-----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, Qtn9nl1AET7biwZlqqmqB0IrPP9oPInFvyP+I21+/kUPkFStFVJ6JXWWB1ufc/8R MZUR7oa1x4IKaR5jHKv74w== 0000043300-00-000008.txt : 20000525 0000043300-00-000008.hdr.sgml : 20000525 ACCESSION NUMBER: 0000043300-00-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000226 FILED AS OF DATE: 20000524 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: 643040 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 ended Commission file number 1-4141 February 26, 2000 - ----------------- 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. ---- The aggregate market value of the voting stock held by non-affiliates of the Registrant at May 8, 2000 was $315,331,621. The number of shares of common stock outstanding at May 8, 2000 was 38,367,216. 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 1999 Annual Report to Shareholders. The Registrant has filed with the S.E.C. since the close of its last fiscal year ended February 26, 2000, 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 750 stores averaging approximately 35,900 square feet per store as of February 26, 2000. In addition, the Company began franchising as wholesaler, its Canadian Food Basics stores in fiscal 1995. As of February 26, 2000, the Company served as wholesaler to 65 franchise stores in Canada averaging approximately 29,400 square feet per store. On the basis of reported sales for fiscal 1999, the Company believes that it is one of the 10 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, Waldbaum's, Super Foodmart, Ultra Food & Drug, Dominion, Food Basics, The Barn Markets and Food Emporium, 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. In support of its retail operations, the Company also operates one coffee roasting plant in the United States. Through its Compass Foods Division, the Company manufactures and distributes a line of whole bean coffees under the Eight O'Clock, Bokar and Royale labels, 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 and The Farm. Building upon a broad base of A&P supermarkets, the Company has historically expanded and diversified within the retail food business through the acquisition of other supermarket chains and the development of several alternative store types. 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 including retail stores, warehousing and distribution facilities, supply logistics and processes. In support of its modernizing program, on March 13, 2000, the Company announced Phase II of its Great Renewal-supply chain initiative, to develop a state of the art supply chain and business management infrastructure over the next four years. During fiscal 1999, the Company expended approximately $480 million for capital projects which included 54 new supermarkets, 14 new franchised stores and 59 remodels or enlargements. The Company's plans for fiscal 2000 anticipate capital expenditures of approximately $560 million, including $60 million relating to the supply chain initiative and $500 million relating to ongoing capital projects which include the opening of 50 to 60 new supermarkets and the remodeling or expansion of up to 65 stores. In addition, the Company plans to continue with similar levels of capital expenditures in fiscal 2001 and several years thereafter. 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 a processing facility that produces coffee products. The main ingredients for coffee products are purchased principally from Brazilian and Central American sources. Other ingredients are obtained from domestic suppliers. Employees As of February 26, 2000, the Company had approximately 80,900 employees, of which 70% 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 1999 Annual Report to Shareholders on pages 36 through 40, 42, 43 and 46 and is herein incorporated by reference. ITEM 2. Properties At February 26, 2000, the Company operated 750 retail stores and serviced 65 franchised stores. Approximately 10% 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 40 Massachusetts 18 New Hampshire 1 Vermont 2 ---- Total 61 Middle Atlantic States: District of Columbia 1 Delaware 8 Maryland 43 New Jersey 104 New York 148 Pennsylvania 30 ---- Total 334 Midwestern States: Michigan 100 Wisconsin 36 ---- Total 136 Southern States: Louisiana 21 Mississippi 5 North Carolina 1 Virginia 12 ---- Total 39 ---- Total United States 570 ---- Ontario, Canada 180 ---- Total Stores 750 ==== Franchised Stores: Ontario, Canada 65 ---- Total Franchised Stores 65 ==== The total area of all Company operated retail stores is approximately 27 million square feet averaging approximately 35,900 square feet per store. Excluding liquor and Food Emporium stores, which are generally smaller in size, the average store size is approximately 38,000 square feet. The total area of all franchised stores is approximately 1.9 million square feet averaging approximately 29,400 square feet per store. The 54 new supermarkets opened in fiscal 1999 had a range in size from 21,500 to 79,900 square feet, with an average size of approximately 48,600 square feet. The stores built by the Company over the past several years and those planned for fiscal 2000, generally range in size from 50,000 to 65,000 square feet with an average of approximately 58,000 square feet. The selling area of new stores is approximately 73% of the total square footage. The Company operates one coffee roasting plant in the United States. In addition, the Company maintains 14 warehouses that service its store network. These warehouses are geographically located as follows: Company Warehouses - ------------------ Indiana 1 Louisiana 1 Maryland 1 Michigan 2 New Jersey 2 New York 2 Pennsylvania 1 Wisconsin 1 ---- Total United States 11 ---- Ontario, Canada 3 ---- Total Warehouses 14 ==== The net book value of real estate pledged as collateral for all mortgage loans amounted to approximately $9 million as of February 26, 2000. ITEM 3. Legal Proceedings - -------------------------- The information required is contained in the 1999 Annual Report to Shareholders on page 45 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 1999. PART II - ------- ITEM 5. Market for the Registrant's Common Stock and Related Security Holder - ----------------------------------------------------------------------------- Matters ------- The information required is contained in the 1999 Annual Report to Shareholders on pages 47, 50 and 54 and is herein incorporated by reference. ITEM 6. Selected Financial Data - -------------------------------- The information required is contained on page 50 of the 1999 Annual Report to Shareholders and is herein incorporated by reference. ITEM 7. Management's Discussion and Analysis - --------------------------------------------- The information required is contained in the 1999 Annual Report to Shareholders on pages 20 through 27 and is herein incorporated by reference. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------- The information required is contained in the 1999 Annual Report to Shareholders on pages 26 and 27 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 1999 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 47 of the 1999 Annual Report to Shareholders and is herein incorporated by reference. ITEM 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure -------------------- None 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 ---- --- ---------------- Christian W.E. Haub 35 President and Chief Executive Officer Fred Corrado 59 Vice Chairman of the Board and Chief Financial Officer Michael J. Larkin 58 Senior Executive Vice President - Chief Operating Officer George Graham 50 Executive Vice President - Chief Merchandising Officer William P. Costantini 52 Senior Vice President - General Counsel & Secretary John P. Dunne 61 Non-Executive Chairman - The Great Atlantic & Pacific Company of Canada, Limited Nicholas L. Ioli, Jr. 56 Senior Vice President - Chief Information Officer Laurane S. Magliari 49 Senior Vice President - People Resources and Services William McEwan 43 President and Chief Executive Officer - Atlantic Region Operations Brian Pall 41 Senior Vice President - Chief Development Officer Cheryl M. Palmer 42 Senior Vice President - Strategic Marketing Brian Piwek 53 President and Chief Executive Officer - The Great Atlantic & Pacific Company of Canada, Limited Craig C. Sturken 56 Chairman and Chief Executive Officer - Midwestern Operations 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. Haub was elected a director on December 3, 1991, President and Chief Operating Officer of the Company on December 7, 1993 and Co-Chief Executive Officer on April 2, 1997. He was elected to his current position effective May 1, 1998. He is a member of the Executive Committee and an ex officio member of the Finance and Retirement Benefits Committees. Mr. Corrado has been a director since 1990. He is Vice Chairman of the Executive Committee and a member of the Finance and Retirement Benefits Committees. During the past five years, Mr. Corrado also served as Treasurer and Executive Vice President of the Company. 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. 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. Costantini was elected Senior Vice President, General Counsel & Secretary effective April 24, 2000. Prior to joining the Company and for the past five years, Mr. Costantini was successively Executive Vice President & General Counsel of Olsten Corporation and Senior Vice President & General Counsel of Olsten. Mr. Dunne was appointed Non-Executive Chairman of The Great Atlantic & Pacific Company of Canada, Limited on February 14, 2000. Prior thereto and for the past five years, Mr. Dunne was successively Chairman and Co-Chief Executive Officer, 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. Ioli was elected Senior Vice President - Chief Information Officer on July 13, 1999. Prior to joining the Company and for the past five years, Mr. Ioli was Vice President, Chief Information Officer, Citizens Utilities Company. Ms. Magliari was elected Senior Vice President, People Resources and Services on February 16, 1999. Prior to joining the Company and for the past five years, Ms. Magliari was successively Vice President, Human Resources, Publishers Clearing House and Vice President, Global Marketing, The Chase Manhattan Bank. Mr. McEwan was appointed President and Chief Executive Officer of the Company's Atlantic Region effective the beginning of fiscal year 2000. Prior to assuming his present position and for the past five years, he was successively President and Chief Merchandising Officer and Executive Vice President, Merchandising and Procurement of The Great Atlantic and Pacific Company of Canada, Limited. Mr. Pall was appointed Chief Development Officer of the Company on May 1, 2000. Prior thereto and for the past five years, Mr. Pall was successively Senior Vice President, Development and Corporate Vice President, Real Estate Development. Ms. Palmer was appointed Senior Vice President, Strategic Marketing on May 3, 1999. Prior to joining the Company and for the past five years, Ms. Palmer was successively Group Vice President/General Manager for Allied Domecq Spirits & Wines and held various management positions for Cadbury Beverages, Inc. Mr. Piwek was appointed President and Chief Executive Officer of The Great Atlantic & Pacific Company of Canada, Limited on February 14, 2000. Prior thereto and for the past five years, Mr. Piwek was successively Vice Chairman and Co-Chief Executive Officer of The Great Atlantic & Pacific Company of Canada, Limited and President of Overwaitea Food Group, a retailer and franchisor in British Columbia and Alberta, Canada. Mr. Sturken was appointed Chairman and Chief Executive Officer - Midwestern 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. Mr. Peter O'Gorman, Executive Vice President, International Store and Product Development resigned from the Company effective May 28, 1999. Mr. Robert Ulrich, Senior Vice President, General Counsel and Secretary retired from the Company effective May 18, 2000. Mr. Aaron Malinsky, Vice Chairman and Chief Development Officer resigned from the Company, effective May 12, 2000. The Company has filed with the Commission since the close of its fiscal year ended February 26, 2000 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 12 and is incorporated by reference from the Company's fiscal 1999 definitive proxy statement. ITEM 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------- The information required is contained in the Company's fiscal 1999 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 fiscal 1999 definitive proxy statement on pages 1 and 7 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 1999 Annual Report to Shareholders. The following required items, appearing on pages 28 through 49 of the 1999 Annual Report to Shareholders, are herein incorporated by reference: Statements of Consolidated Operations Statements of Consolidated Shareholders' Equity and Comprehensive Income (Loss) 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 4.1 to Form 8-K rights of security holders, dated as of January 1, 1991 including indentures * 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, February 28, 1998, February 27, 1999 and attached b) Supplemental Executive Exhibit 10)b) to Form 10-K Retirement Plan, amended for the fiscal years ended and restated February 27, 1993 and February 28, 1998 c) 1984 Stock Option Plan, Exhibit 10)e) to Form 10-K as amended for the fiscal year ended February 23, 1991 * Agreements with respect to long-term debt where the total amount of securities authorized thereunder does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis shall be furnished to the Commission on request. Exhibit Incorporated by reference Numbers Description (If applicable) ------- ----------- ------------------------- 10) d) 1994 Stock Option Plan Exhibit 10)e) to Form 10-K for the fiscal year ended February 25, 1995 e) 1994 Stock Option Plan Exhibit 10)f) to Form 10-K for Non-Employee Directors for the fiscal year ended February 25, 1995 f) Directors' Deferred Exhibit 10)h) to Form 10-K Payment Plan for the fiscal year ended February 22, 1997 g) Competitive Advance and Exhibit 10) to Form 8-K Revolving Credit Facilities filed on June 12, 1997; Agreement dated as of Exhibit 10)I to Form 10-K June 10, 1997 and amendment for the fiscal year ended dated February 17, 1999 February 27, 1999 h) Project Great Renewal - Exhibit 99.1) to Form 8-K Phase I dated as of filed December 9, 1998; December 8, 1998; Phase II Exhibit 99) to Form 8-K dated March 13, 2000 filed March 24, 2000 i) 1998 Long Term Incentive Exhibit 10)k to Form 10-K and Share Award plan for the fiscal year ended February 27, 1999 Exhibit Incorporation by reference Numbers Description (If applicable) ------- ----------- -------------------------- 11) Not Applicable 12) Not Applicable 13) 1999 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 --------------------- On March 24, 2000, the Company filed Form 8-K with the Securities and Exchange Commission with respect to Phase II of its Project "Great Renewal" program (Great Renewal - Phase II). The Company engaged IBM Corporation and Retek Inc., food and drug retailing industry systems consultants, along with a team of Company executives, to help develop a state of the art supply chain and business management infrastructure. Great Renewal - Phase II is intended to modernize the Company's operating facilities, improve efficiency in its processes, enhance growth and be a catalyst that guides the Company toward a competitive position in the North America food retailing business. 