-----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, KfAP52zw4a/90AOkwWosccZLEXl1n/O65t8x1ByX5hfpKaqIRC2A0XaYA8woux+f YSQe+4+TrP/VRnF2N6jjQg== 0000043300-01-000004.txt : 20010123 0000043300-01-000004.hdr.sgml : 20010123 ACCESSION NUMBER: 0000043300-01-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001202 FILED AS OF DATE: 20010116 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-Q SEC ACT: SEC FILE NUMBER: 001-04141 FILM NUMBER: 1508818 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-Q 1 0001.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Mark One [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended December 2, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number 1-4141 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. (Exact name of registrant as specified in 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) (201) 573-9700 Registrant's telephone number, including area code Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of January 12, 2001 the Registrant had a total of 38,347,216 shares of common stock - $1 par value outstanding. PART I - FINANCIAL INFORMATION ITEM 1 - Financial Statements The Great Atlantic & Pacific Tea Company, Inc. Statements of Consolidated Operations (Dollars in thousands, except share and per share amounts) (Unaudited) 12 Weeks Ended 40 Weeks Ended ------------------------ ------------------------ December 2, December 4, December 2, December 4, 2000 1999 2000 1999 ----------- ----------- ---------- -------------- Sales $2,428,790 $2,332,128 $8,068,144 $7,730,230 Cost of merchandise sold (1,740,230) (1,655,840) (5,755,986) (5,521,052) ---------- ---------- ---------- ---------- Gross margin 688,560 676,288 2,312,158 2,209,178 Store operating, general and administrative expense (690,744) (620,204) (2,264,120) (2,136,436) ---------- ---------- ---------- ---------- (Loss) income from operations (2,184) 56,084 48,038 72,742 Interest expense (23,240) (20,308) (74,308) (62,612) Interest income 1,472 1,269 4,762 4,608 ----------- --------- ---------- ---------- (Loss) income before income taxes (23,952) 37,045 (21,508) 14,738 Benefit (provision) for income taxes 9,439 (15,691) 7,205 (7,552) ---------- ------- -------- -------- Net (loss) income $(14,513) $21,354 $(14,303) $ 7,186 ========== ======= ======== ======== (Loss) earnings per share: Net (loss) income per share - basic and diluted $ (0.38) $ 0.56 $(0.37) $ 0.19 ======= ======= ====== ======== Weighted average number of common shares outstanding 38,347,216 38,367,216 38,347,216 38,345,329 Common stock equivalents - 46,118 - 99,763 ---------- ---------- ---------- ---------- Weighted average number of common and common equivalent shares outstanding 38,347,216 38,413,334 38,347,216 38,445,092 ========== ========== ========== ========== See Notes to Quarterly Report -2- The Great Atlantic & Pacific Tea Company, Inc. Statements of Consolidated Shareholders' Equity and Comprehensive (Loss) Income (Dollars in thousands, except share and per share amounts) (Unaudited) Una- Accumu- mortized lated Value of Other Addit- Restrict- Compre- Total ional ed hensive Share- Common Paid-In Stock Retained (Loss)/ holders' Stock Capital Grant Earnings Income Equity ------- ------- -------- -------- ------- ---------- FY 2000 - 40 Week Period Balance at beginning of period 38,367,216 shares $38,367 $457,101 $ (441) $411,861 $(60,696) $846,192 Net loss (14,303) (14,303) Other comprehensive income: Foreign currency translation adjustment (12,179) (12,179) Minimum pension liability adjustment 2,682 2,682 Forfeiture of restricted stock grant (20) (631) 441 (210) Cash dividends ($.10 per share) (11,505) (11,505) ------- -------- ------ -------- ------- -------- Balance at end of period $38,347 $456,470 $ - $386,053 $(70,193) $810,677 ======= ======== ====== ======== ======== ======== FY 1999 - 40 Week Period Balance at beginning of period 38,290,716 shares $38,291 $454,971 $ - $413,034 $(69,039) $837,257 Net income 7,186 7,186 Other comprehensive income: Foreign currency translation adjustment 2,767 2,767 Issuance of 20,000 shares of common stock 20 631 (651) - Exercise of stock options, 56,500 shares 56 1,499 1,555 Amortization of restricted stock grant 180 180 Cash dividends ($.10 per share) (11,498) (11,498) ------- -------- ----- -------- -------- -------- Balance at end of period $38,367 $457,101 $(471) $408,722 $(66,272) $837,447 ======= ======== ===== ======== ======== ======== Comprehensive (Loss) Income 12 Weeks Ended 40 Weeks Ended ------------------------ ----------------------- December 2, December 4, December 2, December 4, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Net (loss) income $(14,513) $ 21,354 $(14,303) $ 7,186 Foreign currency translation adjustment (9,679) 289 (12,179) 2,767 Minimum pension liability adjustment - - 2,682 - -------- --------- -------- --------- Total comprehensive (loss) income $(24,192) $ 21,643 $(23,800) $9,953 ======== ========= ======== ====== See Notes to Quarterly Report -3- The Great Atlantic & Pacific Tea Company, Inc. Consolidated Balance Sheets (Dollars in thousands except share amounts) December 2, February 26, 2000 2000 ----------- ----------- (Unaudited) ASSETS Current assets: