availability and cost of financing. The Company's current cash resources, together with cash generated from operations, will be sufficient for the Company's 1998 capital expenditure program, mandatory scheduled debt repayments and dividend payments throughout fiscal 1998. PAGE 18 MARKET RISK Market risk represents the risk of loss that may impact the consolidated financial position, results of operations or cash flows of the Company. The Company is exposed to market risk in the areas of interest rates and foreign currency exchange rates. Interest rates The Company's exposure to market risk for changes in interest rates relates primarily to the Company's debt obligations. The Company has no cash flow exposure due to rate changes on its $500 million in notes. However, the Company does have cash flow exposure on its committed and uncommitted bank lines of credit due to its variable LIBOR pricing. In addition, during 1997 the Company entered into an interest rate swap agreement whereby the Company receives a fixed interest rate while paying a variable rate of interest on the $75 million Canadian notes. Accordingly, a 1% change in LIBOR will result in interest expense fluctuating approximately $2.5 million. Foreign Exchange Risk The Company is exposed to foreign exchange risk to the extent of adverse fluctuations in the Canadian dollar. Based upon historical Canadian currency movement, the Company does not believe that reasonably possible near-term changes in the Canadian currency will result in a material effect on future earnings, financial position or cash flows of the Company. The Company entered into a five year cross-currency swap agreement to hedge five year notes in Canada that are denominated in U.S. dollars. The Company does not have any currency risk regarding the Canadian 5 year notes. The Company is exposed to currency risk in the event of default by the counterparty. Such default is remote as the counterparty is a widely recognized investment banker. YEAR 2000 COMPLIANCE The year 2000 issue is the result of computer programs that were written using two digits rather than four to define the applicable year. Accordingly, computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. To the extent that the Company's software applications contain source code that is unable to appropriately interpret the upcoming calendar year 2000 and beyond, some level of modification or replacement of such applications will be necessary to avoid the possibility of system failures and the temporary inability to process transactions or engage in other normal business activities. The Company has implemented a formal plan to address the year 2000 issue which includes assessing the extent of affected software and developing procedures to resolve the potential problems associated with that software. In addition, the Company is communicating with its major vendors to determine the extent to which the Company might be affected by their year 2000 compliance issues. Based on current information, costs of addressing potential problems are not expected to have a material adverse impact on the Company's financial position, results of operations or cash flows in future periods. However, if the Company, or its vendors are unable to resolve such processing issues in a timely manner, it could result in a material financial risk. Accordingly, the Company has allocated the resources it believes are necessary to resolve all significant year 2000 issues in a timely manner. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income" ("SFAS 130") and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130 relates to the change in the equity of a business during a reporting period from transactions of the business. The Company currently intends to adopt this new accounting standard effective in the first quarter of fiscal 1998. The expected impact in the adoption of SFAS 130 is not readily determinable as the impact is predicated on the future changes in the Canadian exchange rate. SFAS 131 supersedes SFAS No. 14 "Financial Reporting for Segments of a Business Enterprise". SFAS 131 provides for the disclosure of financial information disaggregated by the way management organizes the segments of the enterprise for making operating decisions. The Company is currently assessing the extent of disclosures that will be required by SFAS 131 and will adopt this statement in fiscal 1998. In February 1998, the FASB issued SFAS No. 132 "Employer's Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 standardizes the disclosure requirements for pensions and other postretirement benefits. It does not address the accounting for such benefits. SFAS 132 is effective for fiscal years beginning after December 31, 1997 and requires restatement of disclosures for all prior periods presented. The Company will adopt SFAS 132 in fiscal 1998 and believes it will impact the financial statements to the extent that it is necessary to provide additional disclosure about the Company's pensions and other postretirement benefits. PAGE 19 STATEMENTS OF CONSOLIDATED OPERATIONS The Great Atlantic & Pacific Tea Company, Inc. (Dollars in thousands, except per share amounts) - ----------------------------------------------- Fiscal 1997 Fiscal 1996 Fiscal 1995 (53 weeks) (52 weeks) (52 weeks) ----------- ------------ ----------- Sales $10,262,243 $10,089,014 $10,101,356 Cost of merchandise sold (7,327,365) (7,167,315) (7,166,119) ----------- ----------- ----------- Gross margin 2,934,878 2,921,699 2,935,237 Store operating, general and administrative expense (2,779,619 (2,752,396) (2,783,503) ----------- ----------- ---------- Income from operations 155,259 169,303 151,734 Interest expense (80,152) (73,208) (73,143) Interest income 7,793 4,496 2,501 ----------- ----------- ---------- Income before income taxes and extraordinary item 82,900 100,591 81,092 Provision for income taxes (19,314) (27,559) (23,868) ----------- ----------- ---------- Income before extraordinary item 63,586 73,032 57,224 Extraordinary loss on early extinguishment of debt (net of income tax benefit of $394) (544) - - ----------- ----------- ---------- Net income $ 63,042 $ 73,032 $ 57,224 =========== =========== ========== Basic earnings (loss) per share: Income before extraordinary item $ 1.66 $ 1.91 $ 1.50 Extraordinary loss on early extinguishment of debt (0.01) - - ----------- ----------- ---------- Net income per share - basic $ 1.65 $ 1.91 $ 1.50 =========== =========== ========== Diluted earnings (loss) per share: Income before extraordinary item $ 1.66 $ 1.91 $ 1.50 Extraordinary loss on early extinguishment of debt (0.01) - - ----------- ----------- ---------- Net income per share - diluted $ 1.65 $ 1.91 $ 1.50 =========== =========== ========== See Notes to Consolidated Financial Statements. PAGE 20 STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY The Great Atlantic & Pacific Tea Company, Inc. (Dollars in thousands, except share amounts) - ------------------------------------------------ Fiscal 1997 Fiscal 1996 Fiscal 1995 ----------- ----------- ----------- Common stock: Shares: Issued and outstanding at beginning of year 38,247,716 38,220,333 38,220,333 Stock options exercised 5,250 27,383 - ----------- ---------- ----------- Issued and outstanding at end of year 38,252,966 38,247,716 38,220,333 =========== =========== =========== Balance at beginning of year $ 38,247 $ 38,220 $ 38,220 Stock options exercised 6 27 - ----------- ----------- ----------- Balance at end of year $ 38,253 $ 38,247 $ 38,220 =========== =========== =========== Capital surplus: Balance at beginning of year $ 453,751 $ 453,121 $ 453,121 Stock options exercised 143 630 - ----------- ----------- ----------- Balance at end of year $ 453,894 $ 453,751 $ 453,121 =========== =========== =========== Cumulative translation adjustment: Balance at beginning of year $ (49,694)$ (50,936) $ (49,227) Exchange adjustment (5,121) 1,242 (1,709) ----------- ----------- ----------- Balance at end of year $ (54,815)$ (49,694) $ (50,936) =========== =========== =========== Minimum pension liability adjustment: Balance at beginning of year $ - $ - $ - Minimum pension liability adjustment (6,210) - - ----------- ----------- ----------- Balance at end of year $ (6,210) $ - $ - =========== =========== =========== Retained earnings: Balance at beginning of year $ 447,768 $ 382,380 $ 332,800 Net income 63,042 73,032 57,224 Cash dividends (15,300) (7,644) (7,644) ----------- ----------- ----------- Balance at end of year $ 495,510 $ 447,768 $ 382,380 =========== =========== =========== See Notes to Consolidated Financial Statements. PAGE 21 CONSOLIDATED BALANCE SHEETS The Great Atlantic & Pacific Tea Company, Inc. February 28, February 22, (Dollars in thousands) 1998 1997 - --------------------- ------------ ----------- Assets Current assets: Cash and short-term investments $ 70,937 $ 98,830 Accounts receivable 227,703 213,888 Inventories 882,229 881,288 Prepaid expenses and other assets 36,358 37,373 ---------- ---------- Total current assets 1,217,227 1,231,379 ---------- ---------- Property: Land 138,139 128,779 Buildings 368,201 343,076 Equipment and leasehold improvements 2,122,860 2,118,808 ---------- ---------- Total-at cost 2,629,200 2,590,663 Less accumulated depreciation and amortization (1,122,381) (1,104,159) ---------- ---------- 1,506,819 1,486,504 Property leased under capital leases 90,058 103,474 ---------- ---------- Property-net 1,596,877 1,589,978 Other assets 181,149 181,315 ---------- ---------- $2,995,253 $3,002,672 ========== ========== Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term debt $ 16,824 $ 18,290 Current portion of obligations under capital leases 12,293 12,708 Accounts payable 441,149 468,808 Book overdrafts 151,846 182,305 Accrued salaries, wages and benefits 146,064 146,737 Accrued taxes 57,856 52,269 Other accruals 129,098 134,888 ---------- ---------- Total current liabilities 955,130 1,016,005 ---------- ---------- Long-term debt 695,292 701,609 ---------- ---------- Obligations under capital leases 120,980 137,886 ---------- ---------- Deferred income taxes 120,618 113,188 ---------- ---------- Other non-current liabilities 176,601 143,912 ---------- ---------- Commitments and contingencies Shareholders' equity: Preferred stock-no par value; authorized - 3,000,000 shares; issued-none Common stock-$1 par value; authorized - 80,000,000 shares; issued and outstanding 38,252,966 shares and 38,247,716 shares, respectively 38,253 38,247 Capital surplus 453,894 453,751 Cumulative translation adjustment (54,815) (49,694) Minimum pension liability adjustment (6,210) - Retained earnings 495,510 447,768 ---------- ---------- Total shareholders' equity 926,632 890,072 ---------- ---------- $2,995,253 $3,002,672 ========== ========== See Notes to Consolidated Financial Statements. PAGE 22 STATEMENTS OF CONSOLIDATED CASH FLOWS The Great Atlantic & Pacific Tea Company, Inc. (Dollars in thousands) Fiscal 1997 Fiscal 1996 Fiscal 1995 - --------------------- ----------- ----------- ----------- Cash Flows From Operating Activities: Net income $ 63,042 $ 73,032 $ 57,224 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 234,236 230,748 225,449 Deferred income tax provision (benefit) on income before extraordinary item 11,425 (1,067) 9,496 (Gain) loss on disposal of owned property, net (11,363) 1,338 (3,177) (Increase) decrease in receivables (14,116) (5,615) 556 Increase in inventories (6,090) (53,672) (13,103) (Increase) decrease in prepaid expenses and other current assets (2,630) 6,401 (573) Increase in other assets (1,435) (26,753) (12,066) Increase (decrease) in accounts payable (24,542) 15,950 3,944 Increase (decrease) in accrued expenses 8,594 (2,657) (4,251) Increase (decrease) in store closing reserves 6,104 (8,600) (18,240) Increase (decrease) in other accruals and other liabilities 14,052 (13,307) 16,518 Other operating activities, net (1,050) 271 193 --------- --------- --------- Net cash provided by operating activities 276,227 216,069 261,970 --------- --------- --------- Cash Flows From Investing Activities: Expenditures for property (267,623) (296,878) (236,139) Proceeds from disposal of property 31,783 19,408 34,576 --------- --------- --------- Net cash used in investing activities (235,840) (277,470) (201,563) --------- --------- --------- Cash Flows From Financing Activities: Changes in short-term debt (34,500) 37,000 13,000 Proceeds under revolving lines of credit 947,148 459,312 1,182,183 Payments on revolving lines of credit (991,296) (439,591) (1,329,409) Proceeds from long-term borrowings 304,213 4,978 75,000 Payments on long-term borrowings (233,348) (6,155) (4,005) Principal payments on capital leases (13,711) (13,166) (17,953) Increase (decrease) in book overdrafts (28,145) 24,901 (1,075) Deferred financing fees (2,471) - - Proceeds from stock options exercised 149 657 - Cash dividends (15,300) (7,644) (7,644) --------- --------- ---------- Net cash provided by (used in) financing activities (67,261) 60,292 (89,903) --------- --------- --------- Effect of exchange rate changes on cash and short-term investments (1,019) 167 338 --------- --------- --------- Net Decrease in Cash and Short-term Investments (27,893) (942) (29,158) Cash and Short-term Investments at Beginning of Year 98,830 99,772 128,930 --------- --------- --------- Cash and Short-term Investments at End of Year $ 70,937 $ 98,830 $ 99,772 ========= ========= ========= See Notes to Consolidated Financial Statements. PAGE 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. The Company