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 16, 2000 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 - ----------------------- Director Christian W.E. Haub /s/ Fred Corrado Vice Chairman of the Board, - ---------------- Chief Financial Officer and Director Fred Corrado /s/ John D. Barline Director - ------------------- John D. Barline /s/ Rosemarie Baumeister Director - ------------------------ Rosemarie Baumeister /s/ Helga Haub Director - -------------- Helga Haub /s/ Barbara Barnes Hauptfuhrer Director - ------------------------------ Barbara Barnes Hauptfuhrer /s/ Dan Kourkoumelis Director - -------------------- Dan Kourkoumelis /s/ Edward Lewis Director - ---------------- Edward Lewis /s/ William A. Liffers Director - ---------------------- William A. Liffers /s/ Richard L. Nolan Director - ---------------------- Richard L. Nolan /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 16, 2000. /s/ Kenneth A. Uhl Vice President, Controller May 16, 2000 --------------------- --------------- Kenneth A. Uhl Date EX-13 2 COMPARATIVE HIGHLIGHTS The Great Atlantic & Pacific Tea Company, Inc. (Dollars in thousands, except per share amounts) - ------------------------------------------------ Fiscal 1999 Fiscal 1998 Fiscal 1997 (52 weeks) (52 weeks) (53 weeks) ----------- ----------- ----------- Sales $10,151,334 $10,179,358 $10,262,243 Income (loss) from operations 104,830 (164,391) 155,259 Income (loss) before extraordinary item 14,160 (67,164) 63,586 Net income (loss) 14,160 (67,164) 63,042 Net income (loss) per share before extraordinary item - basic and diluted .37 (1.75) 1.66 Net income (loss) per share - basic and diluted .37 (1.75) 1.65 Cash dividends per share .40 .40 .40 Expenditures for property 479,572 438,345 267,623 Depreciation and amortization 232,712 233,663 234,236 Working capital 98,305 109,047 262,097 Shareholders' equity 846,192 837,257 926,632 Debt to total capitalization 54% 51% 48% Book value per share 22.07 21.87 24.22 New store openings 54 46 40 Number of stores at year end 750 839 936 Number of franchised stores served at year end 65 55 52 NOTE: Reference should be made to "Management's Discussion and Analysis" section contained herein for details of non-recurring charges recorded in fiscal 1999 and 1998. Company Profile The Great Atlantic & Pacific Tea Company, Inc. ("the Company"), based in Montvale, New Jersey, operates combination food and drug stores, conventional supermarkets and limited assortment food stores in 15 U.S. states, the District of Columbia and Ontario, Canada, under the A&P, Waldbaum's, Super Foodmart, Food Emporium, Super Fresh, Farmer Jack, Kohl's, Sav-A-Center, Dominion, Ultra Food & Drug, Food Basics and The Barn Markets trade names. As of the fiscal year ended February 26, 2000, the Company operated 750 stores and served 65 franchised stores. Through its Compass Foods Division, the Company also manufactures 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. page 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OPERATING RESULTS Fiscal 1999 Compared with 1998 Sales for fiscal 1999 were $10,151 million, a net decrease of $28 million or 0.3% when compared to fiscal 1998 sales of $10,179 million. The decrease is attributable to the closure of 249 stores, excluding replacement stores, since the beginning of fiscal 1998, which reduced total sales by approximately $1,131 million. Included in the 249 store closures and $1,131 million sales impact are 165 stores relating to the exit stores that were closed during fiscal 1998 and 1999 which had an impact of $869 million. Also contributing to the net sales decrease was a decrease in sales of $17 million in the Company's Compass Food Division. These decreases were partially offset by the opening of 63 stores, excluding replacement stores, since the beginning of fiscal 1998, which added approximately $599 million, or 5.9% to sales in fiscal 1999. In addition, the increase of 4.4% in same store sales ("same store sales" referred to herein include replacement stores) increased sales by $365 million. The Food Basics wholesale business contributed $119 million to the increase and the addition of The Barn Markets and G. A. Love Foods added $10 million to sales in fiscal 1999, both exclusive of the effect of the Canadian exchange rate. The increase in the Canadian exchange rate also improved sales by $27 million or 0.3%. Average weekly sales per supermarket were approximately $245,700 in fiscal 1999 versus $210,500 in fiscal 1998, reflecting a 16.7% increase. Sales in the U.S. decreased by $295 million or 4% compared to fiscal 1998. U.S. same store sales increased 4.1% from the prior year. Sales in Canada increased $267 million or 14% from fiscal 1998. Canadian same store sales increased 6.2% from fiscal 1998. Gross margin as a percent of sales decreased 0.1% to 28.6% from 28.7% for the prior year. Margins were negatively impacted by accelerated inventory markdowns in stores that were identified for closure under the first phase of Project Great Renewal ("Great Renewal - Phase I") and the exit of the Atlanta market during the first quarter of fiscal 1999. The gross margin dollar decrease of $12 million resulted predominantly from a decrease in sales volume. The U.S. operations gross margin decrease of $56 million resulted from a decrease in sales volume, which impacted gross margin by $88 million, partially offset by an increase of $32 million from an increase in the gross margin rate. The Canadian operation's gross margin increase of $44 million resulted from an increase in sales volume, which impacted gross margin by $57 million, and an increase of $6 million from the effect of the change in the Canadian exchange rate. The increase was partially offset by a decrease of $19 million from a decrease in the gross margin rate. Store operating, general and administrative expense decreased approximately $281 million from fiscal 1998. As a percent of sales, store operating, general and administrative expense for fiscal 1999 decreased to 27.6% from 30.3% for the prior year. Fiscal 1998 store operating, general and administrative expense includes charges of $225 million recorded in the third and fourth quarters to establish reserves relating to Great Renewal - Phase I. Also included in store operating, general and administrative expense for fiscal 1998 are shut-down costs of stores and facilities amounting to approximately $9 million relating to 66 stores and three facilities closed in the third and fourth quarters and $6 million of incurred professional fees associated with the identification and implementation of the store and facilities exit program. Further, store operating, general and administrative expense for fiscal 1998 includes a $7 million write-down of property no longer held for a potential store site and a $4 million litigation charge. Fiscal 1999 store operating, general and administrative expense includes additional Great Renewal - Phase I related costs totaling approximately $75 million, including severance of $11 million which could not be accrued in fiscal 1998 because it did not meet the criteria under EITF 94- 3, professional fees of $16 million associated with the implementation of the store exit program, transitionally higher labor costs which approximate $14 million, costs of approximately $20 million for the conversion of additional stores to the Food Basics format and $9 million of other miscellaneous operating costs incurred in connection with the closures. The $75 million also includes the costs of exiting the Atlanta market consisting of severance of $6 million and store occupancy cost of $11 million which relates principally to the present value of future lease obligations, partially offset by a $12 page 20 million gain that resulted from the disposition of fixed and intangible assets. The total fiscal 1999 charge of $75 million is partially offset by a $21.9 million reversal of Great Renewal - Phase I charges originally recorded in fiscal 1998. Reference should be made to the "Store and Facilities Exiting Program - Great Renewal - Phase I" section of this Management's Discussion and Analysis for further details of the Company's exiting program. Excluding the non-recurring charges under Great Renewal - Phase I discussed above, fiscal 1999 store operating, general and administrative expense decreased approximately $83 million from fiscal 1998. As a percentage of sales, store operating, general and administrative expense decreased from 27.8% to 27.1%. Included in the fiscal 1999 results, are higher store operating, general and administrative expense of the stores identified for closure under Great Renewal - Phase I of approximately $69 million or 43.4% of sales. Excluding the results of stores identified for closure and the non- recurring charges under Great Renewal - Phase I, fiscal 1999 store operating, general and administrative expense as a percentage of sales was 26.8%. Interest expense increased $13 million from the previous year, primarily due to the additional present value interest related to the future lease obligations of the store exit programs as well as the issuance of $200 million of 9.375% senior quarterly interest bonds on August 6, 1999. Interest income decreased $0.4 million from the previous year, primarily due to a lower amount of short-term investments. For fiscal 1999, income before income taxes was $27 million compared to a loss of $229 million in fiscal 1998 for an increase of $256 million. Income before taxes for U.S. operations was virtually break even compared to a loss of $244 million in fiscal 1998. The Canadian income before taxes for fiscal 1999 amounted to $27 million, which was an increase of $12 million from the fiscal 1998 amount of $15 million. The Company recorded an income tax provision amounting to $13 million in fiscal 1999 as compared to an income tax benefit of $162 million for fiscal 1998. The income tax provision recorded in fiscal 1999 reflects the Company's estimated annual tax rates applied to its respective domestic and foreign operations. The effective tax rate for fiscal 1999 was 47.6%. The fiscal 1998 benefit of $162 million includes the reversal of the Canadian operation's deferred tax valuation allowance. During the first three quarters of fiscal 1998, the Company reversed approximately $9 million of the Canadian valuation allowance to the extent that the Canadian operations had taxable income. At the beginning of the fourth quarter of fiscal 1998, based upon Management's plan to close underperforming stores in Canada, the implementation of certain tax strategies and the continued performance improvements of the Canadian operations, Management had concluded that it was more likely than not that the net deferred tax assets related to the Canadian operations would be realized. Accordingly, the Company reversed the remaining portion of the Canadian deferred tax valuation allowance amounting to approximately $60 million. (see "Income Taxes" footnote for further discussion). The deferred tax benefit recorded during fiscal 1998 for U.S. operations of approximately $103 million mainly relates to book and tax differences of the store and facilities exit costs. Based on these overall results, net income for fiscal 1999 was $14 million or $0.37 per share - basic and diluted, as compared to a net loss of $67 million or $1.75 per share - basic and diluted. The increase in net income of $81 million in fiscal 1999 from a net loss of $67 million in fiscal 1998 is mainly the result of improved same store sales, reduced operating costs and the decrease in the store and facilities exit costs. The increase is partially offset by a reduction in the number of open stores. Fiscal 1998 Compared with 1997 Sales for fiscal 1998 were $10,179 million, a net decrease of $83 million or 0.8% when compared to fiscal 1997 (a 53-week year) sales of $10,262 million. Total Company same store sales for fiscal 1998 increased 1.9% from the prior year. Average weekly sales per supermarket were approximately $210,500 in fiscal 1998 versus $199,400 in fiscal 1997, resulting in a 5.6% increase. During fiscal 1998, the Company opened 46 new supermarkets, remodeled or expanded 69 stores and closed 143 stores. The Company serviced 55 Food Basics franchised stores at the end of fiscal 1998, versus 52 at the end of fiscal 1997. The sales decrease of $83 million from last year page 21 was the result of the extra week in fiscal 1997 coupled with a decline in the Canadian exchange rate. The extra week of sales in fiscal 1997 amounted to approximately $174 million and the lower Canadian exchange rate reduced fiscal 1998 sales by approximately $131 million. Excluding the impact of the extra week in fiscal 1997 and the lower Canadian exchange rate, sales increased approximately $222 million or 2.2% from fiscal 1997. This increase is the result of new store openings and an increase in same store sales partially offset by store closures. The opening of 44 new stores, excluding 40 replacement stores, since the beginning of fiscal 1997 increased sales by approximately $274 million or 2.7% in fiscal 1998. In addition, the increase in comparable store sales of 1.9% increased sales by $177 million and wholesale sales to the Food Basics franchised stores increased $47 million or 13.8% to $387 million for fiscal 1998, which increased total Company sales by 0.5%. These sales increases were partially offset by the closure of 178 stores, excluding replacement stores, which reduced sales by $327 million or 3.2%. Included in the 178 store closures and $327 million sales impact are 66 stores relating to the exit stores that were closed during the fourth quarter which had an impact of $44 million. U.S. sales decreased $68 million or 0.8% compared to fiscal 1997. U.S. same store sales increased 1.4% from the prior year. In Canada, sales decreased $15 million or 0.8% from fiscal 1997 to $1,903 million. Canada same store sales increased 4.6% from the prior year. Gross margin as a percent of sales increased 0.1% to 28.7% from 28.6% for the prior year. The gross margin dollar decrease of $16 million is primarily the result of a lower Canadian exchange rate, offset by an increase in sales volume and an increase in gross margin rates. The U.S. gross margin decreased $3 million principally as a result of a decrease in sales volume, which had an impact of decreasing margin by $20 million, and an increase in gross margin rates of $17 million. The Canadian operations gross margin decreased $13 million, which was primarily the result of the lower Canadian exchange rate. Store operating, general and administrative expense of $3,084 million in fiscal 1998 increased by approximately $304 million from fiscal 1997. As a percent of sales, store operating, general and administrative expense for fiscal 1998 increased to 30.3% from 27.1% for the prior year. Included in fiscal 1998 store operating, general and administrative expense are charges recorded in both the third and fourth quarters relating to Great Renewal - Phase I, the Company's store and facilities exit program, which amounted to $225 million. The store and facilities exit program relates to a decision made in both the third and fourth quarters of fiscal 1998 to exit the market areas of 132 underperforming stores and to exit four facilities. Reference should be made to the "Store and Facilities Exiting Program - Great Renewal - Phase I" section of this Management's Discussion and Analysis for further details of the Company's exiting program. Excluding the store and facilities exit charges, store operating, general and administrative expense increased $79 million from fiscal 1997 and a rate to sales basis of 28.1% for fiscal 1998 as compared to 27.1% in fiscal 1997. Also included in store operating, general and administrative expense for fiscal 1998 are shut-down costs of stores and facilities amounting to approximately $9 million relating to 66 stores and three facilities closed in the third and fourth quarters of fiscal 1998, and $6 million of incurred professional fees associated with the identification and implementation of the store and facilities exit program. Further, store operating, general and administrative expense for fiscal 1998 also includes a $7 million write- down of property no longer held for a potential store site and a $4 million litigation charge. During fiscal 1998, the Company accelerated its store modernization program and closed an additional 77 stores, for total store closures in fiscal 1998 of 143. As a result of the 77 store closures, the Company incurred $25 million of higher store closing charges in fiscal 1998 than the prior year. The remaining increase from the prior year of $28 million is mainly related to the occupancy costs of the new generation superstores, which increased $20 million from the prior year. Interest expense decreased $9 million from the previous year, primarily due to a decrease in average debt of approximately $55 million. The decrease 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. Accordingly, the Company had higher debt throughout fiscal 1997 until the fourth quarter of fiscal 1997 when the page 22 $200 million of 10-year notes were paid. Interest income decreased $1 million from the previous year, primarily due to a lower amount of short-term investments. Loss before taxes and extraordinary item for fiscal 1998 was $229 million as compared to income of $83 million in fiscal 1997 for a decrease of $312 million. The loss before income taxes for fiscal 1998 includes the store and facilities exit charge of $225 million and other costs noted in store operating, general and administrative expense. Loss before taxes for U.S. operations amounted to $244 million, which was a decrease of $290 million from income of $46 million in fiscal 1997. Excluding the store and facilities exit charge, the U.S. loss before income taxes was $30 million for fiscal 1998 resulting in a $76 million decrease from fiscal 1997. The U.S. decrease of $75 million is the result of the charges noted in store operating, general and administrative expense relating to the property write- down, litigation, professional fees, shut-down costs and higher store closing costs which in total amounted to $46 million. The Canadian income before taxes for fiscal 1998 amounted to $15 million, which was a decrease of $22 million from the fiscal 1997 amount of $37 million. The $22 million decrease includes $10 million of the store and facilities exit charge and $6 million of higher store closing costs as noted in store operating, general and administrative expense. The Company recorded an income tax benefit amounting to $162 million in fiscal 1998 as compared to an income tax provision of $19 million for fiscal 1997. The fiscal 1998 benefit of $162 million includes the previously discussed reversals of the Canadian operation's deferred tax valuation allowance. Based on these overall results, net loss for fiscal 1998 was $67 million or $1.75 per share - basic and diluted, as compared to net income of $63 million or $1.65 per share - basic and diluted, after recording an extraordinary charge of $0.01 per share - basic and diluted for fiscal 1997. The decrease in net income of $130 million to a net loss of $67 million in fiscal 1998 is mainly the result of the store and facilities exit costs pretax charge of $225 million, partially offset by the reversal of the remaining Canadian valuation allowance. STORE AND FACILITIES EXITING PROGRAM - GREAT RENEWAL - PHASE I In May 1998, the Company named a sole Chief Executive Officer of the Company. Following the announcement, the Company initiated a vigorous assessment of all aspects of its business operations in order to identify the factors that were impacting the performance of the Company. As a result of the above assessment, in the third quarter of fiscal 1998, the Company decided to exit two warehouse facilities and a coffee plant in the U.S., and a bakery plant in Canada. In connection with the exit plan, the Company recorded a charge of approximately $11 million which is included in "Store operating, general and administrative expense" in the Statements of Consolidated Operations. The $11 million charge was comprised of $7 million of severance, $3 million of facilities occupancy costs for the period subsequent to closure and $1 million to write-down the