Cash and short-term investments $103,940 $124,603 Accounts receivable 199,124 227,078 Inventories 869,792 791,150 Prepaid expenses and other assets 85,715 80,052 --------- --------- Total current assets 1,258,571 1,222,883 --------- --------- Property: Property owned 1,893,594 1,789,662 Property leased 88,176 94,146 --------- --------- Property-net 1,981,770 1,883,808 Other assets 211,308 228,834 ---------- ---------- Total assets $3,451,649 $3,335,525 ========== ========== LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 15,437 $ 2,382 Current portion of obligations under capital leases 11,525 11,327 Accounts payable 617,951 583,142 Book overdrafts 110,419 112,465 Accrued salaries, wages and benefits 155,380 155,649 Accrued taxes 62,111 51,611 Other accruals 194,979 208,002 --------- --------- Total current liabilities 1,167,802 1,124,578 --------- --------- Long-term debt 1,040,035 865,675 Obligations under capital leases 109,045 117,870 Other non-current liabilities 324,090 381,210 --------- --------- Total liabilities 2,640,972 2,489,333 --------- --------- 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 38,347,216 and 38,367,216 shares, respectively 38,347 38,367 Additional paid-in capital 456,470 457,101 Unamortized value of restricted stock grant - (441) Accumulated other comprehensive loss (70,193) (60,696) Retained earnings 386,053 411,861 ---------- ---------- Total shareholders' equity 810,677 846,192 ---------- ---------- Total liabilities and shareholders' equity $3,451,649 $3,335,525 ========== ========== See Notes to Quarterly Report -4- The Great Atlantic & Pacific Tea Company, Inc. Statements of Consolidated Cash Flows (Dollars in thousands) (Unaudited) 40 Weeks Ended ---------------------------------- December 2, 2000 December 4, 1999 ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $(14,303) $7,186 Adjustments to reconcile net (loss) income to cash provided by operating activities: Store/Facilities exit charge (reversal) and asset write-off (3,061) 11,953 Environmental charge 4,029 - Depreciation and amortization 195,047 176,608 Deferred financing expense 919 838 Deferred income tax (benefit) provision (9,992) 4,975 Gain on disposal of owned property (1,634) (1,297) Other changes in assets and liabilities: Decrease (increase) in receivables 22,995 (17,290) (Increase) in inventories (87,561) (14,763) (Increase) decrease in prepaid expenses and other current assets (3,727) 410 (Increase) in other assets (4,153) (6,038) Increase in accounts payable 44,521 57,883 Increase (decrease) in accrued salaries, wages and benefits 3,772 (6,520) Increase (decrease) in accrued taxes 8,505 (2,449) (Decrease) in other accruals and other liabilities (44,218) (9,897) Other operating activities, net 4,481 (1,744) ------- ------- Net cash provided by operating activities 115,620 199,855 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property (325,729) (367,822) Proceeds from disposal of property 25,240 75,422 -------- -------- Net cash used in investing activities (300,489) (292,400) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Changes in short-term debt (17,000) (4,100) Proceeds under revolving lines of credit 511,471 125,027 Payments on revolving lines of credit (326,556) (215,103) Proceeds from long-term borrowings 22,620 200,157 Payments on long-term borrowings (3,125) (3,942) Principal payments on capital leases (8,514) (8,951) Payment of deferred financing fees (373) (6,298) Decrease in book overdrafts (739) (15,944) Proceeds from stock options exercised - 1,555 Cash dividends (11,505) (11,498) ------- ------- Net cash provided by financing activities 166,279 60,903 Effect of exchange rate changes on cash and short-term investments (2,073) 816 ------- ------- Net decrease in cash and short-term investments (20,663) (30,826) Cash and short-term investments at beginning of period 124,603 136,810 ------- ------- Cash and short-term investments at end of period $103,940 $105,984 ======== ======== See Notes to Quarterly Report -5- The Great Atlantic & Pacific Tea Company, Inc. Notes to Consolidated Financial Statements 1. Basis of Presentation The consolidated financial statements for the 12 and 40 week periods ended December 2, 2000 and December 4, 1999 are unaudited, and in the opinion of Management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items, except for the store and facilities exit costs discussed herein. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. This Form 10-Q should be read in conjunction with the Company's consolidated financial statements and notes incorporated by reference in the 1999 Annual Report on Form 10-K. Certain reclassifications have been made to the prior periods' financial statements in order to conform to the current period presentation. 2. Income Taxes The income tax provision/benefit recorded for the 12 and 40 week periods of fiscal years 2000 and 1999 reflects the Company's estimated expected annual tax rates applied to its respective domestic and foreign financial results. 