operates retail supermarkets in the United States and Canada. The U.S. operations are mainly in the Eastern part of the U.S. and certain parts of the Midwest. See the following footnotes for additional information on the Canadian Operations: Operations in Geographic Areas, Food Basics Franchise Business, Income Taxes and Retirement Plans and Benefits. Revenue Recognition Retail revenue is recognized at point of sale while wholesale revenue is recognized when goods are shipped. Fiscal Year The Company's fiscal year ends on the last Saturday in February. Fiscal 1997 ended February 28, 1998, fiscal 1996 ended February 22, 1997 and fiscal 1995 ended February 24, 1996. Fiscal 1997 was comprised of 53 weeks while fiscal 1996 and fiscal 1995 were each comprised of 52 weeks. Common Stock The principal shareholder of the Company, Tengelmann Warenhandelsgesellschaft, owned 54.67% of the Company's common stock as of February 28, 1998. Cash and Short-term Investments Short-term investments that are highly liquid with an original maturity of three months or less are included in cash and short-term investments and are deemed to be cash equivalents. Inventories Store inventories are valued principally at the lower of cost or market with cost determined under the retail method. Warehouse and other inventories are valued primarily at the lower of cost or market with cost determined on a first-in, first-out basis. Inventories of certain acquired companies are valued using the last-in, first-out method, which was their practice prior to acquisition. Advertising Costs Advertising costs are expensed as incurred. The Company recorded advertising expense of $138 million for each of the three fiscal years in the period ended February 28, 1998. Properties Depreciation and amortization are provided on the straight-line basis over the estimated useful lives of the assets. Buildings are depreciated based on lives varying from twenty to fifty years and equipment based on lives varying from three to ten years. Real property leased under capital leases is amortized over the lives of the respective leases or over their economic useful lives, whichever is less. During fiscal 1997 the Company disposed of certain assets which resulted in a pretax gain of approximately $11 million. Pre-opening Costs The costs of opening new stores are expensed in the year incurred. Earnings Per Share In the fourth quarter of fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires dual presentation of basic and diluted earnings per share ("EPS") on the face of the statements of consolidated operations and requires a reconciliation of the numerators and denominators of the basic and diluted EPS calculations. Basic EPS is computed by dividing net income by the weighted average shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if options to issue common stock were exercised and converted to common stock. Earnings per share for prior periods have been computed in accordance with SFAS 128. The weighted average shares outstanding utilized in the basic earnings per share calculations were 38,249,832 for fiscal 1997, 38,221,329 for fiscal 1996 and 38,220,333 for fiscal 1995. The common stock equivalents that were added to the weighted average shares outstanding for purposes of diluted earnings per share were 19,926 for fiscal 1997, 66,260 for fiscal 1996 and 1,374 for fiscal 1995. Excess of Cost over Net Assets Acquired The excess of cost over fair value of net assets acquired is amortized on a straight-line basis over forty years. The Company recorded amortization expense of $1.5 million for each of the three fiscal years in the period ended February 28, 1998. The accumulated amortization relating to goodwill amounted to $11.7 million and $10.2 million at February 28, 1998 and February 22, 1997, respectively. At each balance sheet date, Management reassesses the appropriateness of the goodwill balance based on forecasts of cash flows from operating results on an undiscounted basis. If the results of such comparison indicate that an impairment may exist, the Company will recognize a charge to operations at that time based upon the difference between the present value of the expected cash flows from future operating results (utilizing a discount rate equal to the Company's average cost of funds at that time) and the balance sheet value. The recoverability of goodwill is at risk to the extent the Company is unable to achieve its forecast assumptions regarding cash flows from operating results. At February 28, 1998, the Company estimates that the cash flows projected to be generated by the respective businesses on an undiscounted basis should be sufficient to recover the existing goodwill balance over its remaining life. Long-Lived Assets The Company adopted the provisions of Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of ("SFAS 121") during the fourth quarter of fiscal 1995. SFAS 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. The Company reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. PAGE 24 Such review is based upon groups of assets and the undiscounted estimated future cash flows from such assets to determine if the carrying value of such assets are recoverable from their respective cash flows. The adoption of SFAS No. 121 did not have an effect on the financial position or results of operations of the Company. Income Taxes The Company provides deferred income taxes on temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Current Liabilities Certain accounts payable checks issued but not presented to banks frequently result in negative book balances for accounting purposes. Such amounts are classified as "Book overdrafts" in the accompanying balance sheets. The Company accrues for vested and non-vested vacation pay. Liabilities for compensated absences of $79 million at both February 28, 1998 and February 22, 1997, are included in the balance sheet caption "Accrued salaries, wages and benefits." Stock-Based Compensation Effective February 25, 1996, the Company adopted Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). In conjunction with the adoption, the Company will continue to apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" with pro forma disclosure of net income and earnings per share as if the fair- value based method prescribed by SFAS 123 had been applied. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accompanying balance sheets include liabilities with respect to self- insured workers' compensation and general liability claims. The Company determines the required liability of such claims based upon various assumptions which include, but are not limited to, the Company's historical loss experience, industry loss standards, projected loss development factors, projected payroll, employee headcount and other internal data. It is reasonably possible that the final resolution of some of these claims may require significant expenditures by the Company in excess of its existing reserves, over an extended period of time and in a range of amounts that cannot be reasonably estimated. Reclassifications Certain reclassifications have been made to the prior years' financial statements in order to conform to the current year's presentation. New Accounting Pronouncements Not Yet Adopted In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income" ("SFAS 130") and SFAS No. 131 "Disclosure about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130 relates to the change in the equity of a business during a reporting period from transactions of the business. The Company currently intends to adopt this new accounting standard effective in the first quarter of fiscal 1998. The expected impact in the adoption of SFAS 130 is not readily determinable as the impact is predicated on the future changes in the Canadian exchange rate. SFAS 131 supersedes SFAS No. 14 "Financial Reporting for Segments of a Business Enterprise". SFAS 131 provides for the disclosure of financial information disaggregated by the way management organizes the segments of the enterprise for making operating decisions. The Company is currently assessing the extent of disclosures that will be required by SFAS 131 and will adopt this statement in fiscal 1998. In February 1998, the FASB issued SFAS No. 132 "Employer's Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 standardizes the disclosure requirements for pensions and other postretirement benefits. It does not address the accounting for such benefits. SFAS 132 is effective for fiscal years beginning after December 31, 1997 and requires restatement of disclosures for all prior periods presented. The Company will adopt SFAS 132 in fiscal 1998 and believes it will impact the financial statements to the extent that it is necessary to provide additional disclosure about the Company's pensions and other postretirement benefits. INVENTORY Approximately 27% of the Company's inventories are valued using the last-in, first-out ("LIFO") method at both February 28, 1998 and February 22, 1997. Such inventories would have been $14 million and $15 million higher at February 28, 1998 and February 22, 1997, respectively, if the retail and first-in, first-out methods were used. The Company recorded LIFO charges of approximately $1 million and $2 million during fiscal years 1996 and 1995, respectively. During fiscal year 1997, the Company recorded a LIFO credit of $0.4 million. Liquidation of LIFO layers in the periods reported did not have a significant effect on the results of operations. PAGE 25 FOOD BASICS FRANCHISE BUSINESS The Company serviced 52 Food Basics franchised stores as of February 28, 1998 and 49 stores as of February 22, 1997. These franchised stores are required to purchase inventory exclusively from the Company which acts as a wholesaler to the franchisees. During fiscal 1997 and 1996, the Company had wholesale sales to these franchised stores of $340 million and $205 million, respectively. A majority of the Food Basics franchised stores were converted from Company operated supermarkets. The Company subleases the stores and leases the equipment in the stores to the franchisees. The Company also provides merchandising, advertising, accounting and other consultative services to the franchisees for which it receives a nominal fee which mainly represents the reimbursements of costs incurred to provide such services (see "Lease Obligations" footnote). Included in other assets are Food Basics franchised business receivables, net of allowance for doubtful accounts, amounting to $37.6 million as of February 28, 1998 and $40.2 million as of February 22, 1997. The inventory notes are collateralized by the inventory in the stores, while the equipment lease receivables are collateralized by the equipment in the stores. The current portion of the inventory and equipment leases of approximately $1.9 million as of February 28, 1998 and $2.4 million as of February 22, 1997 are included in accounts receivable. The repayment of the inventory notes and equipment leases are dependent on positive operating results of the stores. To the extent that the franchisee incur operating losses, the Company establishes an allowance for doubtful accounts. The Company continually assesses the sufficiency of the allowance on a store by store basis based upon the operating losses incurred and the related collateral underlying the amounts due from the franchisees. In the event of default by a franchisee, the Company reserves the option to reacquire the inventory and equipment at the store and operate the franchise as a corporate owned store. Included below are the amounts due to the Company for the next five years and thereafter from the franchised stores for equipment leases and inventory notes. - -------------------------------------------------------------- (Dollars in thousands) - -------------------------------------------------------------- 1998 $5,379 1999 6,595 2000 6,595 2001 6,595 2002 6,595 2003 and thereafter 20,694 ------- 52,453 Less interest portion 12,897 ------- Due from Food Basics franchise business $39,556 ======= For the fiscal years ended February 28, 1998 and February 22, 1997 approximately $2 million and $34 million, respectively, of the franchise business notes relate to equipment leases which were non-cash transactions and accordingly, have been excluded from the consolidated statements of cash flows. INDEBTEDNESS Debt consists of: February 28, February 22, (Dollars in thousands) 1998 1997 - --------------------- ----------- ----------- 7.75% Notes, due April 15, 2007 $300,000 $ - 9 1/8% Notes, due January 15, 1998 - 200,000 7.70% Senior Notes, due January 15, 2004 200,000 200,000 7.78% Notes, due November 1, 2000 75,000 75,000 Mortgages and Other Notes, due 1998 through 2014 (average interest rates at year end of 6.70% and 9.35%, respectively) 11,972 38,878 U.S. Bank Borrowings at 5.86% and 5.76%, respectively 127,500 147,000 Canadian Commercial Paper at 3.44% - 2,192 Canadian Bank Borrowings at 3.65% - 56,956 Less unamortized discount on 7.75% and 9 1/8% Notes (2,356) (127) -------- -------- 712,116 719,899 Less current portion (16,824) (18,290) -------- -------- Long-term debt $695,292 $701,609 ======== ======== On June 10, 1997, the Company executed an unsecured five year $465 million U.S. credit agreement and a five year C$50 million Canadian credit agreement (the "1997 Credit Agreement") with a syndicate of banks, enabling it to borrow funds on a revolving basis sufficient to refinance short-term borrowings. This 1997 Credit Agreement replaced a previous five year $400 