facilities to their estimated fair value. As of February 27, 1999, the Company had closed and terminated operations with respect to the warehouses and the coffee plant. The volume associated with the two warehouses has been transferred to other warehouses in close geographic proximity. Further, the manufacturing processes of the coffee plant have been transferred to the Company's remaining coffee processing facility. The processing associated with the Canadian bakery has been outsourced effective January 1999. In addition, on December 8, 1998, the Company's Board of Directors approved a plan which included the exit of 127 underperforming stores throughout the United States and Canada and the disposal of two other properties. Included in the 127 stores are 31 stores representing the entire Richmond, Virginia market. Further on January 28, 1999, the Board of Directors approved the closure of five additional underperforming stores. In connection with the Company's plan to exit these 132 stores and the write- down of two properties, the Company recorded a charge in the fourth quarter of fiscal 1998 of approximately $215 million. This $215 million consisted of $8 million of severance, $1 million of facilities occupancy costs, $114 million of store occupancy costs, which principally relates to the present value of future lease obligations, net of anticipated sublease page 23 recoveries, which extend through fiscal 2028, an $83 million write-down of store fixed assets and a $9 million write-down to their estimated fair value of the two properties which are held for sale. To the extent fixed assets included in stores identified for closure could be utilized in other continuing stores, the Company has or will transfer those assets to continuing stores. To the extent those fixed assets cannot be transferred, the Company will scrap them and accordingly, the write-down was calculated based upon an estimated scrap value. This fourth quarter charge of $215 million was reduced by approximately $2 million in fiscal 1998 due to changes in estimates of pension withdrawal liabilities and fixed asset write-downs from the time the original charge was recorded. The net charge of $213 million is included in "Store operating, general and administrative expense" in the Statements of Consolidated Operations. In addition to the charges recorded in fiscal 1998, there are other charges related to the plan which could not be accrued at February 27, 1999 because they did not meet the criteria for accrual under EITF 94-3. Such costs have been expensed as incurred as the plan was being executed. During fiscal 1999, the Company recorded an additional pretax charge of $11 million for severance relating to the 132 stores. On April 26, 1999, the Company announced that it had reached definitive agreements to sell 14 stores in the Atlanta, Georgia market, two of which were previously included in the Company's store exit program as discussed above. In conjunction with the sale, the Company decided to exit the entire Atlanta market and close the remaining 22 stores, as well as the distribution center and administrative office. Accordingly, at the time of the announcement, the Company recorded a fiscal 1999 first quarter net pretax charge of approximately $5 million. This charge is comprised of severance of $6 million, future lease commitments of $11 million, partially offset by a $12 million gain related to the disposition of fixed and intangible assets. The net charge is included in "Store operating, general and administrative expense" in the Statements of Consolidated Operations. As of February 26, 2000, the Company has closed all 34 stores in the Atlanta, Georgia market and 131 of the 132 other stores, including all 31 stores in the Richmond, Virginia market. The remaining store is in the process of being disposed of. The Company paid $23 million of the total severance charges from the time of the original charges through the end of fiscal 1999, which resulted from the termination of approximately 3,400 employees. The remaining individual severance payments will be paid by the end of fiscal 2000. At each balance sheet date, Management assesses the adequacy of the reserve balance to determine if any adjustments are required as a result of changes in circumstances and/or estimates. The Company has made favorable progress to date in marketing and subleasing the closed stores. As a result, in the third quarter of fiscal 1999, the Company recorded a net reduction in "Store operating, general and administrative expense" of $21.9 million to reverse a portion of the $215 million restructuring charge recorded in fiscal 1998. This amount represents a $22.2 million reduction in "Store operating, general and administrative expense" for lower store occupancy costs resulting primarily from earlier than anticipated lease terminations and subleases. The credit is partially offset by $0.3 million of additional fixed asset write-downs resulting from lower than anticipated proceeds from the sale of fixed assets. Based upon current available information, Management evaluated the reserve balance of $115 million as of February 26, 2000 and has concluded that it is adequate. The Company will continue to monitor the status of the vacant properties and further adjustments to the reserve balance may be recorded in the future, if necessary. SUPPLY CHAIN INITIATIVE - GREAT RENEWAL - PHASE II On March 13, we announced Great Renewal - Phase II, a major investment over four years to develop a state-of-the-art supply chain and business management infrastructure. Overall, we expect to achieve substantial cash benefits over that period resulting from improved margins, lower operating expenses, reduced working capital and better product availability. After full implementation, we expect to significantly raise the level of our ongoing annual operating income. The Company expects the cost of implementing page 24 Great Renewal - Phase II to reduce net earnings for fiscal 2000 by approximately $1.50 per share. Provided Great Renewal - Phase II plan objectives are delivered on schedule, benefits from improved systems and processes could be derived in fiscal 2000. If planned deliverables are met on time, it is hoped benefits will accelerate in the following years helping to offset costs in fiscal 2001, and providing the opportunity to derive positive net impact onto ongoing operating earnings beginning in fiscal 2002. A team of A&P executives representing all key business functions will work with a team from a new strategic alliance concentrating on the food and drug retailing industry formed by IBM Corporation and Retek, Inc. This combined team will upgrade all processes and business systems related to the flow of information and products between A&P-operated offices, distribution points and stores; and between the Company and its suppliers. Such business processes support Store Operations, Marketing and Merchandising, Supply and Logistics, People Resources, Finance and the enabling technologies. LIQUIDITY AND CAPITAL RESOURCES The Company ended the 1999 fiscal year with working capital of $98 million compared to $109 million at February 27, 1999. The decrease in working capital is due to a number of current asset and liability changes including a decrease in inventories of approximately $50 million due to more effective inventory management practices. Additionally, cash and short-term investments decreased from $137 million at February 27, 1999 to $125 million at February 26, 2000. On August 6, 1999, the Company issued $200 million aggregate principal amount 9.375% senior quarterly interest bonds due August 1, 2039. The Company used the net proceeds from the issuance of the bonds to repay borrowings under its revolving credit facility, to finance the purchase of 16 stores, (6 in the United States and 10 in Canada) and for working capital and general corporate purposes. The Company has an unsecured five year $465 million U.S. credit agreement and a five year C$50 million (U.S. $34 million at February 26, 2000) Canadian credit agreement (the "Credit Agreement") expiring June 10, 2002 with a syndicate of banks, enabling it to borrow funds on a revolving basis sufficient to refinance short-term borrowings. Borrowings under the U.S. credit agreement were $60 million and $130 million at February 26, 2000 and February 27, 1999, respectively. The Canadian subsidiary had no outstanding borrowings at February 26, 2000 or February 27, 1999. Accordingly, as of February 26, 2000, the Company has available $405 million under its U.S. credit agreement and C$50 million (U.S. $34 million at February 26, 2000) under the Canadian credit agreement. As of February 27, 1999, the Company had available $335 million under its U.S. credit agreement and C$50 million (U.S. $33 million at February 27, 1999) under the Canadian credit agreement. The U.S. has uncommitted lines of credit with various banks amounting to $110 million and $211 million as of February 26, 2000 and February 27, 1999, respectively. Borrowings under these uncommitted lines of credit amounted to $27 million and $23 million as of February 26, 2000 and February 27, 1999, respectively. Accordingly, as of February 26, 2000, the Company hads $83 million available in uncommitted lines of credit. The Company's Canadian subsidiary, The Great Atlantic & Pacific Company of Canada, Limited has outstanding $75 million of 5 year Notes denominated in U.S. dollars that are due on November 1, 2000. Additionally, the Company has U.S. bank borrowings of $87 million. Both the Notes and the U.S. bank borrowings have been classified as long-term debt based on Management's intent and ability, through the use of the Credit Agreement, to refinance such Notes and bank borrowings on a long-term basis. The Company has filed two Shelf Registration Statements dated January 23, 1998 and June 23, 1999, allowing it to offer up to $350 million of debt and/or equity securities as of February 26, 2000 at terms determined by market conditions at the time of sale. During fiscal 1999, the Company funded its capital expenditures, debt repayments and cash dividends through internally generated funds combined with proceeds from disposals of property, bank borrowings, revolving lines of credit and the issuance of $200 million aggregate principal amount 9.375% senior quarterly interest bonds on August 6, 1999. page 25 Capital expenditures totaled $480 million during fiscal 1999, which included 54 new supermarkets, and 59 remodels and enlargements. For fiscal 2000, the Company plans to incur approximately $150 million, before tax benefits, in cash expenditures relating to Great Renewal - Phase II. For fiscal 2001, expected Great Renewal - Phase II cash expenditures approximate $100 million, before tax. Provided Great Renewal - Phase II plan objectives are met, fiscal 2001 cash expenditures will be significantly offset by cash benefits. In addition to Great Renewal - Phase II, for fiscal 2000, the Company has planned capital expenditures of approximately $500 million primarily to open 50 to 60 new supermarkets and remodel or expand up to 65 stores. It has been the Company's experience over the past several years that it typically takes 12 to 15 months or longer 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. The Company currently expects to close a total of approximately 35 stores in fiscal year 2000. The Company plans to continue with similar levels of capital expenditures in fiscal 2001 and several years thereafter. 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 $1.5 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 1999 quarterly dividend was $0.10 per share and amounted to $15.3 million. The Company expects to maintain the same dividend amount for fiscal 2000. At fiscal year end 1999, the Company's existing senior debt rating was Ba1 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 believes that its current cash resources, including the funds available under the Credit Agreement, together with cash generated from operations, will be sufficient for the Company's 2000 Great Renewal - Phase II and other capital expenditure programs, mandatory scheduled debt repayments and dividend payments throughout fiscal 2000. Additionally, alternative financing arrangements will be considered when it is advantageous to the Company. MARKET RISK Market risk represents the risk of loss from adverse market changes that may impact the consolidated financial position, results of operations or cash flows of the Company. Among other possible market risks, the Company is exposed to such 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 $775 million in notes as of February 26, 2000 because they are at fixed interest rates. However, the Company does have cash flow exposure on its committed and uncommitted bank lines of credit due to its variable LIBOR pricing. Accordingly, as of fiscal 1999, a 1% change in LIBOR will result in interest expense fluctuating approximately $0.9 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 change in the Canadian currency of 10% 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 page 26 notes in Canada that are denominated in U.S. dollars. The Company does not have any currency risk regarding the Canadian five 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. The fair value of the cross-currency swap agreement was favorable to the Company by $4.6 million as of February 26, 2000. A 10% change in Canadian exchange rates would have resulted in the fair value fluctuating approximately $6.9 million in fiscal 1999. YEAR 2000 COMPLIANCE The Company reviewed the entire range of its operations relating to Year 2000 issues. Remediation and testing are complete for both information technology ("IT") and non-IT mission critical areas that required attention and resources in order to be Year 2000 compliant. The costs incurred to address the Company's Year 2000 issues were approximately $10 million. Although the Company has determined that its major vendors are Year 2000 compliant and the Company has not experienced any significant Year 2000 related issues with its vendors to date, there still is risk of possible failures by vendors to respond to Year 2000 issues. The Company has a contingency plan in place to mitigate the potential effects, if any, that may arise out of such failures. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement requires that all derivative instruments be measured at fair value and recognized in the balance sheet as either assets or liabilities. In addition, the accounting for changes in the fair value of a derivative (gains and losses) depends on the intended use of the derivative and the resulting designation. For a derivative designated as a hedge, the change in fair value will be recognized as a component of other comprehensive income; for a derivative not designated as a hedge, the change in the fair value will be recognized in the Statements of Consolidated Operations. In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" which delays the adoption of SFAS 133 for one year, to fiscal years beginning after June 15, 2000. The Company plans to adopt SFAS 133 in the first quarter of fiscal 2001. The Company is currently evaluating the impact this pronouncement will have on the Consolidated Financial Statements. CAUTIONARY NOTE This report contains certain forward-looking statements about the future performance of the Company which are based on Management's assumptions and beliefs in light of the information currently available to it. The Company assumes no obligation to update the information contained herein. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements including, but not limited to: competitive practices and pricing in the food industry generally and particularly in the Company's principal markets; the Company's relationships with its employees and the terms of future collective bargaining agreements; the costs and other effects of legal and administrative cases and proceedings; the nature and extent of continued consolidation in the food industry; changes in the financial markets which may affect the Company's cost of capital and the ability of the Company to access the public debt and equity markets to refinance indebtedness and fund the Company's capital expenditure program on satisfactory terms; supply or quality control problems with the Company's vendors and changes in economic conditions which affect the buying patterns of the Company's customers. page 27 STATEMENTS OF CONSOLIDATED OPERATIONS The Great Atlantic & Pacific Tea Company, Inc. (Dollars in thousands, except per share amounts) - ------------------------------------------------ Fiscal 1999 Fiscal 1998 Fiscal 1997 (52 weeks) (52 weeks) (53 weeks) ----------- ------------ ----------- Sales $10,151,334 $10,179,358 $10,262,243 Cost of merchandise sold (7,243,718) (7,260,110) (7,327,365) ----------- ----------- ----------- Gross margin 2,907,616 2,919,248 2,934,878 Store operating, general and administrative expense (2,802,786) (3,083,639) (2,779,619) ----------- ----------- ----------- Income (loss) from operations 104,830 (164,391) 155,259 Interest expense (84,045) (71,497) (80,152) Interest income 6,218 6,604 7,793 ----------- ----------- ----------- Income (loss) before income taxes and extraordinary item 27,003 (229,284) 82,900 (Provision) benefit for income taxes (12,843) 162,120 (19,314) ----------- ----------- ----------- Income (loss) before extraordinary item 14,160 (67,164) 63,586 Extraordinary loss on early extinguishment of debt (net of income tax benefit of $394) - - (544) ----------- ----------- ----------- Net income (loss) $ 14,160 $ (67,164) $ 63,042 =========== =========== =========== Earnings (loss) per share: Income (loss) before extraordinary item - basic and diluted $ 0.37 $ (1.75) $ 1.66 Extraordinary loss on early extinguishment of debt - basic and diluted - - (0.01) ----------- ----------- ----------- Net income (loss) per share - basic and diluted $ 0.37 $ (1.75) $ 1.65 =========== =========== =========== See Notes to Consolidated Financial Statements. page 28 STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) The Great Atlantic & Pacific Tea Company, Inc. (Dollars in thousands, except share amounts) - -------------------------------------------- Fiscal 1999 Fiscal 1998 Fiscal 1997 ----------- ----------- ----------- Common stock: Shares: Issued and outstanding at beginning of year 38,290,716 38,252,966 38,247,716 Issuance of 20,000 shares of restricted common stock 20,000 - - Stock options exercised 56,500 37,750 5,250 ---------- ---------- ---------- Issued and outstanding at end of year 38,367,216 38,290,716 38,252,966 ========== ========== ========== Balance at beginning of year $ 38,291 $ 38,253 $ 38,247 Issuance of 20,000 shares of restricted common stock 20 - - Stock options exercised 56 38 6 ---------- ---------- ---------- Balance at end of year $ 38,367 $ 38,291 $ 38,253 ========== ========== ========== Additional paid-in capital: Balance at beginning of year $ 454,971 $ 453,894 $ 453,751 Issuance of 20,000 shares of restricted common stock 631 - - Stock options exercised 1,499 1,077 143 ---------- ---------- ---------- Balance at end of year $ 457,101 $ 454,971 $ 453,894 ========== ========== ========== Unamortized value of restricted stock grant: Issuance of 20,000 shares of restricted common stock $ (651) $ - $ - Amortization of restricted stock grant 210 - - ---------- ---------- ---------- Balance at end of year $ (441) $ - $ - ========== ========== ========== Accumulated other comprehensive (loss) income: Balance at beginning of year $ (69,039) $ (61,025) $ (49,694) Comprehensive income (loss) 8,343 (8,014) (11,331) ---------- ---------- ---------- Balance at end of year $ (60,696) $ (69,039) $ (61,025) ========== ========== ========== Retained earnings: Balance at beginning of year $ 413,034 $ 495,510 $ 447,768 Net income (loss) 14,160 (67,164) 63,042 Cash dividends (15,333) (15,312) (15,300) ---------- ---------- ---------- Balance at end of year $ 411,861 $ 413,034 $ 495,510 ========== ========== ========== Comprehensive income (loss) - --------------------------- Net income (loss) $ 14,160 $ (67,164) $ 63,042 ---------- ---------- ---------- Foreign currency translation adjustment 6,784 (9,936) (5,121) Minimum pension liability adjustment 1,559 1,922 (6,210) ---------- ---------- ---------- Other comprehensive income (loss) 8,343 (8,014) (11,331) ---------- ---------- ---------- Total comprehensive income (loss) $ 22,503 $ (75,178) $ 51,711 ========== ========== ========== See Notes to Consolidated Financial Statements. page 29 CONSOLIDATED BALANCE SHEETS The Great Atlantic & Pacific Tea Company, Inc. February 26, February 27, (Dollars in thousands) 2000 1999 - --------------------- ------------ ----------- Assets Current assets: Cash and short-term investments $ 124,603 $ 136,810 Accounts receivable 227,078 204,700 Inventories 791,150 841,030 Prepaid expenses and other current assets 80,052 60,570 ---------- ---------- Total current assets 1,222,883 1,243,110 ---------- ---------- Property: Land 137,672 141,061 Buildings 420,345 406,122 Equipment and leasehold improvements 2,274,349 2,147,418 ---------- ---------- Total-at cost 2,832,366 2,694,601 Less accumulated depreciation and amortization (1,042,704) (1,097,142) ---------- ---------- 1,789,662 1,597,459 Property leased under capital leases 94,146 89,028 ---------- ---------- Property-net 1,883,808 1,686,487 Other assets 228,834 231,217 ---------- ---------- Total assets $3,335,525 $3,160,814 ========== ========== Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term debt $ 2,382 $ 4,956 Current portion of obligations under capital leases 11,327 11,483 Accounts payable 583,142 557,318 Book overdrafts 112,465 160,288 Accrued salaries, wages and benefits 155,649 152,107 Accrued taxes 51,611 54,819 Other accruals 208,002 193,092 ---------- ---------- Total current liabilities 1,124,578 1,134,063 ---------- ---------- Long-term debt 865,675 728,390 ---------- ---------- Long-term obligations under capital leases 117,870 115,863 ---------- ---------- Other non-current liabilities 381,210 345,241 ---------- ---------- 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 38,367,216 and 38,290,716 shares, respectively 38,367 38,291 Additional paid-in capital 457,101 454,971 Unamortized value of restricted stock grant (441) - Accumulated other comprehensive loss (60,696) (69,039) Retained earnings 411,861 413,034 ---------- ---------- Total shareholders' equity 846,192 837,257 ---------- ---------- Total liabilities and shareholders' equity $3,335,525 $3,160,814 ========== ========== See Notes to Consolidated Financial Statements. page 30 STATEMENTS OF CONSOLIDATED CASH FLOWS The Great Atlantic & Pacific Tea Company, Inc. (Dollars in thousands) Fiscal 1999 Fiscal 1998 Fiscal 1997 - --------------------- ----------- ----------- ----------- Cash Flows From Operating Activities: Net income (loss) $ 14,160 $ (67,164) $ 63,042 Adjustments to reconcile net income (loss) to cash provided by operating activities: Store/Facilities exit charge and asset write-off 14,078 224,580 - Depreciation and amortization 232,712 233,663 234,236 Deferred income tax provision (benefit) on income (loss) before extraordinary item 8,258 (165,672) 11,425 (Gain) loss on disposal of owned property and write-down of property, net (2,973) 4,541 (11,363) (Increase) decrease in receivables (23,041) 19,562 (14,116) Decrease (increase) in inventories 60,026 34,762 (6,090) Decrease (increase) in prepaid expenses and other current assets 2,392 6,816 (2,630) (Increase) decrease in other assets (16,630) 2,071 (1,435) Increase (decrease) in accounts payable 16,546 122,251 (24,542) Increase in accrued expenses 4,797 2,633 8,594 Increase in other accruals 518 43,604 4,250 Increase in non-current other liabilities 5,432 28,203 15,906 Other, net (1,615) (2,764) (1,050) --------- --------- --------- Net cash provided by operating activities 314,660 487,086 276,227 --------- --------- --------- Cash Flows From Investing Activities: Expenditures for property (479,572) (438,345) (267,623) Proceeds from disposal of property 101,319 12,546 31,783 --------- --------- --------- Net cash used in investing activities (378,253) (425,799) (235,840) --------- --------- --------- Cash Flows From Financing Activities: Proceeds under revolving lines of credit 165,102 451,523 947,148 Payments on revolving lines of credit (235,150) (411,632) (991,296) Proceeds from long-term borrowings 206,010 3,685 304,213 Payments on long-term borrowings (4,975) (22,456) (267,848) Principal payments on capital leases (11,968) (12,139) (13,711) (Decrease) increase in book overdrafts (49,354) 12,079 (28,145) Deferred financing fees (6,298) - (2,471) Proceeds from stock options exercised 1,555 1,115 149 Cash dividends (15,333) (15,312) (15,300) --------- --------- ---------- Net cash provided by (used in) financing activities 49,589 6,863 (67,261) --------- --------- --------- Effect of exchange rate changes on cash and short-term investments 1,797 (2,277) (1,019) --------- --------- --------- Net (Decrease) Increase in Cash and Short-term Investments (12,207) 65,873 (27,893) Cash and Short-term Investments at Beginning of Year 136,810 70,937 98,830 --------- --------- --------- Cash and Short-term Investments at End of Year $ 124,603 $ 136,810 $ 70,937 ========= ========= ========= See Notes to Consolidated Financial Statements. page 31 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: Operating Segments, Wholesale Franchise Business, Income Taxes and Retirement Plans and Benefits. The principal shareholder of the Company, Tengelmann Warenhandelsgesellschaft, owned 54.81% of the Company's common stock as of February 26, 2000. 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 1999 ended February 26, 2000, fiscal 1998 ended February 27, 1999 and fiscal 1997 ended February 28, 1998. Fiscal 1999 and fiscal 1998 were each comprised of 52 weeks while fiscal 1997 was comprised of 53 weeks. 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 $139 million for fiscal 1999, $136 million for fiscal 1998 and $138 million for fiscal 1997. 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 1999 and 1997, the Company disposed of certain assets which resulted in a pretax gain of $3 million and $11 million, respectively. During fiscal 1998, the Company disposed of certain assets which resulted in a pretax loss of $5 million. Pre-opening Costs The costs of opening new stores are expensed as incurred. Software Costs The Company capitalizes externally purchased software and amortizes it over three years. Amortization expense for fiscal 1999, fiscal 1998 and fiscal 1997 was $0.9 million, $0.8 million and $0.4 million, respectively. Effective February 29, 1998, the Company adopted the provisions of the American Institute of Certified Public Accountants' Statement of Position 98- 1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires the capitalization of certain internally generated software costs. Such software is amortized over three years and for fiscal 1999 and 1998, the Company capitalized $0.9 million and $1.4 million, respectively, of such software costs and recorded amortization expense of $0.5 million and $0.1 million, respectively. Earnings Per Share In the fourth quarter of fiscal 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") 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 page 32 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. The weighted average shares outstanding utilized in the basic EPS calculation were 38,330,379 for fiscal 1999, 38,273,859 for fiscal 1998 and 38,249,832 for fiscal 1997. The common stock equivalents that were added to the weighted average shares outstanding for purposes of diluted EPS were 85,041 for fiscal 1999 and 19,926 for fiscal 1997. The common stock equivalents for fiscal 1998 would have been 47,772; however, such shares were antidilutive and thus excluded from the diluted EPS calculation for fiscal 1998. 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 between fifteen to forty years. The Company recorded amortization expense of $1.2 million for fiscal 1999 and $1.5 million for both fiscal 1998 and 1997. The accumulated amortization relating to goodwill amounted to $11.1 million and $13.2 million at February 26, 2000 and February 27, 1999, respectively. The decrease in accumulated amortization results from the disposal of the Atlanta division in the first quarter of fiscal 1999 (see "Store and Facilities Exit Costs" footnote" for further details). 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 26, 2000, 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 In accordance with SFAS No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets 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. 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 Company recorded impairment losses during the year ended February 27, 1999 (see "Store and Facilities Exit Costs" footnote for further details). 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 Consolidated Balance Sheets. The Company accrues for vested and non-vested vacation pay. Liabilities for compensated absences of $79 million at both February 26, 2000 and February 27, 1999, are included in the balance sheet caption "Accrued salaries, wages and benefits". Stock-Based Compensation The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") with pro forma disclosure of net income and earnings per share as if the fair value based method prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") had been applied. page 33 Comprehensive Income Effective March 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". This statement requires that all components of comprehensive income be reported prominently in the financial statements. Currently, the Company has other comprehensive income relating to foreign currency translation adjustment and minimum pension liability adjustment. Accumulated other comprehensive loss as of February 26, 2000 includes foreign currency translation of $58.0 million and an additional minimum pension liability adjustment of $2.7 million, net of income tax benefit of $2.2 million. Accumulated other comprehensive loss as of February 27, 1999 includes foreign currency translation of $64.8 million and an additional minimum pension liability adjustment of $4.3 million, net of income tax benefit of $3.4 million. 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 Consolidated 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 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement requires that all derivative instruments be measured at fair value and recognized in the balance sheet as either assets or liabilities. In addition, the accounting for changes in the fair value of a derivative (gains and losses) depends on the intended use of the derivative and the resulting designation. For a derivative designated as a hedge, the change in fair value will be recognized as a component of other comprehensive income; for a derivative not designated as a hedge, the change in the fair value will be recognized in the Statements of Consolidated Operations. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" which delays the adoption of SFAS 133 for one year, to fiscal years beginning after June 15, 2000. The Company plans to adopt SFAS 133 in the first quarter of fiscal 2001. The Company is currently evaluating the impact this pronouncement will have on the Consolidated Financial Statements. STORE AND FACILITIES EXIT COSTS In May 1998, the Company initiated a vigorous assessment of all aspects of its business operations in order to identify the factors that were impacting the performance of the Company. As a result of the above assessment, in the third quarter of fiscal 1998, the Company decided to exit two warehouse facilities and a coffee plant in the U.S. and a bakery plant in Canada. In connection with the exit plan, the Company recorded a charge of approximately $11 million which is included in "Store operating, general and administrative expense" in the Statements of Consolidated Operations for fiscal 1998. The $11 million charge was comprised of $7 million of severance, $3 million of facilities occupancy costs for the period subsequent to closure and $1 million to write- down the facilities to their estimated fair value. As of February 27, 1999, the Company had closed and terminated operations with respect to page 34 the warehouses and the coffee plant. The volume associated with the two warehouses has been transferred to other warehouses in close geographic proximity. Further, the manufacturing processes of the coffee plant have been transferred to the Company's remaining coffee processing facility. The processing associated with the Canadian bakery has been outsourced effective January 1999. In addition, on December 8, 1998, the Company's Board of Directors approved a plan which included the exit of 127 underperforming stores throughout the United States and Canada and the disposal of two other properties. Included in the 127 stores are 31 stores representing the entire Richmond, Virginia market. Further on January 28, 1999, the Board of Directors approved the closure of five additional underperforming stores. In connection with the Company's plan to exit these 132 stores and the write- down of two properties, the Company recorded a charge in the fourth quarter of fiscal 1998 of approximately $215 million. This $215 million charge consisted of $8 million of severance, $1 million of facilities occupancy costs, $114 million of store occupancy costs, which principally relates to the present value of future lease obligations, net of anticipated sublease recoveries, which extend through fiscal 2028, an $83 million write-down of store fixed assets and a $9 million write-down to their estimated fair value of the two properties which are held for sale. To the extent fixed assets included in those stores identified for closure could be utilized in other continuing stores, the Company transferred those assets to continuing stores. The Company will scrap fixed assets that could not be transferred and accordingly, the write-down was calculated based upon an estimated scrap value. This fourth quarter charge of $215 million was reduced by approximately $2 million in fiscal 1998 due to changes in estimates of pension withdrawal liabilities and fixed asset write-downs from the time the original charge was recorded. The net charge of $213 million is included in "Store operating, general and administrative expense" in the Statements of Consolidated Operations for fiscal 1998. In addition to the charges recorded in fiscal 1998, there are other charges related to the plan which could not be accrued at February 27, 1999 because they did not meet the criteria for accrual under EITF 94-3. Such costs have been expensed as incurred as the plan was being executed. During fiscal 1999, the Company recorded an additional pretax charge of $11 million for severance related to the 132 stores. On April 26, 1999, the Company announced that it had reached definitive agreements to sell 14 stores in the Atlanta, Georgia market, two of which were previously included in the Company's store exit program. In conjunction with the sale, the Company decided to exit the entire Atlanta market and close the remaining 22 stores, as well as the distribution center and administrative office. Accordingly, at the time of the announcement, the Company recorded a fiscal 1999 first quarter net pretax charge of approximately $5 million. This charge is comprised of severance of $6 million, future lease commitments of $11 million, partially offset by a $12 million gain related to the disposition of fixed and intangible assets. The net charge is included in "Store operating, general and administrative expense" in the Statements of Consolidated Operations for fiscal 1999. The Company paid $23 million of the total net severance charges