million U.S. revolving credit agreement and a C$100 million revolving credit agreement dated December 12, 1995. The 1997 Credit Agreement resulted in the Company obtaining lower cost of borrowing, reduced facility fees, and extended the maturity to June 2002. The Company pays a facility fee ranging from 3/16% to 1/2% per annum on the total commitment of the U.S. and Canadian revolving credit facilities. Borrowings under the U.S. revolving credit agreement were $90 million and $95 million at February 28, 1998 and February 22, 1997, respectively. The Canadian subsidiary had no outstanding borrowings at February 28, 1998 and $59 million at February 22, 1997. As of February 28, 1998, the Company had available $375 million under its U.S. agreement and C$50 million (U.S. $35 million at February 28, 1998) under the Canadian credit agreement. As of February 22, 1997, the Company had available $305 million under its U.S. agreement and C$19 million (U.S. $14 million at February 22, 1997) under the Canadian credit agreement. In addition, the U.S. has uncommitted lines of credit with various banks amounting to $149 million and $145 million as of February 28, 1998 and February 22, 1997, respectively. PAGE 26 Borrowings under these uncommitted lines of credit amounted to $38 million and $52 million as of February 28, 1998 and February 22, 1997, respectively. As of February 28, 1998, the Company had outstanding a total of $575 million of unsecured, non-callable public debt securities in the form of $75 million 7.78% Notes due November 1, 2000, $200 million 7.70% Notes due January 15, 2004 and $300 million 7.75% Notes due April 15, 2007. As of February 28, 1998, the Company had $410 million available under the 1997 Credit Agreement and $111 million in uncommitted lines of credit. On April 15, 1997, the Company issued $300 million 7.75% 10 year Notes due April 15, 2007. The Company used the net proceeds to reduce bank borrowings under the U.S. and Canadian revolving credit facilities, prepay other indebtedness and for general corporate purposes. The Company borrowed funds available under the U.S. credit facility to repay at maturity indebtedness owing in respect of the Company's 9 1/8% Notes due January 15, 1998. On October 17, 1995, the Company's Canadian subsidiary, The Great Atlantic & Pacific Company of Canada, Ltd. ("A&P Canada"), issued U.S. $75 million of unsecured, non-callable 7.78% Notes due November 1, 2000 guaranteed by the Company. The net proceeds from the issuance of these Notes were used to repay indebtedness under the Canadian subsidiary's revolving credit facility. In conjunction with the issuance of the U.S. $75 million Notes, A&P Canada entered into a five year cross-currency swap agreement expiring November 1, 2000. The cross-currency swap was executed for protection against the effect of a decrease in Canadian exchange rates on both the semi-annual interest payments and the final principal payment due to the Company's U.S. bondholders. The cross-currency swap enables the Company to pay in Canadian dollars a fixed rate of interest of 9.23% on a notional amount of C$100 million for the $75 million 7.78% Notes denominated in U.S. dollars. The cost of the cross-currency swap of 1.45% is charged to interest expense. The Company records an asset or liability to the extent that an eventual transaction gain or loss is expected to be recorded upon the settlement of the notional amount of the underlying debt. Accordingly, the Company has recorded in other assets the receivable due from the counterparty amounting to approximately $4.5 million and $1.4 million as of February 28, 1998 and February 22, 1997, respectively. The fair value of the cross-currency swap was favorable to the Company by $1 million as of February 28, 1998 and unfavorable to the Company by $5.4 million as of February 22, 1997. The Company is exposed to credit losses in the event of nonperformance by the counterparty to its currency swap. However, the Company anticipates that the counterparty will be able to fully satisfy its obligations under the contracts. On April 15, 1997, A&P Canada entered into an interest rate swap agreement with a notional amount of C$100 million where the Company receives a fixed rate of interest and pays a variable rate of interest. The fair value of the interest rate swap was favorable to the Company by $1.4 million as of February 28, 1998. The Company's loan agreements and certain of its notes contain various financial covenants which require, among other things, minimum net worth and maximum levels of indebtedness and lease commitments. The Company was in compliance with all such financial covenants as of February 28, 1998 and believes that it will continue to be in compliance. The net book value of real estate pledged as collateral for all mortgage loans amounted to approximately $14 million and $48 million as of February 28, 1998 and February 22, 1997, respectively. In the second quarter of fiscal 1997, the Company recorded an extraordinary charge of $0.5 million, net of a tax benefit of $0.4 million relating to the early extinguishment of debt which amounted to $0.01 per share - basic and diluted. The Company retired at a premium approximately $20 million in mortgages with a weighted average interest rate of 9.4%. The U.S. bank borrowings of $118 million as of February 28, 1998 are classified as non-current as the Company has the ability and intent to refinance these borrowings on a long-term basis. Maturities for the next five fiscal years and thereafter are: 1998-$17 million; 1999-$14 million; 2000-$106 million; 2001-$40 million; 2002-$37 million; 2003 and thereafter - $498 million. Interest payments on indebtedness were approximately $58 million for fiscal 1997, $49 million for fiscal 1996 and $54 million for fiscal 1995. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows: (Dollars in thousands) February 28, 1998 February 22, 1997 - --------------------- ----------------- ----------------- Carrying Fair Carrying Fair Liabilities: Amount Value Amount Value -------- -------- -------- -------- 7.75% Notes, due April 15, 2007 $297,644 $299,531 $ - $ - -------- -------- -------- -------- 9 1/8% Notes, due January 15, 1998 $ - $ - $199,873 $204,296 -------- -------- -------- -------- 7.70% Senior Notes, due January 15, 2004 $200,000 $205,376 $200,000 $203,390 -------- -------- -------- -------- 7.78% Notes, due November 1, 2000 $ 75,000 $ 75,832 $ 75,000 $ 76,912 -------- -------- -------- -------- Total Indebtedness $712,116 $720,211 $719,899 $729,624 ======== ======== ======== ======== Fair value for the public debt securities is based on quoted market prices. With respect to all other indebtedness, Management has evaluated such debt instruments and has determined, based on interest rates and terms, that the fair value of such indebtedness approximates carrying value at February 28, 1998 and February 22, 1997. As of February 28, 1998 and February 22, 1997, the carrying PAGE 27 values of cash and short-term investments, accounts receivable and accounts payable approximated fair values due to the short-term maturities of these instruments. On April 15, 1997, the Company's Canadian subsidiary entered into an interest rate swap agreement with a notional amount of C$100 million where the Company receives a fixed rate of interest and pays a variable rate of interest. At February 28, 1998 and February 22, 1997, the estimated fair values of the cross-currency swap and interest rate swap agreements were as follows: (Dollars in thousands) February 28, 1998 February 22, 1997 - --------------------- ----------------- ----------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- Cross-currency swap $4,504 $1,077 $1,432 $(5,387) Interest rate swap - 1,350 - - ------ ------- ------- -------- Total cross-currency/ interest rate swap $4,504 $2,427 $1,432 $(5,387) ======= ======= ======= ======== The fair values were determined by the counterparty which is a widely recognized investment banker. As of the end of fiscal 1997, the Company holds equity securities of both common and cumulative preferred stock in Isosceles PLC which were written- off in their entirety during fiscal 1992. There are no quoted market prices for these securities and it is not practicable, considering the materiality of these securities to the Company, to obtain an estimate of their fair value. The Company believes that the fair value for these securities is zero based upon Isosceles' current and prior years' results. LEASE OBLIGATIONS The Company operates primarily in leased facilities. Lease terms generally range up to twenty-five years for store leases and thirty years for other leased facilities, with options to renew for additional periods. The majority of the leases contain escalation clauses relating to real estate tax increases and certain store leases provide for increases in rentals when sales exceed specified levels. In addition, the Company also leases some store equipment and trucks. The consolidated balance sheets include the following: February 28, February 22, (Dollars in thousands) 1998 1997 - --------------------- ------------ ------------ Real property leased under capital leases $ 213,076 $223,507 Accumulated amortization (123,018) (120,033) --------- -------- $ 90,058 $103,474 ========= ======== The Company did not enter into any new capital leases during fiscal 1997 and 1995. During fiscal 1996, the Company entered into new capital leases totaling $22 million. These capital lease amounts are non-cash transactions and, accordingly, have been excluded from the consolidated statement of cash flows. Interest paid as part of capital lease obligations was approximately $16, $17 and $18 million in fiscal 1997, 1996 and 1995, respectively. Rent expense for operating leases consists of: (Dollars in thousands) Fiscal 1997 Fiscal 1996 Fiscal 1995 - --------------------- ----------- ----------- ----------- Minimum rentals $181,061 $162,752 $154,439 Contingent rentals 5,109 5,383 5,890 -------- -------- -------- $186,170 $168,135 $160,329 ======== ======== ======== Future minimum annual lease payments for capital leases and noncancelable operating leases in effect at February 28, 1998 are shown in the table below. All amounts are exclusive of lease obligations and sublease rentals applicable to facilities for which reserves have previously been established. In addition, the Company subleases 52 stores to the Food Basics franchise business. Included in the operating lease table below are the rental payments made by the Company offset by the rental income received from the Food Basics franchised stores. (Dollars in thousands) Capital - --------------------- Leases Real Operating Fiscal Property Leases - ------ -------- --------- 1998 $27,146 $192,841 1999 25,355 185,661 2000 24,271 178,189 2001 23,135 169,274 2002 21,113 156,747 2003 and thereafter 127,328 1,406,972 --------- ---------- 248,348 $2,289,684 Less executory costs (1,818) --------- Net minimum rentals 246,530 Less interest portion (113,257) --------- Present value of net minimum rentals $ 133,273 ========= INCOME TAXES The components of income before income taxes and extraordinary item are as follows: (Dollars in thousands) Fiscal 1997 Fiscal 1996 Fiscal 1995 - ---------------------- ----------- ----------- ----------- United States $45,644 $ 68,478 $73,364 Canadian 37,256 32,113 7,728 -------- -------- --------- Total $82,900 $100,591 $81,092 ======== ======== ========= The provision for income taxes before extraordinary item consists of the following: (Dollars in thousands) Fiscal 1997 Fiscal 1996 Fiscal 1995 - --------------------- ----------- ----------- ----------- Current: Federal $4,171 $24,228 $15,129 Canadian 700 700 (5,622) State and local 3,018 3,698 4,865 ------- -------- -------- 7,889 28,626 14,372 ------- -------- -------- Deferred: Federal 11,076 (926) 9,387 Canadian 16,624 14,329 3,448 State and local 349 (141) 109 Canadian valuation allowance (16,624) (14,329) (3,448) ------- -------- -------- 11,425 (1,067) 9,496 ------- -------- -------- $19,314 $27,559 $23,868 ======= ======== ======== The deferred income tax provision (benefit) results primarily from the annual change in temporary differences between amounts of PAGE 28 assets and liabilities for financial reporting purposes and such amounts as measured by tax laws, Canadian net operating tax loss carryforwards and the Canadian valuation allowance. During fiscal 1994, Management assessed the likelihood of realizing the Canadian net deferred income tax assets and, based on all available evidence, concluded that it was not likely that such assets would be realized. Accordingly, the Company recorded a valuation allowance of $119.6 million against Canadian deferred tax assets. These deferred tax assets resulted from tax loss carryforwards and deductible temporary differences arising from the Canadian write-off of goodwill and long-lived assets during fiscal 1994. During fiscal 1997, since the Canadian operations generated pretax earnings, the Company reversed approximately $17 million of the valuation allowance, which was an increase of $3 million from the fiscal 1996 reversal of $14 million. Although Canada generated pretax earnings in fiscal 1997 of $37 million and $32 million in fiscal 1996, the Company was unable to conclude that the Canadian deferred tax assets were more likely than not to be realized. This conclusion was based in part on Management's assessment of the competitive Canadian marketplace and the level of the Canadian earnings. Accordingly, at February 28, 1998 the