from the time of the original charges through the end of fiscal 1999 which resulted from the termination of approximately 3,400 employees. The remaining individual severance payments will be paid by the end of fiscal 2000. The following tabular reconciliation summarizes the activity related to the aforementioned charges since their initial recording: Severance Store Fixed and Facilities (Dollars in thousands) Occupancy Assets Benefits Occupancy Total - --------------------- --------- -------- -------- ---------- --------- Original Charge $113,732 $ 93,355 $15,102 $ 4,018 $ 226,207 Addition (1) 1,900 - - - 1,900 Utilization (1,100) (92,639) (3,794) (311) (97,844) Adjustment (2) - (716) (1,242) 331 (1,627) --------- -------- ------- ------- --------- Reserve Balance at Feb. 27, 1999 114,532 - 10,066 4,038 128,636 Addition (3) 15,730 - 17,060 3,188 35,978 Utilization (4,614)(4) (295) (19,626) (3,659) (28,194) Adjustment (5) (22,195) 295 - - (21,900) --------- -------- ------- ------- --------- Reserve Balance at Feb. 26, 2000 $103,453 $ - $ 7,500 $ 3,567 $ 114,520 ========= ======== ======= ======= ========= (1) The fiscal 1998 addition represents an increase to the store occupancy reserve for the present value interest accrued. (2) The fiscal 1998 adjustment represents changes in estimates from the original date the respective charges were recorded. The adjustment to severance and benefits relates to a change in the estimate of the calculated pension withdrawal liability. page 35 (3) The fiscal 1999 addition represents an increase to the store occupancy reserve for the present value interest accrued ($7.4 million), the additional severance cost ($11.5 million) and the cost of exiting the Atlanta market (including store occupancy of $8.3 million, severance of $5.6 million and facilities costs of $3.2 million). (4) Store occupancy utilization for fiscal 1999 is comprised of $29.6 million of lease and other occupancy payments for the period, net of $25.0 million of net proceeds on the assignment of leases which was considered in the original charge recorded during fiscal 1998. (5) At each balance sheet date, Management assesses the adequacy of the reserve balance to determine if any adjustments are required as a result of changes in circumstances and/or estimates. The Company has made favorable progress to date in marketing and subleasing the closed stores. As a result, in the third quarter of fiscal 1999, the Company recorded a net reduction in "Store operating, general and administrative expense" of $21.9 million to reverse a portion of the $215 million restructuring charge recorded in fiscal 1998. This amount represents a $22.2 million reduction in "Store operating, general and administrative expense" for lower store occupancy costs resulting primarily from earlier than anticipated lease terminations and subleases. The credit is partially offset by $0.3 million of additional fixed asset write- downs resulting from lower than anticipated proceeds from the sale of fixed assets. Based upon current available information, Management evaluated the reserve balance of $114.5 million as of February 26, 2000 and has concluded that it is adequate. The Company will continue to monitor the status of the vacant properties and further adjustments to the reserve balance may be recorded in the future, if necessary. As of February 26, 2000, the Company closed all 34 stores in the Atlanta, Georgia market and 131 of the 132 other stores, including all 31 stores in the Richmond, Virginia market. The remaining store is in the process of being disposed of. At February 26, 2000, $28.2 million of the reserve is included in "Other accruals" and $86.3 million is included in "Other non-current liabilities" in the Consolidated Balance Sheets. Included in the Statements of Consolidated Operations are the operating results of the 132 underperforming stores and the 34 Atlanta stores which the Company has exited. The operating results of these stores are as follows: Fiscal Fiscal Fiscal (Dollars in thousands) 1999 1998 1997 - ---------------------- -------- ---------- ---------- Sales $200,208 $1,069,441 $1,205,431 ======== ========== ========== Operating Loss $(30,572) $ (43,105) $ (23,210) ======== ========== ========== INVENTORY Approximately 13% and 18% of the Company's inventories are valued using the last-in, first-out ("LIFO") method at February 26, 2000 and February 27, 1999, respectively. Such inventories would have been $20 million and $19 million higher at February 26, 2000 and February 27, 1999, respectively, if the retail and first-in, first-out methods were used. The Company recorded LIFO charges of approximately $1 million during both fiscal 1999 and 1998. During fiscal 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. WHOLESALE FRANCHISE BUSINESS The Company serviced 65 franchised stores as of February 26, 2000 and 55 stores as of February 27, 1999. These franchised stores are required to purchase inventory exclusively from the Company which acts as a wholesaler to the franchisees. During fiscal 1999 and 1998, the Company had wholesale sales to these franchised stores of $523 million and $387 million, respectively. A majority of the 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 franchised business receivables, net of allowance for doubtful accounts, amounting to $53.4 million as of February 26, 2000 and $36.4 million as of February 27, 1999. The inventory notes are collateralized by the inventory page 36 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 $4.1 million as of February 26, 2000 and $2.1 million as of February 27, 1999 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 franchisees 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) - ---------------------- 2000 $ 9,910 2001 10,371 2002 10,371 2003 10,371 2004 10,371 2005 and thereafter 29,608 -------- 81,002 Less interest portion (23,593) -------- Due from franchise business $ 57,409 ======== For the fiscal years ended February 26, 2000 and February 27, 1999, approximately $18 million and $8 million, respectively, of the franchise business notes relate to equipment leases which were non-cash transactions and, accordingly, have been excluded from the Statements of Consolidated Cash Flows. INDEBTEDNESS Debt consists of: February 26, February 27, (Dollars in thousands) 2000 1999 - ---------------------- ----------- ----------- 9.375% Notes, due August 1, 2039 $200,000 $ - 7.75% Notes, due April 15, 2007 300,000 300,000 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 2000 through 2003 (average interest rates at year end of 7.12% and 5.81%, respectively) 8,023 7,417 U.S. Bank Borrowings at 6.35% and 5.49%, respectively 87,000 153,100 Less unamortized discount on 7.75% Notes (1,966) (2,171) -------- -------- 868,057 733,346 Less current portion (2,382) (4,956) -------- -------- Long-term debt $865,675 $728,390 ======== ======== The Company has an unsecured five year $465 million U.S. credit agreement and a five year C$50 million Canadian credit agreement (the "Credit Agreement") expiring June 10, 2002 with a syndicate of banks, enabling it to borrow funds on a revolving basis sufficient to refinance short-term borrowings. The Company pays a facility fee of 0.25% per annum on the total commitment of the U.S. and Canadian revolving credit facilities. Borrowings under the U.S. credit agreement were $60 million and $130 million at February 26, 2000 and February 27, 1999, respectively. The Canadian subsidiary had no outstanding borrowings at February 26, 2000 or February 27, 1999. Accordingly, as of February 26, 2000, the Company has available $405 million under its U.S. credit agreement and C$50 million (U.S. $34 million at February 26, 2000) under the Canadian credit agreement. As of February 27, 1999, the Company had available $335 million under its U.S. credit agreement and C$50 million (U.S. $33 million at February 27, 1999) under the Canadian credit agreement. The U.S. has uncommitted lines of credit with various banks amounting to $110 million and $211 million as of February 26, 2000 and February 27, 1999, respectively. Borrowings under these uncommitted lines of credit amounted to $27 million and $23 million as of February 26, 2000 and February 27, 1999, respectively. Accordingly, as of February 26, 2000, the Company has available $83 million in uncommitted lines of credit. As of February 26, 2000, the Company has 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. The Company also has outstanding $200 million unsecured, public debt securities in the form of 9.375% Notes due August 1, 2039 which are callable after five years. On August 6, 1999, the Company issued $200 million aggregate principal amount 9.375% senior quarterly interest bonds due August 1, 2039. The page 37 Company used the net proceeds from the issuance of the bonds to repay borrowings under its revolving credit facility, to finance the purchase of 16 stores, (6 in the United States and 10 in Canada) and for working capital and general corporate purposes. 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, to prepay other indebtedness and for general corporate purposes. The Company's Canadian subsidiary, The Great Atlantic & Pacific Company of Canada, Limited ("A&P Canada"), has outstanding U.S. $75 million 5 year Notes denominated in U.S. dollars that were issued in October 1995 and are due on November 1, 2000. The Notes have been classified as long-term debt based on Management's ability and intent to refinance these borrowings on a long-term basis. In conjunction with the issuance of the 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 $5.8 million and $8.4 million as of February 26, 2000 and February 27, 1999, respectively. The fair value of the cross-currency swap was favorable to the Company by $4.6 million and $6.9 million as of February 26, 2000 and February 27, 1999, respectively. 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 contract. On April 15, 1997, A&P Canada entered into an interest rate swap agreement with a notional amount of C$100 million expiring November 1, 2000 where A&P Canada receives a fixed rate of interest and pays a variable rate of interest. In August of 1998, A&P Canada assigned the interest rate swap agreement to a financial institution and received consideration of $0.6 million. The consideration received is being amortized as a reduction to interest expense until November 1, 2000. 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. As a result of the store exit charge recorded on December 8, 1998 (see "Store and Facilities Exit Costs" footnote), the Company would not have been in compliance with certain of its covenants as of February 27, 1999, relating to the Credit Agreement. As such, the Company amended the Credit Agreement prior to February 27, 1999. The Company was in compliance with all such financial covenants, as amended, as of February 26, 2000 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 $9 million for both February 26, 2000 and February 27, 1999. In 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%. The U.S. bank borrowings of $87 million and $153 million are classified as non-current as of February 26, 2000 and February 27, 1999, respectively, as the Company has the ability and intent to refinance these borrowings on a long-term basis. The Company has filed two Shelf Registration Statements dated January 23, 1998 and June 23, 1999, allowing it to offer up to $350 million of debt and equity securities as of February 26, 2000 at terms determined by market conditions at the time of sale. Maturities for the next five fiscal years and page 38 thereafter are: 2000-$2 million; 2001-$1 million; 2002-$163 million; 2003- $200 million; 2004-$0; 2005 and thereafter - $504 million. Interest payments on indebtedness were approximately $66 million for fiscal 1999, $56 million for fiscal 1998 and $58 million for fiscal 1997. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows: (Dollars in thousands) February 26, 2000 February 27, 1999 - --------------------- ----------------- ----------------- Carrying Fair Carrying Fair Liabilities: Amount Value Amount Value -------- -------- -------- -------- 9.375% Notes, due August 1, 2039 $200,000 $175,000 $ - $ - -------- -------- -------- -------- 7.75% Notes, due April 15, 2007 $298,034 $270,094 $297,829 $287,384 -------- -------- -------- -------- 7.70% Senior Notes, due January 15, 2004 $200,000 $188,250 $200,000 $197,271 -------- -------- -------- -------- 7.78% Notes, due November 1, 2000 $ 75,000 $ 74,438 $ 75,000 $ 75,243 -------- -------- -------- -------- Total Indebtedness $868,057 $802,805 $733,346 $720,415 ======== ======== ======== ======== 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 both February 26, 2000 and February 27, 1999. As of February 26, 2000 and February 27, 1999, the carrying values of cash and short-term investments, accounts receivable and accounts payable approximated fair values due to the short-term maturities of these instruments. At February 26, 2000 and February 27, 1999, the estimated fair value of the cross-currency swap agreement was as follows: (Dollars in thousands) February 26, 2000 February 27, 1999 - --------------------- ----------------- ----------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- ------ Cross-currency swap $5,758 $4,568 $8,438 $6,927 ======== ======== ======== ====== The fair values were determined by the counterparty, which is a widely recognized investment banker. As of the end of fiscal 1999, 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 26, February 27, (Dollars in thousands) 2000 1999 - --------------------- ----------- ----------- Real property leased under capital leases $ 207,117 $ 210,094 Accumulated amortization (112,971) (121,066) --------- --------- $ 94,146 $ 89,028 ========= ========= During fiscal 1999 and 1998, the Company entered into new capital leases totaling $16 million and $12 million, respectively. The Company did not enter into any new capital leases during fiscal 1997. These capital lease amounts are non-cash transactions and, accordingly, have been excluded from the Statements of Consolidated Cash Flows. Interest paid as part of capital lease obligations was approximately $14 million in both fiscal 1999 and 1998 and $16 million in fiscal 1997. Rent expense for operating leases consists of: (Dollars in thousands) Fiscal 1999 Fiscal 1998 Fiscal 1997 - --------------------- ----------- ----------- ----------- Minimum rentals $194,158 $193,703 $181,061 Contingent rentals 3,780 3,987 5,109 -------- -------- -------- $197,938 $197,690 $186,170 ======== ======== ======== Future minimum annual lease payments for capital leases and noncancelable operating leases in effect at February 26, 2000 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 65 stores to the franchise business. Included in the operating lease table below are the rental payments made by the Company partially offset by the rental income received from the franchised stores. page 39 (Dollars in thousands) Capital - --------------------- Leases Real Operating Fiscal Property Leases - ------ --------- ---------- 2000 $ 25,536 $ 211,640 2001 24,709 206,608 2002 22,898 196,218 2003 20,691 186,050 2004 18,925 179,212 2005 and thereafter 151,627 1,809,206 --------- ---------- 264,386 $2,788,934 Less executory costs (1,247) ========== --------- Net minimum rentals 263,139 Less interest portion (133,942) --------- Present value of net minimum rentals $ 129,197 ========= INCOME TAXES The components of income (loss) before income taxes and extraordinary item are as follows: (Dollars in thousands) Fiscal 1999 Fiscal 1998 Fiscal 1997 - --------------------- ----------- ----------- ----------- United States $ (77) $(244,573) $45,644 Canadian 27,080 15,289 37,256 ------- --------- -------- Total $27,003 $(229,284) $82,900 ======= ========= ======== The provision (benefit) for income taxes before extraordinary item consists of the following: (Dollars in thousands) Fiscal 1999 Fiscal 1998 Fiscal 1997 - --------------------- ----------- ----------- ---------- Current: Federal $ 872 $ - $ 4,171 Canadian 710 552 700 State and local 3,003 3,000 3,018 -------- --------- -------- 4,585 3,552 7,889 -------- --------- -------- Deferred: Federal 121 (77,489) 11,076 Canadian 12,045 6,806 16,624 State and local (3,908) (25,786) 349 Canadian valuation allowance - (69,203) (16,624) -------- ---------- -------- 8,258 (165,672) 11,425 -------- --------- --------- $ 12,843 $(162,120) $ 19,314 ========= ========= ======== The deferred income tax provision (benefit) results primarily from the annual change in temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws, net operating tax loss carryforwards and in fiscal 1998 and 1997, the Canadian valuation allowance. The Company recorded income tax provisions amounting to $13 million in fiscal 1999 as compared to income tax benefits of $162 million for fiscal 1998 and income tax provisions of $19 million for fiscal 1997. The fiscal 1998 benefit of $162 million includes reversals of the Canadian operations deferred tax valuation allowance. During the first three quarters of fiscal 1998, the Company reversed approximately $9 million of the Canadian valuation allowance to the extent that the Canadian operations had taxable income. In addition, in the fourth quarter of fiscal 1998, the Company concluded that it was more likely than not that the net deferred tax assets related to the Canadian operations would be realized based upon Management's plan to close underperforming stores in Canada (see "Store and Facilities Exit Costs" footnote), the implementation of certain tax strategies and the continued performance improvements of the Canadian operations. Accordingly, the Company reversed the remaining portion of the Canadian deferred tax valuation allowance amounting to approximately $60 million. The deferred tax benefit recorded for U.S. operations of approximately $103 million mainly relates to book and tax differences of the store and facilities exit costs recorded in fiscal 1998. The fiscal 1997 income tax provisions include reversals of the Canadian valuation allowance of $17 million. These reversals were recorded to the extent that the Canadian operations had taxable income. However, Management had still concluded that it was more likely than not that the Canadian net deferred tax assets would not be realized, and through the end of fiscal 1997, the Company provided a full valuation allowance for its Canadian net deferred tax assets, principally net operating loss carryforwards. The Company has elected to permanently reinvest earnings of the Canadian subsidiary. Accordingly, the Company does not provide for taxes associated with Canada's undistributed earnings. As of February 26, 2000, the Company had net operating tax loss carryforwards of approximately $133 million, consisting of $80 million from the Canadian operations and $53 million from the U.S. operations. The Canadian portion of the net operating loss carryforwards will expire between February 2002 and February 2007 and the U.S. portion will expire between February 2019 and February 2020. A reconciliation of income taxes at the 35% federal statutory income tax rate for fiscal 1999, 1998 and 1997 to income taxes as reported is as follows: (Dollars in thousands) Fiscal 1999 Fiscal 1998 Fiscal 1997 - ---------------------- ----------- ----------- ----------- Income taxes computed at federal statutory income tax rate $ 9,451 $ (80,249) $ 29,015 State and local income taxes, net of federal tax benefit (588) (14,810) 2,188 Tax rate differential relating to Canadian operations 3,278 2,007 4,155 Canadian valuation allowance - (69,203) (16,624) Goodwill and other permanent differences 702 135 580 ------- --------- -------- Income taxes, as reported $12,843 $(162,120) $ 19,314 ======= ========= ======== page 40 Income tax payments, net of refunds, for fiscal 1999 and 1998 were approximately $6 million and $2 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 26, February 27, (Dollars in thousands) 2000 1999 - ---------------------- ------------ ------------ Current assets: Insurance reserves $ 31,073 $ 20,158 Other reserves and accrued benefits 40,659 31,219 Accrued postretirement and postemployment benefits 1,406 2,717 Lease obligations 1,315 1,472 Pension obligations 4,241 4,486 Miscellaneous 6,612 4,055 --------- --------- 85,306 64,107 --------- --------- Current liabilities: Inventories (15,561) (14,697) Health and welfare (9,841) (9,167) Miscellaneous (5,693) (6,519) --------- ---------- (31,095) (30,383) --------- ---------- Deferred income taxes included in prepaid expenses and other current assets $ 54,211 $ 33,724 ========= ========== February 26, February 27, (Dollars in thousands) 2000 1999 - --------------------- ------------ ------------ Non-current assets: Isosceles investment $ 42,617 $ 42,617 Alternative minimum tax 7,500 7,500 Fixed assets 459 3,449 Other reserves 56,372 74,397 Lease obligations 14,530 15,787 Net operating loss carryforwards 75,417 66,736 Insurance reserves 4,200 5,881 Accrued postretirement and postemployment benefits 31,035 35,387 Pension obligations 4,140 7,527 Step rents 15,098 13,619 Miscellaneous 7,364 5,308 --------- --------- 258,732 278,208 --------- --------- Non-current liabilities: Fixed assets (244,050) (237,213) Pension obligations (20,807) (21,136) Miscellaneous (2,352) (2,590) ---------- --------- (267,209) (260,939) ---------- --------- Net non-current deferred income tax (liability) asset $ (8,477) $ 17,269 ========== ========= The net non-current deferred tax asset and liability is recorded in the Consolidated Balance Sheets as follows: February 26, February 27, (Dollars in thousands) 2000 1999 - ---------------------- ------------ ------------ Other assets $ 49,992 $ 59,651 Non-current liability (58,469) (42,382) ---------- ---------- Net non-current deferred income tax (liability) asset $ (8,477) $ 17,269 ========== ========== RETIREMENT PLANS AND BENEFITS Defined Benefit Plans The Company provides retirement benefits to certain non-union and 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. During fiscal 1998, the Company adopted SFAS No. 132, "Employers' Disclosure about Pension and Postretirement Benefits" ("SFAS 132"). SFAS 132 standardizes the disclosure requirements for pension and other postretirement benefits. This Statement addresses disclosure only. It does not address expense recognition or liability measurement. Accordingly, there was no effect on financial position or net income as a result of adopting SFAS 132. The components of net pension cost are as follows: (Dollars in thousands) Fiscal 1999 Fiscal 1998 Fiscal 1997 - --------------------- ----------- ----------- ----------- Service cost $16,153 $ 14,014 $ 11,942 Interest cost 26,300 25,872 26,192 Expected return on plan assets (34,890) (32,040) (31,279) Amortization of unrecognized net asset (1,194) (1,184) (1,244) Amortization of unrecognized net prior service cost 1,240 1,237 1,158 Amortization of unrecognized net actuarial loss 730 506 380 Curtailments and settlements 1,205 863 - -------- -------- -------- Net pension cost $ 9,544 $ 9,268 $ 7,149 ======== ======== ======== 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 following tables set forth the change in benefit obligations and change in plan assets for fiscal 1999 and 1998 for the Company's defined benefit plans: (Dollars in thousands) - ---------------------- Change in Benefit Obligation 1999 1998 - ---------------------------- -------- -------- Benefit obligation - beginning of year $423,156 $403,970 Service cost 16,153 14,014 Interest cost 26,300 25,872 Actuarial (gain) loss (60,065) 18,991 Benefits paid (26,195) (24,948) Amendments 1,721 167 Curtailments and settlements 1,182 460 Effect of exchange rates 11,362 (15,370) -------- -------- Benefit obligation - end of year $393,614 $423,156 ======== ======== Change in Plan Assets - --------------------- Plan assets at fair value - beginning of year $458,663 $444,408 Actual return on plan assets 9,023 46,412 Company contributions 9,865 10,019 Benefits paid (26,195) (24,948) Effect of exchange rates 13,082 (17,228) -------- -------- Plan assets at fair value- end of year $464,438 $458,663 ======== ======== page 41 Amounts recognized in the Company's Consolidated Balance Sheets consist of the following: (Dollars in thousands) - ---------------------- 1999 1998 ---- ---- Plan assets in excess of projected benefit obligation $ 70,824 $ 35,507 Unrecognized net transition asset (3,013) (4,078) Unrecognized prior service cost 6,262 5,407 Unrecognized net actuarial gain (43,891) (8,105) -------- -------- Total recognized in the Consolidated Balance Sheets $ 30,182 $ 28,731 ======== ======== Prepaid benefit cost $ 56,529 $ 51,480 Accrued benefit liability (31,504) (33,198) Intangible asset 236 2,734 Other comprehensive income 2,729 4,288 Tax benefit 2,192 3,427 -------- -------- Total recognized in the Consolidated Balance Sheets $ 30,182 $ 28,731 ======== ======== Plans with accumulated benefit obligation in excess of plan assets consist of the following: 1999 1998 ---- ---- Accumulated benefit obligation $ 92,973 $111,738 Projected benefit obligation $ 97,114 $116,800 Plan assets at fair value $ 69,480 $ 85,199 -------- -------- 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 26, 2000 and February 27, 1999, 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, $2.7 million and $4.3 million, each net of income tax benefits was reflected as a reduction to shareholders' equity, respectively. 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 during fiscal 2000. The transfer to CCWIPP has been delayed for the past five 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 26, 2000 and February 27, 1999, prepaid pension assets of approximately $16 million related to the aforementioned plans are included in the table herein. Actuarial assumptions used to determine year-end plan status are as follows: 1999 1998 ----------------- --------------- U.S. Canada U.S. Canada ----- ------ ----- ------ Weighted average discount rate 7.75% 7.50% 6.50% 6.25% Weighted average rate of compensation increase 4.75% 4.00% 4.00% 4.00% Expected long-term rate of return on plan assets 8.75% 8.40% 8.00% 8.40% 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 2000. 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 1999, 1998 and 1997. Multi-employer Union Pension Plans 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 $32 million in fiscal 1999, $34 million in fiscal 1998 and $38 million in fiscal 1997. The Company could, under certain 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 page 42 liabilities for future withdrawals because such withdrawals 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 1999 Fiscal 1998 Fiscal 1997 - ---------------------- ----------- ----------- ----------- Service cost $ 548 $1,666 $ 788 Interest cost 1,977 3,464 2,518 Prior service cost (1,347) (263) - Amortization of (gain) loss (509) 27 (1,056) ------- ------- ------- Net postretirement benefits cost $ 669 $4,894 $ 2,250 ======= ======= ======= The unfunded status of the plans is as follows: (Dollars in thousands) Fiscal 1999 Fiscal 1998 - ---------------------- ----------- ----------- Unfunded accumulated benefit obligation at beginning of year $36,690 $48,980 Service cost 548 1,666 Interest cost 1,977 3,464 Benefits paid (1,782) (2,790) Actuarial (gain) loss (9,533) 1,837 Plan amendment - (16,162) Foreign exchange 290 (305) -------- ------- Accumulated benefit obligation at end of year 28,190 36,690 Unrecognized net gain from experience differences 9,191 221 Unrecognized prior service cost 14,552 15,899 -------- ------- Accrued postretirement benefit costs at end of year $51,933 $52,810 ======== ======= Assumed discount rate: U.S. 7.75% 6.50% Canada 7.50% 6.50% -------- ------- The assumed rate of future increase in health care benefit cost for fiscal 1999 was 9.25% and is expected to decline to 5.0% by the year 2020 and remain at that level thereafter. The effect of a 1% change in the assumed health care cost trend rate for each future year on the net postretirement health care cost would either increase by $0.3 million or decrease by $0.2 million, while the accumulated postretirement benefit obligation would either increase by $3.0 million or decrease by $2.5 million. 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 26, 2000. As of February 26, 2000 and February 27, 1999, the Company has a liability reflected in the Consolidated Balance Sheets of $25 million and $24 million, respectively, with respect to such benefits. STOCK OPTIONS At February 26, 2000, the Company has four 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 and SAR's vest over a four year period on the anniversary date of issuance, while some options vest immediately. Effective July 13, 1999, the Board of Directors and shareholders approved the 1998 Long Term Incentive and Share Award Plan (the "1998 Plan") for its officers and key employees. The 1998 Plan provides for the granting of 5,000,000 shares as options, SAR's or stock awards. The Company's 1994 Stock Option Plan (the "1994 Plan") for officers and key employees provided for the granting of 1,500,000 shares as either options or SAR's. The 1,500,000 shares to be granted under the 1994 Plan were fully utilized as of February 26, 1999. 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. 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 totaled 3,600 in fiscal 1999 and 1,600 in both fiscal 1998 and 1997. Options and SAR's issued under all of the Company's plans are granted at the fair market value of the Company's common stock at the date of grant. 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. In fiscal 1999, 488,050 options were granted under the 1998 Plan. There were no SAR's granted during fiscal 1999. The Company accounts for stock options using page 43 the intrinsic value-based method prescribed by APB 25. 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 earnings per share would have been reduced to the pro forma amounts indicated below: (Dollars in thousands, except per share amounts) - ------------------------------------------------ Fiscal Fiscal Fiscal 1999 1998 1997 ------ ------ ------ Net income (loss): As reported $14,160 $(67,164) $63,042 Pro forma $11,275 $(68,987) $61,584 Net income (loss) per share - basic and diluted: As reported $ 0.37 $ (1.75) $1.65 Pro forma $ 0.29 $ (1.80) $1.61 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. The fair value of the fiscal 1999, 1998 and 1997 option grants was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: fiscal 1999, 1998 and 1997; expected volatility of 30% and expected life of 7 years for all three years. The dividend yield was between 1.08% and 1.42% in fiscal 1999 and 1.23% and 1.63% in both fiscal 1998 and 1997. The risk-free interest rates used for the grants are between 5.37% and 6.78% in fiscal 1999, 5.14% and 5.63% in fiscal 1998 and 6.11% and 6.84% in fiscal 1997. For fiscal 1999, the Company recognized a $3.1 million credit to reverse previously accrued SAR compensation charges due to the decline in the Company's stock price. The Company recognized compensation expense of $0.6 million and $1.4 million in fiscal 1998 and 1997, respectively, 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 of the Company's common stock on the date of grant. A summary of option transactions is as follows: Officers, Key Employees and Directors - ------------------------------------- Weighted Average Exercise Shares Price --------- -------- 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 Granted 897,600 31.32 Cancelled or expired (10,000) 27.88 Exercised (37,750) 27.88 --------- ------- Outstanding February 27, 1999 1,799,800 $29.55 Granted 491,650 32.35 Cancelled or expired (211,000) 29.69 Exercised (56,500) 26.64 --------- ------- Outstanding February 26, 2000 2,023,950 $30.30 ========= ======= Exercisable at: February 27, 1999 499,399 $27.68 February 26, 2000 811,450 $28.61 --------- ------- Following are the weighted average fair value of options granted during the year ended: February 28, 1998 $10.96 February 27, 1999 $11.72 February 26, 2000 $12.64 ------- A summary of stock options outstanding and exercisable at February 26, 2000 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. 26, 2000 Life Price Feb. 26, 2000 Price - --------------- ------------- ----------- -------- ------------- ------- $21.50-$26.13 51,200 6.4 years $24.72 38,700 $24.27 $26.50-$27.50 128,600 6.6 years $27.28 86,816 $27.27 $27.63-$27.75 116,200 6.4 years $27.73 66,200 $27.72 $27.88 392,750 5.3 years $27.88 392,750 $27.88 $28.25-$30.00 38,000 9.8 years $28.91 - - $30.25-$32.56 870,800 8.8 years $31.40 226,984 $31.39 $32.44-$37.00 426,400 9.3 years $32.67 - - --------- ------- 2,023,950 811,450 ========= ======= A summary of SAR transactions is as follows: Officers and Key Employees - -------------------------- Price Range Shares Per Share ---------- --------------- 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 Cancelled or expired (388,625) 27.45 - 46.38 Exercised (89,644) 21.88 - 27.25 --------- --------------- Outstanding February 27, 1999 1,179,719 $21.88 - $65.13 Cancelled or expired (212,250) 23.38 - 65.13 Exercised (84,707) 21.88 - 27.25 --------- --------------- Outstanding February 26, 2000 882,762 $21.88 - $52.38 ========= =============== Exercisable at: February 27, 1999 1,138,969 $21.88 - $65.13 February 26, 2000 866,137 $21.88 - $52.38 page 44 LITIGATION On August 28, 1998, Capital Graphics Advertising Agency, Inc. ("Capital Graphics") was awarded a verdict against the Company amounting to $4 million. This lawsuit is the result of the Company terminating a relationship with an Atlanta printer, which the Company felt that it had a right to terminate. However, a jury awarded Capital Graphics damages, plus interest and litigation expenses totaling $4 million. During fiscal 1998, the Company recorded a $4 million charge included in store operating, general and administrative expense. The Company believes that it has several strong bases for the appellate court to set aside the jury's verdict and order a new trial. Accordingly, the Company has proceeded with an appeal, which has been argued and is currently under review by the court. The action entitled Shirley A. Lang, et al. v. Kohl's Food Stores, Inc. and The Great Atlantic & Pacific Tea Company, Inc. was tried to a Madison, Wisconsin jury the week commencing August 9, 1999. The issue before the jury was the alleged violation of the Federal Equal Pay Act stemming from the complaint that Kohl's produce clerk and produce manager positions allegedly pay more than Kohl's bakery and deli clerk and manager positions, but allegedly require no greater skill than the produce positions. The plaintiffs sought lost wages, punitive damages and other benefits, costs and attorney's fees and other relief. In July the court had granted summary judgment to the defendants in respect of the alleged violations of the Civil Rights Act of 1964 ("Title VII"), arising out of the same produce/bakery deli pay differential allegations. On August 13, 1999, the jury returned a unanimous verdict in favor of the defendants (i.e., the Company and its Kohl's Food Stores, Inc. subsidiary). An appeal has been filed and will be contested vigorously by the Company. On January 13, 2000, the Attorney General of the State of New York filed an action in New York Supreme Court, City of New York alleging that the Company and its subsidiary, Shopwell, Inc., together with the Company's outside delivery service, Chelsea Trucking, Inc., violated New York law by failing to pay minimum and overtime wages to individuals who deliver groceries at a Food Emporium store in New York City. The complaint seeks a determination of violation of law, an unspecified amount of restitution, an injunction and costs. A purported class action lawsuit was filed on January 13, 2000 in the federal district court