Company is continuing to fully reserve its Canadian net deferred tax asset. The valuation allowance will be adjusted when and if, in the opinion of Management, significant positive evidence exists which indicates that it is more likely than not that the Company will be able to realize the Canadian net deferred tax asset. The positive evidence that Management believes is necessary in order to reverse some or all of the Canadian deferred tax asset valuation allowance is a trend in earnings to a level which would allow Management to conclude that it is more likely than not that a portion or all of the deferred tax assets would be realized. The Canadian pretax income for financial statement purposes are higher than the taxable income for tax purposes due to certain differences between the financial statement and income tax treatment of certain items. This is of further significance since the largest portion of the Canadian deferred tax asset relates to net operating loss carryforwards which to expire between fiscal 1999 and fiscal 2002. During fiscal 1994, the Company made an election to permanently reinvest prior years' earnings of the Canadian subsidiary. Accordingly, the Company does not provide for taxes associated with Canada's undistributed earnings. The Company's Canadian net operating tax loss carryforwards of approximately $135 million will expire between February 2000 and February 2003. A reconciliation of income taxes at the 35% federal statutory income tax rate for fiscal 1997, 1996 and 1995 to income taxes as reported is as follows: (Dollars in thousands) Fiscal 1997 Fiscal 1996Fiscal 1995 - --------------------- ----------- ---------------------- Income taxes computed at federal statutory income tax rate $ 29,015 $35,207 $28,382 State and local income taxes, net of federal tax benefit 2,188 2,312 3,233 Tax rate differential relating to Canadian operations 4,155 3,789 (4,879) Canadian valuation allowance (16,624) (14,329) (3,448) Goodwill 580 580 580 -------- -------- ------- Income taxes, as reported $ 19,314 $27,559 $23,868 ======== ======== ======= The fiscal 1995 tax rate differential relating to Canadian operations in the above table includes a $6.5 million benefit related to a refund of previously paid Canadian taxes. Income tax payments, net of refunds, for fiscal 1996 and 1995 were approximately $13 and $19 million, respectively. For fiscal 1997 the Company had net income tax refunds of $1 million. The components of net deferred tax assets (liabilities) are as follows: February 28, February 22, (Dollars in thousands) 1998 1997 - --------------------- ------------ ------------ Current assets: Insurance reserves $22,420 $ 24,186 Other reserves 5,031 6,552 Accrued postretirement and postemployment benefits 3,038 3,038 Lease obligations 1,619 1,817 Pension obligations 3,827 2,390 Miscellaneous 2,870 3,013 -------- -------- 38,805 40,996 -------- -------- Current liabilities: Inventories (14,819) (14,819) Health and welfare (9,960) (9,534) Miscellaneous (7,083) (5,997) -------- -------- (31,862) (30,350) -------- -------- Valuation allowance (3,005) (3,337) -------- -------- Deferred income taxes included in prepaid expenses and other assets $ 3,938 $ 7,309 ======== ======== Non-current assets: Isosceles investment $ 42,617 $ 42,617 Fixed assets 4,077 4,061 Other reserves 6,177 5,420 Lease obligations 17,354 19,166 Canadian loss carryforwards 60,270 80,494 Insurance reserves 4,200 6,720 Accrued postretirement and postemployment benefits 29,808 28,110 Pension obligations 6,800 6,300 Step rents 11,352 9,625 Miscellaneous 7,759 8,677 --------- --------- 190,414 211,190 --------- --------- Non-current liabilities: Fixed assets (212,044) (205,153) Pension obligations (22,981) (21,050) Miscellaneous (2,404) (1,936) --------- --------- (237,429) (228,139) --------- --------- Valuation allowance (73,603) (96,239) --------- --------- Deferred income taxes $(120,618) $(113,188) ========= ========= PAGE 29 RETIREMENT PLANS AND BENEFITS Defined Benefit Plans The Company provides retirement benefits to certain non-union and some union employees under various defined benefit plans. The Company's defined benefit pension plans are non-contributory and benefits under these plans are generally determined based upon years of service and, for salaried employees, compensation. The Company funds these plans in amounts consistent with the statutory funding requirements. The components of net pension cost are as follows: (Dollars in thousands) Fiscal 1997 Fiscal 1996 Fiscal 1995 - --------------------- ----------- ----------- ----------- Service cost $11,942 $ 10,826 $ 9,340 Interest cost 26,192 24,798 23,976 Actual return on plan assets (45,893) (34,921) (42,724) Net amortization and deferral 14,908 5,254 16,362 -------- -------- -------- Net pension cost $ 7,149 $ 5,957 $ 6,954 ======== ======== ======== The Company's defined benefit pension plans are accounted for on a calendar year basis. The majority of plan assets is invested in listed stocks and bonds. The funded status of the plans is as follows: 1997 1996 ---------------------- ---------------------- Assets Accumulated Assets Accumulated Exceed Benefits Exceed Benefits Accumulated Exceed Accumulated Exceed (Dollars in thousands) Benefits Assets Benefits Assets - --------------------- ----------- ---------- ----------- ---------- Accumulated benefit obligation: Vested $286,909 $100,618 $300,111 $ 38,726 Nonvested 3,568 2,001 3,766 1,907 -------- -------- -------- -------- $290,477 $102,619 $303,877 $ 40,633 ======== ======== ======== ======== Projected benefit obligation $296,333 $107,637 $312,762 $ 42,969 Plan assets at fair value 362,538 81,870 378,903 22,600 -------- -------- -------- -------- Excess (deficiency) of assets over projected benefit obligation 66,205 (25,767) 66,141 (20,369) Unrecognized net transition (asset) obligation (5,880) 398 (7,446) 483 Unrecognized net (gain) loss from experience differences (17,809) 7,119 (15,059) (1,109) Unrecognized prior service cost 2,311 4,130 3,082 3,964 Additional minimum liability - (8,985) - (2,824) -------- -------- -------- -------- Prepaid pension asset (pension liability) $44,827 $ (23,105) $ 46,718 $(19,855) ======== ======== ======== ======== The prepaid pension asset is included in other assets while the pension liability is included in accrued salaries, wages and benefits and other non- current liabilities. At February 28, 1998, the Company's additional minimum pension liability for its defined benefit plans was in excess of the unrecognized prior service costs and net transition obligation and accordingly, $6.2 million was reflected as a reduction to shareholders' equity. The amount was not tax effected as it related to the Canadian subsidiary which has its deferred tax assets fully reserved by a valuation allowance. During the year ended February 25, 1995, the Company's Canadian subsidiary and the United Food & Commercial Workers International Union, Locals 175 and 633, entered into an agreement which will result in the amalgamation of three of the Company's Canadian defined benefit pension plans with the Canadian Commercial Workers Industry Pension Plan ("CCWIPP"), retroactive to July 1, 1994, subject to the approval of the CCWIPP trustees and the appropriate regulatory bodies. Under the terms of this agreement, CCWIPP will assume the assets and defined benefit liabilities of the three pension plans and the Company will be required to make defined contributions to CCWIPP based upon hours worked by employees who are members of CCWIPP. The Company expects that the necessary approvals will be received by January 1999. The transfer to CCWIPP has been delayed for the past three years as the regulatory bodies have taken longer to review the transfer than originally anticipated. The Company will not change the reporting for these three plans until such approval is received. Accordingly, at February 28, 1998 and February 22, 1997, prepaid pension assets of approximately $11 million and $15 million, respectively, related to the aforementioned plans are included in the above table. Actuarial assumptions used to determine year-end plan status are as follows: 1997 1996 ---------------- --------------- U.S. Canada U.S. Canada ----- ------ ----- ------ Discount rate 7.00% 6.75% 7.50% 7.75% Weighted average rate of compensation increase 4.00% 4.00% 4.50% 4.00% Expected long-term rate of return on plan assets 8.00% 8.40% 8.50% 8.80% The impact of the changes in the actuarial assumptions has been reflected in the funded status of the pension plans and the Company believes that such changes will not have a material effect on net pension cost for fiscal 1998. Defined Contribution Plans The Company maintains a defined contribution retirement plan to which the Company contributes an amount equal to 4% of eligible participants' salaries and a savings plan to which eligible participants may contribute a percentage of eligible salary. The Company contributes to the savings plan based on specified percentages of the participants' eligible contributions. Participants become fully vested in the Company's contributions after 5 years of service. The Company's contributions charged to operations for both plans were approximately $11 million in each of the three fiscal years in the period ended February 28, 1998. The Company participates in various multi-employer union pension plans which are administered jointly by management and union representatives and which sponsor most full-time and certain part-time union employees who are not covered by the Company's other pension plans. The pension expense for these plans approximated $38 million in each of the three fiscal years in the period ended February 28, 1998. The Company could, under certain PAGE 30 circumstances, be liable for unfunded vested benefits or other expenses of jointly administered union/management plans. At this time, the Company has not established any liabilities because such withdrawal from these plans is not probable. Postretirement Benefits The Company provides postretirement health care and life benefits to certain union and non-union employees. The Company recognizes the cost of providing postretirement benefits during employees' active service period. The components of net postretirement benefits cost are as follows: (Dollars in thousands) Fiscal 1997 Fiscal 1996 Fiscal 1995 - ---------------------- ----------- ----------- ----------- Service cost $ 788 $ 794 $ 600 Interest cost 2,518 2,394 2,900 Net amortization and deferra l (1,056) (1,100) (800) ------- ------ ------ Net postretirement benefits cost $ 2,250 $2,088 $2,700 ======= ====== ====== The unfunded status of the plans is as follows: (Dollars in thousands) Fiscal 1997 Fiscal 1996 - --------------------- ----------- ----------- Unfunded accumulated benefit obligation: Retirees $19,102 $17,680 Fully eligible active plan participants 10,760 4,026 Other active plan participants 19,118 13,225 ------- ------- 48,980 34,931 Unrecognized net gain from experience differences 1,976 16,407 ------- ------- Accrued postretirement costs $50,956 $51,338 ======= ======= Assumed discount rate 7.0% 7.5% ======= ====== The assumed rate of future increase in health care benefit cost was 9.50% in fiscal 1997 and is expected to decline to 5.0% by the year 2020 and remain at that level thereafter. The effect of a one-percentage-point increase in the assumed health care cost trend rate for each future year on the net postretirement health care cost and the accumulated postretirement benefit obligation would be approximately $0.6 million and $5.0 million, respectively. Postemployment Benefits The Company accrues costs for preretirement postemployment benefits provided to former or inactive employees and recognizes an obligation for these benefits. The costs of these benefits have been included in operations for each of the three fiscal years in the period ended February 28, 1998. As of February 28, 1998 and February 22, 1997, the Company has a liability reflected in the balance sheet of $25 million with respect to such benefits. STOCK OPTIONS Effective February 25, 1996, the Company adopted SFAS 123 which establishes financial accounting and reporting standards for stock-based employee compensation plans. SFAS 123 encourages all entities to adopt a fair value based method of accounting for stock-based compensation plans in which compensation cost is measured at the date the award is granted based on the fair value of the award and is recognized over the employees' service period. However, SFAS 123 allows an entity to continue to use the intrinsic value- based method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), with pro forma disclosures of net income and earnings per share as if the fair value based method had been applied. APB 25 requires compensation expense to be recognized over the employees' service period based on the excess, if any, of the quoted market price of the stock at the date the award is granted or other measurement date, as applicable, over an amount an employee must pay to acquire the stock. At February 28, 1998, the Company has three fixed stock-based compensation plans. The Company applies the principles of APB 25 for stock options and FASB Interpretation No. 28 for stock appreciation rights ("SAR's"). Most of the options vest over a four year period on the anniversary date of issuance, while some options vest immediately. The 1994 Stock Option Plan for officers and key employees provides for the granting of 1,500,000 shares as either options or SAR's. Options and SAR's issued under this plan are granted at the fair market value of the Company's common stock at the date of grant. The 1984 Stock Option Plan for officers and key employees, which expired on February 1, 1994, provided for the granting of 1,500,000 shares and was amended as of July 10, 1990 to increase by 1,500,000 the number of options available for grant as either options or SAR's. Each option was available for grant at the fair market value of the Company's common stock on the date the option was granted. SAR's allow the holder, in lieu of purchasing stock, to receive cash in an amount equal to the excess of the fair market value of common stock on the date of exercise over the option price. A total of 327,500 options and 10,000 SAR's was granted in fiscal 1997 under the 1994 plan. The 1994 Stock Option Plan for Board of Directors provides for the granting of 100,000 stock options at the fair market value of the Company's common stock at the date of grant. Options granted under this plan in fiscal 1997, 1996 and 1995 totaled 1,600, 5,200 and 1,800, respectively. The fair value of the fiscal 1997, 1996 and 1995 option grants was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: fiscal 1997, 1996 and 1995; expected volatility of 30% and expected life of 7 years for all three years and dividend yield between 1.26% and 1.63% in fiscal 1997 and 0.72% and 0.91% in both fiscal 1996 and 1995. The risk-free interest rates used for the grants are between 6.11% and 6.84% in fiscal 1997 and 5.57% and 6.94% in both fiscal 1996 and 1995. The Company recognized compensation expense of $1.4 million in fiscal 1997, $5.8 million in fiscal 1996 and $0.3 million in fiscal 1995 with respect to SAR's. There was no compensation expense recognized for the other fixed plans since the exercise price of the stock options equaled the fair market value the Company's common stock on the date of grant. Had compensation cost for the Company's stock options been determined based on the fair value at the grant dates for awards under those plans consistent with the fair value methods prescribed by SFAS 123, the Company's net income and PAGE 31 earnings per share would have been reduced to the pro forma amounts indicated below: (Dollars in thousands, except per share amounts) - ------------------------------------------------ Fiscal Fiscal Fiscal 1997 1996 1995 ------ ------ ------ Net Income: As reported $63,042 $73,032 $57,224 Pro forma $61,584 $71,920 $56,624 Earnings Per Share - basic and diluted: As reported $1.65 $1.91 $1.50 Pro forma $1.61 $1.88 $1.48 The pro forma effect on net income and earnings per share may not be representative of the pro forma effect in future years because it includes compensation cost on a straight-line basis over the vesting periods of the grants and does not take into consideration the pro forma compensation costs for grants made prior to fiscal 1995. A summary of option transactions is as follows: Officers, Key Employees and Directors - --------------------------------------- Weighted Average Exercise Shares Price ------ -------- Outstanding February 25, 1995 84,800 $24.82 Granted 670,800 27.71 Cancelled or expired (10,000) 27.88 ------- ------ Outstanding February 24, 1996 745,600 $27.38 Granted 70,200 27.72 Cancelled or expired (63,350) 26.13 Exercised (27,383) 23.85 ------- ------ Outstanding February 22, 1997 725,067 $27.66 Granted 329,100 28.06 Cancelled or expired (98,967) 27.76 Exercised (5,250) 27.88 -------- ------- Outstanding February 28, 1998 949,950 27.78 ======== ======= Exercisable at: February 22, 1997 182,400 $27.58 February 28, 1998 312,367 $27.60 -------- ------- Weighted average fair value of options granted during the year ended: February 24, 1996 $11.45 February 22, 1997 $11.94 February 28, 1998 $10.96 ======= A summary of stock options outstanding and exercisable at February 28, 1998 is as follows: Options Outstanding Options Exercisable ---------------------------------- ----------------------- Weighted Number Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise at Contractual Exercise at Exercise Prices Feb. 28, 1998 Life Price Feb. 28, 1998 Price - --------------- ------------- ----------- -------- ------------- -------- $21.500-$26.125 101,200 8.7 years $24.61 13,700 $23.30 $26.500-$27.500 128,600 8.5 years $27.28 28,250 $27.08 $27.625-$27.750 121,200 8.4 years $27.73 15,934 $27.63 $27.875 508,750 7.3 years $27.88 252,750 $27.88 $30.375-$31.688 90,200 9.5 years $31.62 1,733 $30.46 -------- ------- 949,950 312,367 ======== ======= A summary of SAR transactions is as follows: Officers and Key Employees - -------------------------- Price Range Shares Per Share --------- --------------- Outstanding February 25, 1995 2,385,125 $21.50 - $65.13 Granted 10,000 21.88 Cancelled or expired (166,750) 23.38 - 46.38 Exercised (75,625) 21.50 - 24.75 --------- --------------- Outstanding February 24, 1996 2,152,750 $21.50 - $65.13 Granted 86,500 27.25 - 31.63 Cancelled or expired (20,000) 27.38 - 56.13 Exercised (247,237) 21.50 - 34.75 --------- --------------- Outstanding February 22, 1997 1,972,013 $21.88 - $65.13 Granted 10,000 26.63 Cancelled or expired (136,750) 23.38 - 52.38 Exercised (187,275) 23.00 - 27.25 --------- --------------- Outstanding February 28, 1998 1,657,988 $21.88 - $65.13 ========= =============== Exercisable at: February 22, 1997 1,647,388 $23.00 - $65.13 February 28, 1998 1,596,863 $21.88 - $65.13 ========= =============== LITIGATION The Company is involved in various claims, administrative agency proceedings and lawsuits arising out of the normal conduct of its business. Although the ultimate outcome of these legal proceedings cannot be predicted with certainty, the management of the Company believes that the resulting liability, if any, will not have a material effect upon the Company's consolidated financial statements or liquidity. OPERATIONS IN GEOGRAPHIC AREAS The Company has been engaged in the retail food business since 1859 and currently does business principally under the names A&P, Waldbaum's, Food Emporium, Super Fresh, Farmer Jack, Kohl's, Sav-A-Center, Dominion and Food Basics. Sales in the table below reflect sales to unaffiliated customers in the United States and Canada as well as wholesale sales to franchised stores. (Dollars in thousands) Fiscal 1997 Fiscal 1996 Fiscal 1995 - --------------------- ----------- ----------- ----------- Sales: United States $ 8,344,253 $ 8,281,925 $ 8,365,327 Foreign 1,917,990 1,807,089 1,736,029 ----------- ----------- ----------- Total $10,262,243 $10,089,014 $10,101,356 =========== =========== =========== Income From Operations: United States $ 109,501 $ 122,159 $ 125,118 Foreign 45,758 47,144 26,616 ----------- ----------- ----------- Total $ 155,259 $ 169,303 $ 151,734 =========== =========== =========== Assets: United States $2,521,008 $2,549,500 $2,438,353 Foreign 474,245 453,172 422,494 ---------- ----------- ----------- Total $2,995,253 $3,002,672 $2,860,847 ========== =========== =========== PAGE 32 SUMMARY OF QUARTERLY RESULTS (unaudited) The table below summarizes the Company's results of operations by quarter for fiscal 1997 and 1996. The first quarter of each fiscal year contains sixteen weeks while the other quarters each contain twelve weeks, except the fourth quarter of fiscal 1997 which contains thirteen weeks resulting from a 53 week year. (Dollars in thousands, First Second Third Fourth Total except per share data) Quarter Quarter Quarter Quarter Year - ---------------------- ------- ------- ------- ------- ------- 1997 Sales $3,104,591 $2,335,695 $2,318,821 $2,503,136 $10,262,243 Gross margin 884,216 673,467 663,727 713,468 2,934,878 Depreciation and amortization 71,439 53,963 53,763 55,071 234,236 Income from operations 53,006 38,640 30,753 32,860 155,259 Interest expense 24,418 18,928 18,670 18,136 80,152 Income before extraordinary item 22,787 16,207 11,234 13,358 63,586 Extraordinary loss on early extinguishment of debt - (544) - - (544) Net income 22,787 15,663 11,234 13,358 63,042 Per share data: Income (loss) per share before extraordinary item - basic and diluted .60 .42 .29 .35 1.66 Extraordinary loss on early extinguishment of debt - basic and diluted - (.01) - - (.01) Net income - basic and diluted .60 .41 .29 .35 1.65 Cash dividends .10 .10 .10 .10 .40 Market price: High 31.375 27.875 36.000 32.750 Low 23.125 24.125 25.313 26.750 Number of stores at end of period 964 943 941 936 Number of franchised stores served at end of period 48 48 52 52 - ---------------------------------------------------------------------------- 1996 Sales $3,092,554 $2,329,987 $2,318,762 $2,347,711 $10,089,014 Gross margin 896,780 662,355 668,664 693,900 2,921,699 Depreciation and amortization 69,558 53,240 53,939 54,011 230,748 Income from operations 52,743 34,553 34,398 47,609 169,303 Interest expense 21,550 16,387 17,028 18,243 73,208 Net income 21,879 13,994 14,091 23,068 73,032 Per share data: Net income - basic and diluted .57 .37 .37 .60 1.91 Cash dividends .05 .05 .05 .05 .20 Market price: High 36.750 34.625 34.000 34.375 Low 22.125 25.875 25.125 29.875 Number of stores at end of period 993 977 974 973 Number of franchised stores served at end of period 24 36 47 49 - ---------------------------------------------------------------------------- PAGE 33 MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS The management of The Great Atlantic & Pacific Tea Company, Inc. has prepared the consolidated financial statements and related financial data contained in this Annual Report. The financial statements were prepared in accordance with generally accepted accounting principles appropriate to our business and, by necessity and circumstance, include some amounts which were determined using management's best judgments and estimates with appropriate consideration to materiality. Management is responsible for the integrity and objectivity of the financial statements and other financial data included in this report. To meet this responsibility, management maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that accounting records are reliable. Management supports a program of internal audits and internal accounting control reviews to provide reasonable assurance that the system is operating effectively. The Board of Directors pursues its responsibility for reported financial information through its Audit Review Committee. The Audit Review Committee meets periodically and, when appropriate, separately with management, internal auditors and the independent auditors, Deloitte & Touche LLP, to review each of their respective activities. /s/Christian W.E. Haub President and Chief Executive Officer /s/Fred Corrado Vice Chairman of the Board and Chief Financial Officer INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of The Great Atlantic & Pacific Tea Company, Inc.: We have audited the accompanying consolidated balance sheets of The Great Atlantic & Pacific Tea Company, Inc. and its subsidiary companies as of February 28, 1998 and February 22, 1997 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three fiscal years in the period ended February 28, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Great Atlantic & Pacific Tea Company, Inc. and its subsidiary companies at February 28, 1998 and February 22, 1997 and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 28, 1998 in conformity with generally accepted accounting principles. /s/Deloitte & Touche LLP Parsippany, New Jersey April 30, 1998 PAGE 34 FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA The Great Atlantic & Pacific Tea Company, Inc. (Dollars in thousands, except per share data) - ------------------------ Fiscal 1997 Fiscal 1996 Fiscal 1995 Fiscal 1994Fiscal 1993 (53 weeks) (52 weeks) (52 weeks) (52 weeks) (52 weeks) ----------- ----------- ----------- ---------------------- Operating Results Sales $10,262,243 $10,089,014 $10,101,356 $10,331,950 $10,384,077 Income (loss) from operations 155,259 169,303 151,734 (57,530) 68,280 Depreciation and amortization 234,236 230,748 225,449 235,444 235,910 Interest expense 80,152 73,208 73,143 72,972 63,318 Income (loss) before cumulative effect of accounting change and extraordinary item 63,586 73,032 57,224 (166,586) 3,959 Extraordinary loss on early extinguishment of debt (544) - - - - Cumulative effect on prior years of change in accounting principle: Postemployment benefits - - (4,950) - Net income (loss) 63,042 73,032 57,224 (171,536) 3,959 - ------------------------------------------------------------------------------ Per Share Data Income (loss) before cumulative effect of accounting change and extraordinary item - basic and diluted 1.66 1.91 1.50 (4.36) .10 Extraordinary loss on early extinguishment of debt - basic and diluted (0.01) - - - - Cumulative effect on prior years of change in accounting principle: Postemployment benefits - basic and diluted - - - (.13) - Net income (loss) - basic and diluted 1.65 1.91 1.50 (4.49) .10 Cash dividends .40 .20 .20 .65 .80 Book value per share 24.22 23.27 21.53 20.27 26.02 - ------------------------------------------------------------------------------ Financial Position Current assets 1,217,227 1,231,379 1,174,935 1,193,731 1,230,339 Current liabilities 955,130 1,016,005 983,968 1,096,454 1,151,132 Working capital 262,097 215,374 190,967 97,277 79,207 Current ratio 1.27 1.21 1.19 1.09 1.07 Expenditures for property 267,623 296,878 236,139 214,886 267,329 Total assets 2,995,253 3,002,672 2,860,847 2,894,788 3,098,695 Current portion of long-term debt 16,824 18,290 13,040 112,821 77,755 Current portion