for the Southern District of New York against the Company, Shopwell, Inc. and others by Faty Ansoumana and others. The federal court action makes similar minimum wage and overtime pay allegations under both federal and state law and extends the allegations to various stores operated by the Company. The Company plans to vigorously defend both actions, on the ground among others, that the individuals in question are not employees of the Company. The Company is involved in various other 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. SUPPLY CHAIN INITIATIVE - GREAT RENEWAL - PHASE II On March 13, 2000, the Company announced the second phase of its Project Great Renewal, to develop a state-of-the-art supply and business management infrastructure. As of February 26, 2000, the Company has committed to approximately $2 million of software purchases and consulting services, which become due in fiscal 2000. Additionally, subsequent to February 26, 2000 and through April 5, 2000, the Company has entered into agreements with a number of technology hardware, software and consulting suppliers, committing the Company to additional purchases totaling approximately $46 million. Of this amount, approximately $25 million becomes due in fiscal 2000, and approximately $21 million becomes due in fiscal 2001. page 45 OPERATING SEGMENTS During the fourth quarter of fiscal 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). This statement establishes standards for reporting information about operating segments in annual financial statements and selected information in interim financial statements. It also establishes standards for related disclosures about products and services and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker is the Chief Executive Officer. The Company currently operates in three reportable segments: United States Retail, Canada Retail and Wholesale. The retail segments are comprised of retail supermarkets in the United States and Canada, while the Wholesale segment is comprised of the Company's Canadian operation that serves as exclusive wholesaler to the Company's franchised stores and serves as wholesaler to certain third party retailers. The accounting policies for the segments are the same as those described in the summary of significant accounting policies. The Company measures segment performance based upon operating profit. Information on segments is as follows: (Dollars in thousands) - --------------------- Fiscal 1999 - ----------- U.S. Canada Total Retail Retail Wholesale Company ---------- ---------- --------- ----------- Sales $7,981,134 $1,646,712 $523,488 $10,151,334 Depreciation and amortization 204,975 27,413 324 232,712 Operating income 69,703 17,029 18,098 104,830 Interest expense (70,097) (11,504) (2,444) (84,045) Interest income 317 2,521 3,380 6,218 (Loss) income before taxes (77) 8,046 19,034 27,003 Total assets 2,684,624 567,573 83,328 3,335,525 Capital expenditures 416,863 61,444 1,265 479,572 Fiscal 1998 - ----------- U.S. Canada Total Retail Retail Wholesale Company ---------- ---------- --------- ----------- Sales $8,276,493 $1,515,602 $387,263 $10,179,358 Depreciation and amortization 209,656 23,990 17 233,663 Operating (loss) income (186,558) 11,317 10,850 (164,391) Interest expense (58,389) (11,485) (1,623) (71,497) Interest income 876 2,686 3,042 6,604 (Loss) income before taxes (244,071) 2,518 12,269 (229,284) Total assets 2,601,113 504,926 54,775 3,160,814 Capital expenditures 376,688 61,657 - 438,345 Fiscal 1997 - ----------- U.S. Canada Total Retail Retail Wholesale Company ---------- ---------- --------- ----------- Sales $8,344,253 $1,577,742 $340,248 $10,262,243 Depreciation and amortization 209,521 24,699 16 234,236 Operating income 109,501 40,088 5,670 155,259 Interest expense (65,968) (13,179) (1,005) (80,152) Interest income 2,110 2,639 3,044 7,793 Income before taxes and extraordinary item 45,643 29,548 7,709 82,900 Total assets 2,521,008 417,064 57,181 2,995,253 Capital expenditures 243,442 24,181 - 267,623 Geographic Areas Fiscal 1999 Total - ----------- United States Canada Company ------------- ---------- ----------- Sales $7,981,134 $2,170,200 $10,151,334 Long-lived assets 1,652,094 265,818 1,917,912 Fiscal 1998 Total - ----------- United States Canada Company ------------- ---------- ----------- Sales $8,276,493 $1,902,865 $10,179,358 Long-lived assets 1,528,249 204,687 1,732,936 Fiscal 1997 Total - ----------- United States Canada Company ------------- ---------- ----------- Sales $8,344,253 $1,917,990 $10,262,243 Long-lived assets 1,469,641 175,174 1,644,815 page 46 SUMMARY OF QUARTERLY RESULTS (unaudited) The following table summarizes the Company's results of operations by quarter for fiscal 1999 and 1998. The first quarter of each fiscal year contains sixteen weeks, while the other quarters each contain twelve weeks. (Dollars in thousands, First Second Third Fourth Total except per share data) Quarter Quarter Quarter Quarter Year - ---------------------- ------- ------- ------- ------- ------ 1999 Sales $3,113,722 $2,284,380 $2,332,128 $2,421,104 $10,151,334 Gross margin 871,589 661,301 676,288 698,438 2,907,616 Depreciation and amortization 69,966 52,336 54,306 56,104 232,712 Income (loss) from operations (9,710) 26,368 56,084 32,088 104,830 Interest expense 24,394 17,910 20,308 21,433 84,045 Net income (loss) (19,546) 5,378 21,354 6,974 14,160 Per share data: Net income (loss) - basic and diluted (.51) .14 .56 .18 .37 Cash dividends .10 .10 .10 .10 .40 Market price: High 34.25 37.38 36.94 28.88 Low 29.13 32.06 25.44 23.38 Number of stores at end of period 759 749 758 750 Number of franchised stores served at end of period 57 62 62 65 - --------------------------------------------------------------------------- 1998 Sales $3,078,386 $2,330,249 $2,344,400 $2,426,323 $10,179,358 Gross margin 886,313 673,278 679,714 679,943 2,919,248 Depreciation and amortization 72,194 54,167 55,081 52,221 233,663 Income (loss) from operations 44,231 28,653 (1,749) (235,526) (164,391) Interest expense 21,032 15,781 16,212 18,472 71,497 Net income (loss) 19,169 10,951 (8,734) (88,550) (67,164) Per share data: Net income (loss) - basic and diluted .50 .29 (.23) (2.31) (1.75) Cash dividends .10 .10 .10 .10 .40 Market price: High 34.25 33.63 27.63 34.00 Low 29.63 23.56 22.13 25.43 Number of stores at end of period 919 913 907 839 Number of franchised stores served at end of period 53 53 55 55 page 47 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 the 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 page 48 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 26, 2000 and February 27, 1999 and the related statements of consolidated operations, consolidated shareholders' equity and comprehensive income (loss), and consolidated cash flows for each of the three fiscal years in the period ended February 26, 2000. 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 26, 2000 and February 27, 1999 and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 26, 2000 in conformity with generally accepted accounting principles. /s/Deloitte & Touche LLP Parsippany, New Jersey April 5, 2000 page 49 FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA The Great Atlantic & Pacific Tea Company, Inc. (Dollars in thousands, except per share data) - ------------------------ Fiscal 1999 Fiscal 1998 Fiscal 1997 Fiscal 1996 Fiscal 1995 (52 weeks) (52 weeks) (53 weeks) (52 weeks) (52 weeks) ----------- ----------- ----------- ----------------------- Operating Results Sales $10,151,334 $10,179,358 $10,262,243 $10,089,014 $10,101,356 Income (loss) from operations 104,830 (164,391) 155,259 169,303 151,734 Depreciation and amortization 232,712 233,663 234,236 230,748 225,449 Interest expense 84,045 71,497 80,152 73,208 73,143 Income (loss) before extraordinary item 14,160 (67,164) 63,586 73,032 57,224 Extraordinary loss on early extinguishment of debt - - (544) - - Net income (loss) 14,160 (67,164) 63,042 73,032 57,224 - ----------------------------------------------------------------------------- Per Share Data Income (loss) before extraordinary item - basic and diluted .37 (1.75) 1.66 1.91 1.50 Extraordinary loss on early extinguishment of debt - basic and diluted - - (0.01) - - Net income (loss) - basic and diluted .37 (1.75) 1.65 1.91 1.50 Cash dividends .40 .40 .40 .20 .20 Book value per share 22.07 21.87 24.22 23.27 21.53 - ----------------------------------------------------------------------------- Financial Position Current assets 1,222,883 1,243,110 1,217,227 1,231,379 1,174,935 Current liabilities 1,124,578 1,134,063 955,130 1,016,005 983,968 Working capital 98,305 109,047 262,097 215,374 190,967 Current ratio 1.09 1.10 1.27 1.21 1.19 Expenditures for property 479,572 438,345 267,623 296,878 236,139 Total assets 3,335,525 3,160,814 2,995,253 3,002,672 2,860,847 Current portion of long-term debt 2,382 4,956 16,824 18,290 13,040 Current portion of capital lease obligations 11,327 11,483 12,293 12,708 13,125 Long-term debt 865,675 728,390 695,292 701,609 650,169 Long-term portion of capital lease obligations 117,870 115,863 120,980 137,886 129,887 Total debt 997,254 860,692 845,389 870,493 806,221 Debt to total capitalization 54% 51% 48% 49% 49% - ---------------------------------------------------------------------------- Equity Shareholders' equity 846,192 837,257 926,632 890,072 822,785 Weighted average shares outstanding 38,330,379 38,273,859 38,249,832 38,221,329 38,220,333 Number of registered shareholders 6,890 7,419 8,029 8,808 10,010 - ---------------------------------------------------------------------------- Other Number of employees 80,900 83,400 79,980 84,000 89,000 New store openings 54 46 40 30 30 Number of stores at year end 750 839 936 973 1,014 Total store area (square feet) 26,904,331 28,736,319 30,574,286 30,587,324 31,101,589 Number of franchised stores served at year end 65 55 52 49 7 Total franchised store area (square feet) 1,908,271 1,537,388 1,389,435 1,345,786 177,936 - ----------------------------------------------------------------------------- page 50 EXECUTIVE OFFICERS AND OPERATING MANAGEMENT Management Executive Committee Christian W.E. Haub President and Chief Executive Officer Fred Corrado Vice Chairman of the Board, Chief Financial Officer Michael J. Larkin Senior Executive Vice President, Chief Operating Officer George Graham Executive Vice President, Chief Merchandising Officer William Costantini Senior Vice President, General Counsel and Secretary Nicholas Ioli, Jr. Senior Vice President, Chief Information Officer Laurane Magliari Senior Vice President, People Resources and Services Brian Pall Senior Vice President, Chief Development Officer Cheryl Palmer Senior Vice President, Strategic Marketing page 51 SENIOR OPERATING MANAGEMENT ATLANTIC REGION Bill McEwan President and Chief Executive Officer MIDWEST REGION Craig Sturken Chairman and Chief Executive Officer SOUTHERN REGION Donald Dobson Group Vice President A&P CANADA Brian Piwek Vice Chairman, President and Chief Executive Officer COMPASS FOODS/EIGHT O'CLOCK COFFEE Donald J. Sommerville President and General Manager page 52 BOARD OF DIRECTORS James Wood (c) Chairman of the Board John D. Barline, Esq. (b)(e) Williams, Kastner & Gibbs LLP, Tacoma, Washington Rosemarie Baumeister (b) Executive Vice President, Tengelmann Warenhandelsgesellschaft, Muelheim, Germany Fred Corrado (c)(d)(e) Vice Chairman of the Board, Chief Financial Officer 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 Dan Kourkoumelis Former President and CEO, Quality Food Centers, Inc. William A. Liffers (a)(b)(c) Former Vice Chairman, American Cyanamid Company Richard L. Nolan (a) William Barclay Harding Professor of Management Technology at the Harvard Business School and member of the Board of Directors for Novell, Surebridge Technologies, and Zefer Fritz Teelen (d) Former Chief Operating Officer, Tengelmann Warenhandelsgesellschaft, Muelheim, Germany R.L. "Sam" Wetzel (a)(b)(d)(e) President and Chief Executive Officer, Wetzel International, Inc. (a) Member of Audit Review Committee William A. Liffers, Chairman (b) Member of Compensation Policy Committee John D. Barline, 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 page 53 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 9:30 a.m. (CDT) on Tuesday, July 11, 2000 at the Windsor Court Hotel 300 Gravier Street New Orleans, Louisiana. 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 11, 2000. Estimated Date of Announcement of Quarterly Results 1st - July 10, 2000 2nd - October 3, 2000 3rd - January 4, 2001 4th - March 27, 2001 Estimated Date of Dividend Payments 1st - April 17, 2000 2nd - August 7, 2000 3rd - November 3, 2000 4th - January 31, 2001 page 54 EX-21 3 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. AND SUBSIDIARIES State of Incorporation - Maryland Date of Incorporation - May 29, 1925 Name Changed - July 30, 1958 The Stock of all subsidiaries is 100% owned or controlled by the parent company except as denoted below and in the case of a few subsidiaries where nominal qualifying shares are held in the names of subsidiary officers and/or directors in trust. No shares of any subsidiary's stock are subject to options. COMPANIES STATE INCORPORATED A&P Wine and Spirits, Inc. Massachusetts ANP Properties I Corp. Delaware ANP Sales Corp. Maryland 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 The Barn Fruit Markets Inc. Ontario G. A. Love Foods Inc. Ontario Love's York Properties Inc. Ontario 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 Gerard Avenue, Inc. Delaware The Great Atlantic & Pacific Tea Company of Vermont, Inc. Vermont Hamilton Property I, Inc. Delaware Hopelawn Property I, Inc. Delaware 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 North Jersey Properties, Inc. I Delaware North Jersey Properties, Inc. II Delaware North Jersey Properties, Inc. III Delaware North Jersey Properties, Inc. IV Delaware North Jersey Properties, Inc. V Delaware North Jersey Properties, Inc. VI Delaware Richmond, Incorporated d/b/a Pantry Pride & Sun, Inc. Delaware Regina Properties, Inc. New Jersey COMPANIES STATE INCORPORATED 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 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. 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 26, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 12-MOS FEB-26-2000 FEB-26-2000 124603 0 227078 0 791150 1222883 1883808 0 3335525 1124578 983545 0 0 38367 807825 3335525 10151334 10151334 7243718 7243718 2802786 0 (84045) 27003 (12843) 14160 0 0 0 14160 .37 .37
EX-10.A 5 Separation and Release Agreement, dated as of May 28, 1999, by and between Peter J. O'Gorman and The Great Atlantic & Pacific Tea Company, Inc. This will confirm our understandings with respect to the termination of your employment with The Great Atlantic & Pacific Tea Company, Inc., which is effective May 28, 1999, whereupon all rights, privileges and entitlements as an active employee will cease, except only to the extent herein provided. Your resignation as a corporate officer of the Company effective May 28, 1999 is an integral part of this Agreement. In return for your general release which is set forth below, the Company will pay you at your current salary rate through May 31, 2000 ("the severance period"). These payments include any and all otherwise applicable paid leave, including but expressly not limited to your vacation entitlement. Upon your attainment of age sixty-two you will be eligible for your pension under the special executive retirement plan (SERP) with 20 years' service credit and without any early retirement reduction for retiring prior to age 65. Your life insurance coverage and your Executive Medical health benefits including your prescription drug coverage under the Company plan will be continued for you and your covered dependents until you attain age 65; any COBRA entitlements will follow. Your unexercised Stock Options and Stock Appreciation Rights ("SAR's") which are vested currently or after vesting during the severance period will be exercisable through the date that is three months after the end of the severance period, unless sooner expired. These provisions exceed anything to which you are otherwise entitled by reason of your having been employed by or separated from the Company prior to the execution of this Release Agreement. The foregoing voluntary consideration is given in return for your discharge and release of all claims, obligations, and demands which you have, ever had, or in the future may have against The Great Atlantic & Pacific Tea Company, Inc., each and any parent, subsidiary or affiliated entity and any of its or their officers, directors, employees, agents, predecessors or successors (the "Company") arising out of or related to your employment with and separation from the Company, including, but not limited to, any and all claims under Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act ("ADEA"), the Older Workers Benefit Protection Act, the Americans with Disabilities Act, the Employment Retirement Income Security Act of 1974, the Family and Medical Leave Act, the Equal Pay Act, the Worker Adjustment and Retraining Notification Act, each and every state or local variation of these federal laws including without limitation the New Jersey Law Against Discrimination, the New Jersey Conscientious Employee Protection Act, and the New Jersey Family Leave Act, and any and all other applicable federal, state, and local fair employment practices, individual rights, wage or discrimination laws, and any and all claims for breach of contract or implied contract, constructive or wrongful discharge, or for negligence, retaliation and all torts. This release shall not affect any subsequent acts giving rise to claims. This Separation and Release Agreement does contain and constitute the full and complete understanding and agreement between you and the Company ("Agreement"). You further understand and agree that by entering into this Agreement the Company is not