of capital lease obligations 12,293 12,708 13,125 14,492 16,097 Long-term debt 695,292 701,609 650,169 612,473 544,399 Long-term portion of capital lease obligations 120,980 137,886 129,887 146,400 162,866 Total debt 845,389 870,493 806,221 886,186 801,117 Debt to total capitalization .48 .49 .49 .53 .45 - ----------------------------------------------------------------------------- Equity Shareholders' equity 926,632 890,072 822,785 774,914 994,417 Weighted average shares outstanding 38,249,832 38,221,329 38,220,333 38,220,333 38,220,351 Number of registered shareholders 8,029 8,808 10,010 10,867 11,831 - ----------------------------------------------------------------------------- Other Number of employees 79,980 84,000 89,000 92,000 94,000 New store openings 40 30 30 22 16 Number of stores at year end 936 973 1,014 1,108 1,173 Total store area (square feet) 30,574,286 30,587,324 31,101,589 33,310,121 34,696,265 Number of franchised stores at year end 52 49 7 - - Total franchised store area (square feet) 1,389,435 1,345,786 177,936 - - - ----------------------------------------------------------------------------- PAGE 35 EXECUTIVE OFFICERS AND KEY OPERATING MANAGEMENT Senior Executive Officers Christian W.E. Haub President and Chief Executive Officer Fred Corrado Vice Chairman, Chief Financial Officer Michael J. Larkin Senior Executive Vice President, Chief Operating Officer Joseph McCaig Executive Assistant to the Chief Executive Officer George Graham Executive Vice President, Chief Merchandising Officer Aaron Malinsky Executive Vice President, Development and Strategic Planning Peter J. O'Gorman Executive Vice President, International Store and Product Development Merchandising/Staff Officers H. Nelson Lewis Senior Vice President, Human Resources Brian Pall Senior Vice President, Development Michael J. Rourke Senior Vice President, Communications and Corporate Affairs Robert G. Ulrich Senior Vice President and General Counsel Peter R. Brooker Vice President, Planning and Corporate Secretary Stephen T. Brown Vice President, Industrial Relations Timothy J. Courtney Vice President, Taxation R. Paul Gallant President, Compass Foods R. Terrence Galvin Vice President, Finance and Treasurer Kenneth W. Green Vice President, Produce Merchandising and Procurement Joseph J. Hoffman Vice President, Meat Merchandising and Procurement Robert A. Keenan Vice President, Chief Internal Auditor Francis X. Leonard Vice President, Real Estate Administration Mary Ellen Offer Vice President, Assistant Corporate Secretary and Senior Counsel Richard J. Scola Vice President, Real Estate Law, Assistant General Counsel and Assistant Corporate Secretary Kenneth A. Uhl Vice President, Controller William T. Wolverton Vice President, Warehousing and Transportation Supermarket Operations Canada John Dunne Chairman and Co-Chief Executive Officer Brian Piwek Vice Chairman and Co-Chief Executive Officer William McEwan President and Chief Merchandising Officer Greater Metro Area William Louttit Chairman and Chief Executive Officer, Greater Metro New York Operations Andrew Fuchs President, Metro Group David Hoalt President, New England Alfred Limbrick President, Super Fresh David Smithies President, Waldbaum, Inc. Mid-Atlantic/Southeast/Southern Glenn R. Dickson Group Vice President, Southeast Donald B. Dobson Group Vice President, Southern Herbert Whiteside Group Vice President, Mid-Atlantic Mid-West Craig C. Sturken Chairman and Chief Executive Officer, Mid-West Operations James Holt President, Kohl's Food Stores, Inc. PAGE 36 BOARD OF DIRECTORS James Wood (c) Chairman of the Board John D. Barline, Esq. (e) Williams, Kastner & Gibbs LLP, Tacoma, Washington Rosemarie Baumeister (b) Executive Vice President, Tengelmann Warenhandelsgesellschaft, Germany Fred Corrado (c)(d)(e) Vice Chairman of the Board and Chief Financial Officer Christopher F. Edley (a)(b)(c)(e) President Emeritus and former President and Chief Executive Officer of the United Negro College Fund, Inc. Christian W.E. Haub (c)(d)(e) President and Chief Executive Officer Helga Haub (c)(d) Barbara Barnes Hauptfuhrer (a)(c)(d)(e) Director of various corporations William A. Liffers (a)(c) Former Vice Chairman of American Cyanamid Company Fritz Teelen (d) Chief Operating Officer of Tengelmann Warenhandelsgesellschaft, Germany R.L. "Sam" Wetzel (a)(b)(d)(e) President and Chief Executive Officer of Wetzel International, Inc. (a) Member of Audit Review Committee, William A. Liffers, Chairman (b) Member of Compensation Policy Committee, Christopher F. Edley, Chairman (c) Member of Executive Committee, James Wood, Chairman (d) Member of Finance Committee, R.L. "Sam" Wetzel, Chairman (e) Member of Retirement Benefits Committee, Barbara Barnes Hauptfuhrer, Chairman SHAREHOLDER INFORMATION Executive Offices Box 418 2 Paragon Drive Montvale, NJ 07645 Telephone 201-573-9700 Transfer Agent and Registrar American Stock Transfer and Trust Company 40 Wall Street New York, NY 10005 Telephone 212-936-5100 Independent Auditors Deloitte & Touche LLP Two Hilton Court Parsippany, NJ 07054 Shareholder Inquiries and Publications Shareholders, security analysts, members of the media and others interested in further information about the Company are invited to contact the Treasury Department at the Executive Offices in Montvale, New Jersey. Internet users can access information on A&P at: www.aptea.com Correspondence concerning shareholder address changes should be directed to: American Stock Transfer and Trust Company 40 Wall Street New York, NY 10005 Telephone 212-936-5100 Form 10-K Copies of Form 10-K filed with the Securities and Exchange Commission will be provided to shareholders upon written request to the Secretary at the Executive Offices in Montvale, New Jersey. Annual Meeting The Annual Meeting of Shareholders will be held at 10:00 a.m. (E.D.T.) on Tuesday, July 14, 1998 at The Springfield Marriott Hotel, 1500 Main Street, Springfield, Massachusetts. Shareholders are cordially invited to attend. Common Stock Common stock of the Company is listed and traded on the New York Stock Exchange under the ticker symbol "GAP" and has unlisted trading privileges on the Boston, Midwest, Philadelphia, Cincinnati, and Pacific Stock Exchanges. The stock is reported in newspapers and periodical tables as "GtAtPc." Financial Calendar Annual Meeting of Shareholders July, 14, 1998. Estimated Date of Announcement of the Quarter's Results 1st July 7, 1998 2nd September 29, 1998 3rd December 22, 1998 4th March 16, 1999 Estimated Date of Dividend Payment 1st May 1, 1998 2nd August 10, 1998 3rd November 2, 1998 4th February 1, 1999 EX-21 3 EXHIBIT 21 SUBSIDIARIES of the REGISTRANT SUBSIDIARY NAME STATE INCORPORATED A&P Wine and Spirits, Inc. Massachusetts ANP Properties I Corp. Delaware ANP Sales Corp. Maryland APG VII, Inc. South Dakota APW Produce Company, Inc. New York APW Supermarket Corporation Delaware APW Supermarkets, Inc. New York Big Star, Inc. Georgia The Great Atlantic and Pacific Tea Company, Limited (NRO) Canada The Great Atlantic & Pacific Company of Canada, Limited d/b/a A&P and New Dominion Canada A&P Drug Mart Limited Ontario A&P Properties Limited Ontario Food Basics, Limited Ontario 3399486 Canada, Inc. Canada Borman's, Inc. d/b/a Farmer Jack Delaware Compass Foods, Inc. Delaware Family Center, Inc. d/b/a Family Mart Delaware Futurestore Food Markets, Inc. Delaware The Great Atlantic & Pacific Tea Company of Vermont, Inc. Vermont Kohl's Food Stores, Inc. Wisconsin Kwik Save Inc. Pennsylvania Limited Foods, Inc. Delaware LO-LO Discount Stores, Inc. Texas Montvale Holdings, Inc. New Jersey Richmond, Incorporated d/b/a Pantry Pride & Sun, Inc. Delaware Regina Properties, Inc. New Jersey St. Pancras Company Limited Bermuda St. Pancras Too, Limited Bermuda Shopwell, Inc. d/b/a Food Emporium Delaware Southern Acquisition Corporation Delaware Southern Development, Inc. of Delaware Delaware Super Fresh Food Markets, Inc. Delaware Super Fresh Food Markets of Maryland, Inc. Maryland Super Fresh/Sav-A-Center, Inc. Delaware Super Fresh Food Markets of Virginia, Inc. Delaware Super Market Service Corp. Pennsylvania Super Plus Food Warehouse, Inc. Delaware Supermarket Distribution Service Corp. New Jersey Supermarket Distribution Service - Florence, Inc. New Jersey Supermarket Distribution Services, Inc. Delaware Supermarket Systems, Inc. Delaware Tea Development Co., Inc. Delaware The South Dakota Great Atlantic & Pacific Tea Company, Inc. South Dakota Transco Service-Milwaukee, Inc. New Jersey Viviola Land Corp. Inc. New Jersey Waldbaum, Inc. d/b/a Waldbaum, Inc. and Food Mart New York W.S.L. Corporation New Jersey 2008 Broadway, Inc. New York EX-27 4
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. FORM 10-K FOR THE YEAR ENDED FEBRUARY 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR FEB-28-1998 FEB-28-1998 70937 0 227703 0 882229 1217227 2842276 (1245399) 2995253 955130 816272 0 0 38253 888379 2995253 10262243 10262243 (7327365) (7327365) (2779619) 0 (72359) 82900 (19314) 63586 0 (544) 0 63042 1.65 1.65
EX-10.A 5 September 22, 1997 Mr. Brian Piwek Dear Brian: Further to our discussions, I am writing to set out our formal offer of employment on the terms indicated below: Position: Vice-Chairman and Co-Chief Executive Officer Location: Toronto Offices Salary: $375,000 (Canadian) Per Annum Management Incentive Plan: Bonus eligibility under the terms of the plan with a base of $200,000. Specifically you will be admitted to the Bonus Plan and payment each year is based on the achievement of the overall operating results under the terms of the plan. The plan runs on the fiscal year from March to February and is paid in April of each year. Your bonus base is guaranteed for the first fiscal year ending February 19, 1998, at the rate shown above. Company Car: As per the lease car plan which includes maintenance and gasoline costs. Type of car open for discussion. Stock Option or SARS: The Board of Directors will award you 25,000 Stock Appreciation Rights (SARS) or stock options of The Great Atlantic & Pacific Tea Company, Inc. at the price in effect at The Board of Directors Meeting on October 2, 1997. Further options will be granted in future years upon approval of The Board of Directors. Employee Benefit Programmes: We also have a full range of employee benefit programmes which will be provided to you with immediate coverage, as follows: Extended Health Care: Provides for Prescription Drug Coverage, Semi-Private Hospital, Vision Care, Ambulance Service and many health aids such as crutches, etc. Dental Plan: Provides for basic dental care, major restorative care and orthodontic for children up to age 19. Life Insurance: Coverage of two times annual salary to a maximum of $450,000 under the plan including Accidental Death coverage. $50,000 Voluntary Life and A.D. & D. packages are also available under the terms of the Plan. Pension Plan: The A&P Corporate Pension Plan will be available to you. This plan applies to all non-union employees and is a non- contributory Defined Benefit Plan. You will be enrolled in the Corporate SERP Plan. Relocation Allowance: A&P will reimburse all reasonable expenses incurred in your move. A booklet describing our benefit plans, one describing the Management Incentive Plan and another describing the Relocation Policy will be forwarded to you. We look forward to your joining our executive team effective October 27, 1997, and trust you will find our offer acceptable. If you do, please sign, date and return a copy of this letter to us by courier at your earliest opportunity. Please confirm acceptance of this offer by signing below: /s/ J.P. Dunne - -------------------------------------- J.P. Dunne Date /s/ B. Piwek - ------------------------------------ B. Piwek Date The Great Atlantic & Pacific Tea Company, Inc. ("A&P") September 19, 1997 Mr. Joseph McCaig Dear Joe: This letter sets forth the key points of your employment with A&P. 1. Title - Executive Assistant to the Chief Executive Officer. 2. Salary - $450,000 annually. 3. Bonus - You will be entitled to participate in the Company's Corporate Management Bonus Program with a bonus base of $250,000, $50,000 of which will be guaranteed in fiscal 1997. 4. Stock Options - You will receive a grant of 50,000 SAR's or Stock Options under the A&P Stock Option Plan at the price in effect on the date of grant - to be submitted to the Board of Directors for approval at their October 2, 1997 Meeting. 5. Benefits - You will participate in the Company's Executive Medical Program and will become a member of the Company's Supplemental Executive Retirement Plan ("SERP") effective immediately upon employment. 6. Severance - In the event of involuntary termination by the Company (except in the case of termination for cause) you will be entitled to continuance of your salary as severance pay for eighteen (18) months after termination. 7. Automobile Allowance - The Company will provide you with an automobile allowance compensating for the use of a Cadillac Seville sedan. We confirm that you began your employment on September 8, 1997. Please be so kind as to indicate your agreement with the foregoing by signing in the space provided below. Very truly yours, THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. By: /s/ Fred Corrado Fred Corrado /s/ Joseph McCaig Joseph McCaig -1- The Great Atlantic & Pacific Tea Company, Inc. ("A&P") April 2, 1997 Mr. William Louttit Dear Bill: This letter sets forth the key points of your employment with A&P. 1. Title - Chairman - Greater Metro Area (Executive Vice President) equivalent in our grade structure. 2. Salary - $400,000 annually. 3. Bonus - You will be entitled to participate in the Company's Corporate Management Bonus Program with a bonus base of $150,000, A bonus of $150,000 will be guaranteed for fiscal 1997 and paid for fiscal 1997. 4. Stock Options - You will receive a grant of 50,000 under the A&P Stock Option Plan at the price in effect on the date you commence your employment with A&P - to be submitted to the Board of Directors for approval. 5. Benefits - You will participate in the Company's Executive Medical Program and will become a member of the Company's Supplemental Executive Retirement Plan ("SERP") effective immediately upon employment. 6. Severance - In the event of involuntary termination by the Company (except in the case of termination for cause) you will be entitled eighteen (18) months' salary as severance pay. 7. Car Allowance - You will receive a car allowance compensating you for the use of a Cadillac Seville. We would expect you to begin your employment as of Monday, April 7, 1997. Please be so kind as to indicate your agreement with the foregoing by signing in the space provided below. Very truly yours, THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. By: /s/ Fred Corrado Fred Corrado Vice Chairman /s/ William Louttit William Louttit -2- The Great Atlantic & Pacific Tea Company, Inc. ("A&P") May 7, 1997 Mr. Michael Larkin Dear Mike: This letter sets forth the terms of your employment with A&P. 1. Title - Senior Executive Vice President, Chief Operating Officer. 2. Salary - $425,000 annually. 3. Bonus - You will be entitled to participate in the Company's Corporate Management Bonus Program with a bonus base of $175,000. 4. Stock Options - You will receive a grant of 50,000 under the A&P Stock Option Plan at the price in effect on the date you commence your employment with A&P - to be submitted to the Board of Directors for approval. 5. Benefits - You will participate in the Company's Executive Medical Program and will become a member of the Company's Supplemental Executive Retirement Plan ("SERP") effective immediately upon employment. You will receive full credit under SERP for your past service with A&P and for the period of time since your departure from A&P through your return to work for A&P. You will be able to retire at age 62 with no reduction in benefits for retirement prior to age 65. 6. Term of Employment - The term of this Agreement shall be three (3) years commencing upon your employment date. 7. Contingency - This offer of employment is contingent upon your making all necessary arrangements to sever your contractual and other business arrangements with Wakefern Food Corp. and to sell or otherwise dispose of your interest in two ShopRite stores which you presently operate in the state of Pennsylvania. Please be so kind as to indicate your agreement with the foregoing by signing in the space provided below. Very truly yours, THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. By: /s/ Fred Corrado Fred Corrado Vice Chairman /s/ Michael Larkin Michael Larkin EX-10.B 6 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Effective September 1, 1997) TABLE OF CONTENTS Page INTRODUCTION 1 SECTION 1 DEFINITIONS 2 1.1 Agreement 2 1.2 Average Annual Compensation 2 1.3 Board of Directors 2 1.4 Chief Executive Officer 2 1.5 Committee 2 1.6 Company 2 1.7 Consecutive Service 2 1.8 Early Retirement Date 2 1.9 Employee 2 1.10 Member 2 1.11 Normal Retirement Date 2 1.12 Objective Pension 3 1.13 Pension Offset 3 1.14 Plan 4 1.15 Postponed Retirement Date 4 1.16 Retirement Date 4 1.17 Retirement Plan 4 1.18 Retirement Savings Plan 4 1.19 Savings Plan 4 1.20 Service 4 SECTION 2 MEMBERSHIP 5 2.1 Membership 5 2.2 Agreements 5 2.3 Continuation of membership 5 2.4 Discontinuation of membership 5 SECTION 3 NORMAL AND POSTPONED RETIREMENT 6 3.1 Normal and postponed retirement dates 6 3.2 Normal retirement pension 6 3.3 Postponed retirement pension 6 3.4 Normal objective pension 6 SECTION 4 EARLY RETIREMENT 7 4.1 Early retirement date 7 4.2 Early retirement pension 7 4.3 Early objective pension 7 SECTION 5 IN EVENT OF DEATH 8 5.1 Surviving spouse benefit 8 5.2 Amount of surviving spouse pension 8 Page SECTION 6 IN EVENT OF TERMINATION OF EMPLOYMENT 9 6.1 Vesting 9 6.2 Termination before age 55 9 SECTION 7 PAYMENT OF BENEFITS 10 7.1 Retirement pension 10 7.2 Surviving spouse pensions 10 SECTION 8 PROVISION OF BENEFITS 11 8.1 Source of benefits 11 SECTION 9 ADMINISTRATION OF THE PLAN 12 9.1 Plan Administrator 12 9.2 Powers and duties of the Plan Administrator 12 SECTION 10 MISCELLANEOUS 13 10.1 Rights of employees 13 10.2 Governing law 13 SECTION 11 AMENDMENT OF TERMINATION OF THE PLAN 14 11.1 Amendment 14 11.2 Termination 14 APPENDIX A 15 APPENDIX B 16 APPENDIX C 17 INTRODUCTION The Great Atlantic & Pacific Tea Company, Inc. Supplemental Executive Retirement Plan (Effective September 1, 1997) set forth herein, is an amendment and restatement of the Plan as originally established under The Great Atlantic & Pacific Tea Company, Inc. Supplemental Executive Retirement Plan (Effective January 1, 1978) and continued under The Great Atlantic & Pacific Tea Company, Inc. Supplemental Executive Retirement Plan (Effective October 1, 1984, The Great Atlantic & Pacific Tea Company, Inc. Supplemental Executive Retirement Plan (Effective February 28, 1988), and The Great Atlantic & Pacific Tea Company, Inc. Supplemental Executive Retirement Plan (Effective September 30, 1991). The Plan is intended to be an unfunded deferred compensation plan for "a select group of management or highly compensated employees" described in Section 201(2) of the Employee Retirement Income Security Act of 1974. The purpose of the Plan is to supplement other sources of retirement income in order to provide a total objective benefit for retiring executives or surviving spouses of deceased executives. The Great Atlantic & Pacific Tea Company, Inc. Supplemental Executive Retirement Plan (Effective September 30, 1991) set forth herein shall not be applicable to any Member (as defined in Section 1.10) whose employment with the Company ceased before September 30, 1991; rather, the rights and benefits of, or arising with respect to, such Members shall be governed by the terms of the Plan as in effect from time to time before September 1, 1997. -1- SECTION 1 Definitions The following words and phrases as used herein have the following meanings unless a different meaning is plainly required by the context: 1.1 "Agreement" means the agreement between the Member and the Company evidencing the participation in and benefits to which such Member may be entitled under the Plan as provided in Section 2.2 (Agreements). 1.2 "Average Annual Compensation" means the highest average which can be produced by averaging a Member's base earnings, exclusive of bonuses, paid by the Company for any five consecutive calendar years within the last ten calendar years prior to his retirement or other termination of employment. If the Member has not been employed for at least five consecutive calendar years at the time of determination, the average shall be based on his actual period of employment. 1.3 "Board of Directors" means the board of directors of The Great Atlantic & Pacific Tea Company, Inc. 1.4 "Chief Executive Officer" means the Chief Executive Officer of The Great Atlantic & Pacific Tea Company, Inc. 1.5 "Committee" means the committee appointed by the Board of Directors to administer the Plan. 1.6 "Company" means, individually, (i) The Great Atlantic & Pacific Tea Company, Inc., with respect to its employees, and (ii) any other company directly or indirectly controlled by The Great Atlantic & Pacific Tea Company, Inc. that elects to participate in the Plan with the consent of the Board of Directors, with respect to its employees. Companies participating in the Plan shall be listed in Appendix A to the Plan. 1.7 "Consecutive Service" means all unbroken service with the Company during a Member's most recent employment with the Company. 1.8 "Early Retirement Date" means the first day of any month on which a Member retires in accordance with Section 4 (Early Retirement). 1.9 "Employee" means an employee of the Company. 1.10 "Member" means any Employee or former Employee who is included in the Plan as provided in Section 2 (Membership). 1.11 "Normal Retirement Date" means the first day of the month following the Member's 65th birthday. 1.12 "Objective Pension" means the total amount of retirement income which, in accordance with the intent of this Plan, is expected to become payable to a Member or a Member's spouse under various programs of the Company and Social Security. The terms "Normal Objective Pension" and "Early Objective Pension" distinguish the Objective Pensions pertaining to the corresponding forms of retirement benefit provisions. 1.13 "Pension Offset" means the sum of: (i)the annual pension benefits payable (or that would be payable at the earliest time such benefits could be paid if proper application were made at such time) to the Member as a pension under (1) the Retirement Plan, or (2) any other defined benefit pension plan listed in Appendix B to the Plan, to the extent specified in Appendix B; (ii)one-half of the Member's annual primary Social Security benefit calculated under Title II of the Social Security Act (and, if applicable, the Member's annual benefit under the Old Age Security Act of the Government of Canada and one-half of the Member's annual benefits under the Canada Pension Plan and the Quebec Pension Plan) as in effect at the time his employment with the Company terminates or at his Normal Retirement Date whichever occurs first, based on the assumption that (1) such benefit would become payable at the earliest time such benefit could be paid if proper application were made at such time (or termination of employment if later) and (2) the wages used for such determination are only those wages received from the Company; and (iii)the sum of: (1)the benefits payable at the time of termination under the Retirement Savings Plan that are attributable to "Company retirement contributions" (as that term is used in Section 3.1 of such plan); and (2)the benefits that would have been payable at the time of termination under the Savings Plan from the "Employer Account" as defined in Section 1.19 of such plan if the Member had contributed to such plan the amount of "Basic Savings Contributions" as defined in Section 1.6 of such plan that would have resulted in the largest amount of matching Employer contributions on his behalf for periods of employment on or after September 30, 1991 under such plan or, for periods of employment prior to September 30, 1991, under the Retirement Savings Plan; and (3)the benefits payable at the time of termination under the Savings Plan from the "Employer Account" attributable to matching Employer contributions transferred to the Saving Plan from any of the prior defined contribution plans listed in Appendix B; provided that the Committee shall convert the amount of such benefits to an equivalent annual lifetime annuity payable at the Member's retirement date using the 1984 Unisex Pension Mortality Table, set back in age one year, and the then applicable interest rate published by the Pension Benefit Guaranty Corporation for valuing immediate annuities for plan terminations. For Employees who become Members in the Plan (either for the first time or because of reinstatement) on or after September 1, 1997, the Pension Offset amounts above that are attributable to service with the Company or any predecessor Company prior to the Member's Service Date shall be disregarded. 1.14 "Plan" means The Great Atlantic & Pacific Tea Company, Inc. Supplemental Executive Retirement Plan. 1.15 "Postponed Retirement Date" means the first day of calendar month following the Member's Normal Retirement Date upon which the member retires in accordance with Section 3.1 (Normal retirement date). 1.16 "Retirement Date" means the Normal, Early or Postponed Retirement Date whichever is applicable. 1.17 "Retirement Plan" means The Great Atlantic & Pacific Tea Company, Inc., and Participating United States Subsidiaries Employees' Retirement Plan, as in effect prior to its termination date of May 31, 1984. 