admitting violating any legal right, duty or entitlement and further that you will keep strictly confidential the terms and conditions of this Separation and Release Agreement. The Company advises you to consult with an attorney prior to executing this Agreement. By executing this Agreement you acknowledge that (a) you have been provided an opportunity to consult with an attorney or other advisor of your choice regarding the terms of this Agreement, (b) this is a final offer and you have been given twenty-one (21) days in which to consider whether you wish to enter into this Agreement, (c) you have elected to enter this Agreement knowingly and voluntarily and (d) if you do so within fewer than 21 days from receipt of the final document you have knowingly and voluntarily waived the remaining time. The Company reserves the right reasonably to change or revoke this Agreement prior to your execution hereof. This Separation and Release Agreement shall be fully effective and binding upon all parties hereto immediately upon execution by you and the Company; provided, however, you have seven (7) days following your execution of this Agreement to change your mind. You may revoke the Agreement during those seven days by mailing or delivering a letter of revocation to the Legal Department, attention Mary Ellen Offer, Esq., The Great Atlantic & Pacific Tea Company, Inc., 2 Paragon Drive, Montvale, New Jersey 07645. Such a letter must be signed and received, or postmarked, no later than the seventh day after the date on which you signed the Separation and Release Agreement. You further covenant not to contest the validity of this release after the expiration of the revocation period. Therefore, you agree that if you nonetheless should pursue litigation against the Company involving any matter covered and/or released hereby, you first will restore to the Company the full value of all consideration you have received and waive any to which you are still entitled hereunder and you shall be liable for the Company's costs and attorney fees incidental to defending such legal action. Finally should any provision of this Agreement be found by a court of competent jurisdiction to be unenforceable in whole or in part, the remainder of this Agreement shall not be affected thereby and shall remain in full force and effect. To evidence our understanding and agreement, duplicate originals will be executed and notarized and each party will retain an original. THE COMPANY Agreed and accepted: By: ________________________ ______________________ CHRISTIAN HAUB PETER J. O'GORMAN President & Chief Executive Officer THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. Dated:___________________ Dated:__________________ Sworn to before me this ______ day of _________, 1999. ___________________ Notary Public Employment and Separation Agreement and Release dated as of February 2, 2000 by and between George Graham and The Great Atlantic & Pacific Tea Company, Inc. This will confirm our mutual understandings and agreement concerning your continued employment with and anticipated separation from The Great Atlantic & Pacific Tea Company, Inc. You agree to remain employed and actively engaged in providing the services needed to effectuate the transition in merchandising for the Company. You commit that you will do so for at least the first six (6) months of fiscal 2000 and thereafter at the Company's request through March 3, 2001, whereafter your employment will terminate. Until your termination date in accord herewith ("Eligible Termination") your employment status otherwise remains unchanged. Upon termination all rights, privileges and entitlements as an active employee cease, subject only to the provisions hereinafter set forth. Provided you continue to work as agreed to your Eligible Termination, the Company will pay you at your current salary rate for two (2) calendar years after said termination date, which includes payment for any otherwise applicable paid leave time, notably including vacation time (the "Severance Period"). Your Company provided life insurance and executive medical coverage will be continued during the Severance Period. Any COBRA entitlement, if any, will follow thereafter. Your pension under the special executive retirement plan (SERP) will be calculated with 20 years' service credit and full retirement benefit at age 59 instead of age 65. In the event your spouse Mary Ellen survives you, she will receive 40% of your SERP benefit for the remainder of her life. Your unexercised Stock Options and Stock Appreciation Rights ("SAR's") which are vested as of your Eligible Termination and not previously exercised or expired will be exercisable at any time until the date three months after the end of the Severance Period. Your participation in the Company's management incentive program ceases as of your termination date; provided, you remain entitled on a pro rata basis to any bonus earned, accrued or payable in respect to the fiscal year in which your Eligible Termination occurs. These provisions exceed anything to which you are otherwise entitled by reason of your having been employed by or separated from the Company. The foregoing voluntary consideration is conditioned upon and given in return for your competent and honest employment until your Eligible Termination date, your agreement to provide information, advice and cooperation on matters having their origin prior to separation from the Company, and your discharge and release of all claims, obligations, and demands which you have, ever had, or in the future may have against The Great Atlantic & Pacific Tea Company, Inc., any parents, subsidiaries or affiliated entities and any of its or their officers, directors, employees, agents, predecessors or successors (the "Company") arising out of or related to your employment with and separation from the Company, including, but not limited to, any and all claims under Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act ("ADEA"), the Older Workers Benefit Protection Act, the Americans with Disabilities Act, the Employment Retirement Income Security Act of 1974, the Family and Medical Leave Act, the Equal Pay Act, the Worker Adjustment and Retraining Notification Act, the National Labor Relations Act, each and every state or local variation of these federal laws including without limitation the New Jersey Law Against Discrimination, the New Jersey Family Leave Act, as amended, the New Jersey Conscientious Employee Protection Act, any and all other applicable federal, state, and local fair employment practices, individual or constitutional rights, wage or discrimination laws and any and all claims for breach of contract or implied contract, constructive or wrongful discharge, or for negligence, retaliation and all torts, and any and all claims for attorney fees. This release shall not affect any acts giving rise to claims subsequent to your employment termination date. Excluded from this release are any claims which by law cannot be waived; provided, however, while you cannot waive your right to file a charge with or participate in an investigation conducted by certain government agencies, you are waiving and releasing your claim or right to any monetary recovery should any agency (such as the Equal Employment Opportunity Commission) pursue any claims that would otherwise financially benefit you. This Employment and Separation and Release Agreement does contain and constitute the full and complete understanding and agreement between you and the Company ("Agreement"). You further understand and agree that by entering into this Agreement the Company is not admitting violating any legal right, duty or entitlement and further that you will keep strictly confidential the terms and conditions of this Agreement. The Company advises you to consult with an attorney prior to executing this Agreement. By executing this Agreement you acknowledge that (a) you have been provided an opportunity to consult with an attorney or other advisor of your choice regarding the terms of this Agreement, (b) this is a final offer and you have been given twenty-one (21) days in which to consider whether you wish to enter into this Agreement, (c) you have elected to enter this Agreement knowingly and voluntarily and (d) if you do so within fewer than 21 days from receipt of the final document you have knowingly and voluntarily waived the remaining time. The Company reserves the right reasonably to change or revoke this Agreement prior to your execution hereof. This Agreement shall be fully effective and binding upon all parties hereto immediately upon execution by you and the Company; provided, however, you have seven (7) days following your execution of this Agreement to change your mind. You may revoke the Agreement during those seven days by mailing or delivering a letter of revocation to the Legal Department, attention Mary Ellen Offer, Esq., The Great Atlantic & Pacific Tea Company, Inc., 2 Paragon Drive, Montvale, New Jersey 07645. Such a letter must be signed and received, or postmarked, no later than the seventh day after the date on which you signed the Agreement. You further covenant not to contest the validity of this release after the expiration of the revocation period. Therefore, you agree that if you nonetheless should pursue litigation against the Company involving any matter covered and/or released hereby, you first will restore to the Company the full value of all consideration you have received and waive any to which you are still entitled hereunder and you shall be liable for the Company's costs and attorney fees incidental to defending such legal action. Finally should any provision of this Agreement be found by a court of competent jurisdiction to be unenforceable in whole or in part, the remainder of this Agreement shall not be affected thereby and shall remain in full force and effect. If this is in accordance with our understanding and agreement, please sign and return to my attention the enclosed copy, which shall evidence our binding agreement. Agreed and Accepted: By: _____________________ ___________________ LAURANE MAGLIARI GEORGE GRAHAM Sr. Vice President, People Resources & Services THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. Dated: ___________________ Dated:_____________________ Personal & Confidential To: Brian Pall From: Laurane S. Magliari Date: May 3, 2000 Subject: Promotion to Chief Development Officer - Total Compensation This memo will detail the terms of your promotion to Chief Development Officer effective May 1, 2000. In your new capacity, you will report directly to Christian Haub and participate as a member of the Management Executive Committee (MEC). Annual Base Salary: $300,000 Grade Level: F (Minimum $214.0, Mid-Point $305.0, Maximum $397.0) Annual Incentive Target: 40% ($122.0) of grade mid-point Long Term Incentive Target: 25,000 stock options. Stock option grant for 1999 performance is 26,500 options. Severance Agreement: Should the Company terminate your employment for reason other than cause, you will be entitled to an amount equal to 18 months of continued total compensation inclusive of benefits, (i.e. health insurance, bonus entitlement, etc., not just base salary). As we discussed, you will be considered for participation in SERP once the Plan has been revised and approved by the Retirement Committee. Additionally, should the results of the Total Compensation Study indicate your new position warrants a salary grade level higher than "F", an adjustment will be made at that time. Brian, on behalf of the MEC, we our very excited about your joining the team and look forward to your contributions to our Company's success. cc: Christian Haub November 19, 1999 Via Fed Ex Mr. William Costantini 64 Bouton Road South Salem, NY 10590 Dear Bill: The management team at The Great Atlantic & Pacific Tea Company joins me in offering you the position of Senior Vice President, General Counsel beginning March 1, 2000, based in our Montvale office and reporting to Fred Corrado, Vice Chairman - CFO. This offer is conditioned on a satisfactory reference check and substance abuse testing. Below are the details: Your base salary will be $335,000 per annum, payable in four-week increments (13 times per year) at a rate of $25,769.23. You will be granted 25,000 Stock Options upon your employment with A&P. Subsequent awards under the Company's program are at the decision of the Board of Directors based on individual and Company performance. Your target award is 25,000 options. As Senior Vice President, General Counsel, you will participate in the Fiscal Year 2000 Management Bonus Plan at a target bonus rate of $122,000 (40% of grade mid-point; 1999 mid-point is $305,000). You will be eligible to participate in the A&P Retirement and Savings Plan upon completion of one year of employment. In addition, you have been designated to participate in the Senior Executive Medical Reimbursement Plan for claims incurred subsequent to your start date. In short, this enhanced benefit covers 100% of all medical costs including dental and vision, with the exception of prescriptions, which are covered under the standard plan. A copy of our standard benefits package is enclosed for your review. Also enclosed is a copy of A&P's Relocation Benefits Program, for which you will also be eligible. Bill, we are delighted with your decision to join A&P. We believe your association with our organization will be extremely beneficial to both of us. Sincerely, Enclosed is a duplicate copy of this letter which I would appreciate your signing and returning indicating agreement with the above. ___________________________ _____________________________ (Name) Date January 20, 2000 Robert Ulrich, Esq. 500 Weymouth Drive Wyckoff, NJ 07481 Dear Bob, As we have discussed, you have agreed to announce your retirement from the Company effective May 18, 2000, i.e., on your 25th anniversary date. This confirms the Agreement between the Company and you terminating your active employment effective upon your retirement from the Company on May 18, 2000, on which date you will have attained age 65. The Company has agreed to pay you at your current salary rate from May 18, 2000 through May 17, 2001 ("severance period"). These payments include any and all otherwise applicable paid leave, including but expressly not limited to vacation entitlement. Your Company paid life insurance coverage will be continued through May 31, 2001. Executive Medical Health benefits and prescription drug coverage under the Company plan will be continued for you until May 31, 2001, and for your wife until she attains age 65, i.e., until May 11, 2004. You will be entitled to any bonus that would otherwise be payable to you in respect to fiscal year 2000, whether "earned" or "discretionary." Any unexercised Stock Appreciation Rights ("SAR's") and Stock Options, whether ISO's or Nonqualified Options, which are vested as of May 18, 2000, will remain exercisable through August 17, 2001, namely the conclusion of the third month after the severance period. You will be eligible to receive a pension under the Supplemental Executive Retirement Plan ("SERP") in accordance with the terms of the Plan. Robert Ulrich, Esq. January 20, 2000 Page 2 The Company will reimburse you for your Ridgewood Country Club dues of $2,200 for the year 2000. If this is agreeable to you, please sign in the place indicated below. Very truly yours, Laurane S. Magliari Agreed: Robert G. Ulrich June 15, 1999 Mr. Nicholas Ioli, Jr. 253 North Poverty Road Southbury, CT 06488 Dear Nick: We are pleased to confirm to your our offer of employment. The details are as follows: You will be employed by The Great Atlantic & Pacific Tea Company, Inc. on an agreed upon date, as Sr. Vice President -Chief Information Officer reporting to Fred Corrado, Vice Chairman, which is conditioned on satisfactory substance abuse testing. Your base salary will be $225,000 per annum, payable in four weekly increments (13 times per year) at rate of $17,307.69. Checks are issued on Thursday of the last week of each fiscal period. As Sr. Vice President-Chief Information Officer, you will participate in the Fiscal Year 1999 Management Bonus Plan at a target bonus rate of 40% of grade mid- point (1999 mid-point is $305,000). Bonus payment for FY 1999 will be prorated coincident with your start date. Additionally, you will be granted an issuance of 15,000 Stock Options under the A&P Stock Option Plan at the price in effect on the date you begin employment with A&P. In the event of involuntary termination by the company (except in the case of termination for cause), you will be entitled to twelve (12) months' salary as severance pay. You are also eligible for full relocation benefits should your relocation occur during your first twelve months of employment. Vacation entitlement will be four (4) weeks each calendar year. You will participate in the Company's Executive Medical Program immediately upon commencement of employment. You will be eligible to participate in the A&P Retirement and Savings Plan upon completion of one year of employment. Nick, we are delighted with your decision to join A&P. We believe your association with our organization will be extremely beneficial to both of us. Sincerely, Laurane Magliari Enclosed is a duplicate copy of this letter which I would appreciate your signing and returning indicating agreement with the above. NICHOLAS L. IOLI, JR. DATE EX-23 6 EXHIBIT 23 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, Registration Statement No. 333-36225 on Form S-3 and Registration Statement No. 333-80347 on Form S- 3 of our report dated April 5, 2000, contained in the Company's 1999 Annual Report to Shareholders and incorporated by reference in the Annual Report on Form 10-K of the Great Atlantic & Pacific Tea Company, Inc. for the year ended February 26, 2000. /s/ Deloitte & Touche LLP Deloitte & Touche Parsippany, New Jersey May 22, 2000 -----END PRIVACY-ENHANCED MESSAGE-----