1.18 "Retirement Savings Plan" means The Great Atlantic & Pacific Tea Company, Inc. Retirement Savings Plan, as adopted effective as of March 1, 1984 and as thereafter amended from time to time. 1.19 "Savings Plan" means The Great Atlantic & Pacific Tea Company, Inc. Savings Plan, as adopted effective as of January 1, 1991 and as thereafter amended from time to time. 1.20 "Service" means a Member's period of employment with the Company after the "Service Date" applicable to such Company as set forth in Appendix A, computed in years and completed months expressed as a fraction of a year. For each additional year of "Continuous Service" credited to a Member who was a "Special Member" under the Plan as in effect prior to October 1, 1984, such Member shall be deemed to have an additional year of Service under this Plan [the terms "Continuous Service" and "Special Member", as used in this Section 1.20, shall have the meaning as defined in The Great Atlantic & Pacific Tea Company, Inc. Supplemental Executive Retirement Plan (Effective January 1, 1978)]. The masculine pronoun wherever used shall include the feminine pronoun and the singular, the plural. SECTION 2 Membership 2.1 Membership: The Chief Executive Officer, with the approval of the Compensation Policy Committee of the Board of Directors, shall select the Employees who are to be eligible to become Members in the Plan. 2.2 Agreements: Membership in the Plan shall be evidenced by an Agreement between the Employee and the Company in such form as the Chief Executive Officer shall approve and which shall comply with and be subject to the provisions of the Plan. 2.3 Continuation of membership: An Employee who has become a Member in accordance with Sections 2.1 and 2.2 shall, except as may otherwise be stipulated in his Agreement with the Company, continue as a Member as long as he continues in the employment of the Company and thereafter as long as he is entitled to benefits under the Plan. 2.4 Discontinuation of membership: A Member shall cease to be such and shall forfeit all rights to benefits otherwise payable to him or with respect to him under the Plan if the Board of Directors gives him timely written notice of its findings that he (a) has misused Company funds or property, or has been engaged in illegal activities, or (b) has engaged in any activity deemed detrimental to the best interests of the Company or a subsidiary or division of the Company. Written notice under this Section 2.4 shall be timely if sent to the Member's last known address within six months after the Board of Directors discovers the existence of facts which could give rise to a loss of benefits; provided, however, that said notice, to be effective, must be sent to the Member within twelve months following his termination of employment. A member who ceases to be such for any of the above causes shall forfeit all rights to any pension benefits payable to him or with respect to him, and the vesting provisions of Section 6.1 shall be void. SECTION 3 Normal and Postponed Retirement 3.1 Normal and postponed retirement dates: A Member's Normal Retirement Date is the first day of the month following his 65th birthday. A member may retire or, to the extent permitted by law he may be retired on his Normal Retirement Date or, if not so retired, he may continue in employment beyond his Normal Retirement Date and retire on the first day of a subsequent month, his Postponed Retirement Date. 3.2 Normal retirement pension: A Member who retires at his Normal Retirement Date shall be entitled to an annual pension equal to (a) the excess, if any, of his Normal Objective Pension, determined in accordance with Section 3.4, over his Pension Offset multiplied by (b) his Percentage of Pension determined in accordance with Section 6.1 (Vesting). 3.3 Postponed retirement pension: A Member who retires on his Postponed Retirement Date shall be entitled to an annual pension equal to (a) the excess, if any, of his Normal Objective Pension, determined in accordance with Section 3.4 and based upon his Service and Average Annual Compensation as of his Normal Retirement Date over his Pension Offset determined as of his Normal Retirement Date multiplied by (b) his Percentage of Pension determined in accordance with Section 6.1 (Vesting) as of his Postponed Retirement Date. 3.4 Normal objective pension: The Normal Objective Pension of a Member who has completed at least 20 years of Service is 45% of his Average Annual Compensation. The Normal Objective Pension of a Member who has completed less than 20 years of Service is the sum of (a) 3% of his Average Annual Compensation multiplied by the number of years of his Service to a maximum of 10 years of Service and (b) 1-1/2% of his Average Annual Compensation multiplied by the number of years of his Service in excess of 10. SECTION 4 Early Retirement 4.1 Early retirement date: A Member who has attained age 55 and has completed 10 years of Consecutive Service may elect to retire on an Early Retirement Date which shall be the first day of any month prior to his Normal Retirement Date. 4.2 Early retirement pension: A Member who retires at an Early Retirement Date shall be entitled to an annual pension equal to (a) the excess, if any, of his Early Objective Pension, determined in accordance with Section 4.3, over his Pension Offset multiplied by (b) his Percentage of Pension determined in accordance with Section 6.1 (Vesting). 4.3 Early objective pension: A Member's Early Objective Pension shall be determined as follows: (a) A Normal Objective Pension is determined in accordance with Section 3.4 (Normal objective pension). (b) The amount determined in (a) is then reduced by 5/12 of 1% for each month by which the member's Early Retirement Date precedes his Normal Retirement Date. SECTION 5 In Event Of Death 5.1 Surviving spouse benefit: In the event of the death, whether before or after retirement, of a Member who is survived by a "spouse" (as defined herein) such spouse shall be entitled to a surviving spouse pension. The annual amount of the surviving spouse pension shall be set forth in Section 5.2. The term "spouse" shall mean an individual who (i) was legally married to the Member continuously during the one-year period ending on the date of the Member's death and (ii) in the case of a Member who himself receives a benefit from the Plan, was also legally married to the Member continuously during the one-year period ending on the date on which payment of the Plan benefit to the Member commenced. 5.2 Amount of surviving spouse pension: The surviving spouse pension with respect to a Member whose death occurs after retirement shall be 40% of the Normal or Early pension, whichever is applicable, that the Member was receiving at the time of his death. The surviving spouse pension with respect to a Member whose death occurs prior to retirement shall be 40% of the pension, if any, to which the member would have been entitled under Section 6.1, if he had retired or terminated employment on the day before his death. SECTION 6 In Event Of Termination Of Employment 6.1 Vesting: Except as otherwise provided in Appendix C, if a Member's employment with the Company ceases for any reason after (i) completing five or more years of Service if he became a Member under the Plan as in effect prior to January 1, 1982, or (ii) completing five or more years of Service and attaining the age of 55 if he became a Member under the Plan as in effect on or after January 1, 1982, he shall be entitled to a percentage of the net pension determined in accordance with Section 3.2 or 4.2, in an amount as follows: Years of Service Percentage of Pension Less than 5 0% 5, but less than 6 50% 6, but less than 7 60% 7, but less than 8 70% 8, but less than 9 80% 9, but less than 10 90% 10 or more 100% Notwithstanding the foregoing, however, except as otherwise provided in Appendix C, if such Member's employment is terminated involuntarily after completing five years of Service, but prior to attaining the age of 55, he shall be entitled to a percentage, determined under the schedule immediately above, of the net pension determined in accordance with Section 3.2 or 4.2 unless he is terminated for cause for one of the reasons specified in Section 2.4 (Discontinuance of membership) hereof. In no case will any benefits be payable to a participant who terminates employment prior to completing one year of Service as a Member. 6.2 Termination before age 55: If a member's employment with the Company terminates prior to his attaining age 55, his Objective Pension and net pension, including Pension Offset, shall be determined assuming commencement at age 65 and the pension benefit payable from the Plan will commence at age 65. Upon proper application by such Member and approval by the Committee, the Member shall be able to have his Objective Pension and net pension, including Pension Offset, redetermined based upon an earlier benefit commencement in accordance with Section 4 (Early Retirement) and the net pension payable shall commence on such date. SECTION 7 Payment Of Benefits 7.1 Retirement pensions: Normal or Early pensions are payable in monthly installments as of the first day of each month commencing with the Member's Retirement Date and ceasing with the last payment due prior to his death. 7.2 Surviving spouse pensions: Surviving spouse pensions are payable in monthly installments as of the first day of each month commencing with the first day of the month following the Member's death and ceasing with the last payment due prior to the surviving spouse's death. SECTION 8 Provision Of Benefits 8.1 Source of benefits: Benefits under the Plan shall not be prefunded, but shall be paid by the Company as and when they become due as provided herein, and the interest of the Member and his spouse in any benefits under the Plan shall be only of an unsecured creditor of the Company. SECTION 9 Administration Of The Plan 9.1 Plan Administrator: The Committee shall be the Plan Administrator, except with respect to any matter relating exclusively to a member of the Committee in which case the Board of Directors of the Company shall serve as the Plan Administrator. 9.2 Powers and duties of the Plan Administrator: The Committee, in addition to all the powers and duties specified in the various provisions of the Plan, shall have the exclusive right to interpret the Plan and to decide any matter arising in connection with the administration of the Plan. SECTION 10 Miscellaneous 10.1 Rights of employees: Neither the adoption of the Plan nor its operation shall in any way affect the right and power of the Company to dismiss or otherwise terminate the employment of, or change the terms of employment or amount of compensation of, any Employee at any time for any reason. By his agreement to participate in the Plan each Member shall conclusively bind himself and any person claiming under or through him to any action or decision taken or made under the Plan by the Committee, the Company or the Board of Directors of the Company. 10.2 Governing law: The Plan shall be construed in accordance with the laws of the State of New York. SECTION 11 Amendment Or Termination Of The Plan 11.1 Amendment: The Board of Directors of the Company reserves the right at any time and from time to time, to modify or amend in whole or in part any or all of the provisions of the Plan. 11.2 Termination: The Board of Directors of the Company shall have the right to terminate the Plan at any time. APPENDIX A THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN COMPANY SERVICE DATE 1. The Great Atlantic & Pacific Tea Company, Inc. (A&P) Date of employment with A&P. 2. Food Mart Division of (1) For purposes Waldbaum, Inc. of computing the amount of a Member's Normal Objective Pension or Early Objective Pension (but not for determining eligibility for benefits under Section 4, 5, or 6) - Date of employment with Waldbaum, Inc. or its predecessor; (2) For purposes of determining eligibility for benefits under Sections 4, 5 and 6 - January 1, 1987. 3.The Great Atlantic & Earlier of (1) date of Pacific Tea Company of employment with A&P Ltd. or Canada Limited (A&P Ltd.) (2) date of employment with A&P. 4. Shopwell, Inc. August 1, 1986 5. Waldbaum, Inc., except January 1, 1987 for the Food Mart Division of Waldbaum, Inc. 6. Borman's Inc. February 1, 1989 For Employees who become Members in the Plan (either for the first time or because of reinstatement) on or after September 1, 1997, the Service Date can not precede the Member's most recent employment date with the Company or any predecessor Company. Notwithstanding any of the above, the Chairman of the Board may designate individuals for whom the Service Date is earlier than provided for above but not earlier than the individual's original employment date with the Company or any predecessor Company. APPENDIX B THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN OTHER PENSION OFFSET PLANS Defined Benefit Pension Plans 1. The Great Atlantic & Pacific Company of Canada, Limited Employees Retirement Plan 2. A&P Pension Plan (Cash Balance Plan) Defined Contribution Plans 1. Waldbaum's Food Mart Management and Staff Deferred Salary Plan 2. Shopwell, Inc. Savings Plan for Non-union Employees 3. Waldbaum's, Inc. Management Savings Plan 4. Borman's Employees Savings Plan APPENDIX C 1. In the case of a Member employed by Food Mart Division of Waldbaum, Inc., the following Section 6.1 shall apply in lieu of the Section 6.1 contained in the body of the Plan: 6.1 If a Member's employment with the Company ceases for any reason after completing five or more years of Service (recognizing, in accordance with Appendix A, only employment on and after January 1, 1987), he shall be entitled to 100% of the net pension determined in accordance with Section 3.2 or 4.2; if his employment with the Company ceases for any reason before completing five years of service (recognizing, in accordance with Appendix A, only employment on and after January 1, 1987), he shall not be entitled to any benefits under the Plan. EX-23 7 INDEPENDENT AUDITORS' CONSENT THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.: We consent to the incorporation by reference in Registration Statement No. 2- 92428 on Form S-8, Post Effective Amendment No. 7 to Registration Statement No. 2-59290 on Form S-8, Post Effective Amendment No. 3 to Registration Statement No. 2-73205 on Form S-8 and Registration Statement No. 333-36225 on Form S-3 of our report dated April 30, 1998, contained in the Company's 1997 Annual Report to Shareholders and incorporated by reference in this Annual Report on Form 10-K of The Great Atlantic & Pacific Tea Company, Inc. for the year ended February 28, 1998. Deloitte & Touche LLP Parsippany, New Jersey May 26, 1998 -----END PRIVACY-ENHANCED MESSAGE-----