3. Wholesale Franchise Business As of December 2, 2000, the Company served 68 franchised stores. These franchisees are required to purchase inventory exclusively from the Company which acts as a wholesaler to the franchisees. The Company had sales to these franchised stores of $152 million and $128 million for the third quarters of fiscal 2000 and 1999, respectively, and $486 million and $387 million for the 40 week periods ended in fiscal years 2000 and 1999, respectively. In addition, 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 fee which primarily represents the reimbursement of costs incurred to provide such services. The Company holds as assets inventory notes collateralized by the inventory in the stores and equipment lease receivables collateralized by the equipment in the stores. The current portion of the inventory notes and equipment leases, net of allowance for doubtful accounts, amounting to approximately $4.4 million and $4.1 million, are included in accounts receivable at December 2, 2000 and February 26, 2000, respectively. The long-term portion of the inventory notes and equipment leases, net of allowance for doubtful accounts, amounting to approximately $51.9 million and $53.4 million are included in other assets at December 2, 2000 and February 26, 2000, respectively. The repayment of the inventory notes and equipment leases are dependent upon 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 results 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. 4. New Accounting Pronouncements Not Yet Adopted In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards 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 Consolidated Balance Sheets 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. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Financial Instruments and Certain Hedging Activities - An Amendment of FASB Statement No. 133". This Statement amends the accounting and reporting standards of SFAS 133 for certain derivative instruments, for certain hedging activities and for decisions made by the FASB relating to the Derivatives Implementation Group ("DIG") process. Certain decisions arising from the DIG process that required specific amendments to SFAS 133 were incorporated into this Statement. The Company is required to adopt SFAS 133 and SFAS 138 in the first quarter of fiscal 2001. The Company does not expect these pronouncements will have a material impact on the Company's financial position, results of operations or cash flow. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 was issued to provide guidance in applying generally accepted accounting principles to the large number of revenue recognition issues that registrants encounter, including nonrefundable, up-front fees and the disclosure of judgements as to the appropriateness of the principles relating to revenue recognition accounting policies. Since the issuance of SAB 101, the Staff has received requests from a number of groups asking for additional time to determine the effects, if any, on registrants' revenue recognition practices and as such, the SEC has delayed the implementation date of SAB 101 until no later than the fourth quarter of fiscal years beginning after December 15, 1999. The Company has evaluated the impact of this Staff Accounting Bulletin and has concluded that it will have no effect on the Consolidated Financial Statements. Revenue is recognized at the point of sale for retail sales. Vendor allowances and credits that relate to the Company's buying and merchandising activities are recognized as earned. In May 2000, the Emerging Issues Task Force ("EITF") issued No. 00-14 "Accounting for Certain Sales Incentives". The EITF reached a consensus on several issues involving the accounting and income statement classification of rebates, coupons and other discounts. The Company has evaluated the impact of this issue and has concluded that it will have no effect on the accounting or classification of sales incentives since coupons issued by the Company are recorded upon redemption as a reduction of sales. 5. Store and Facilities Exit Costs - Great Renewal - Phase I 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 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 two warehouses and the coffee plant. The volume associated with the warehouses was transferred to other warehouses in close geographic proximity. Further, the manufacturing processes of the coffee plant were transferred to the Company's remaining coffee processing facility. The processing associated with the Canadian bakery was outsourced in 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 were 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 (including pension withdrawal obligations), $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 estimated fair value of two properties. 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 plans to 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. In addition to the charges recorded in fiscal 1998, there were other charges related to the plan which could not be accrued for at February 27, 1999 because they did not meet the criteria for accrual under EITF 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit Activity (Including Certain Costs Incurred in a Restructuring)." Such costs have been expensed as incurred as the plan was being executed. During the 40 week period ended December 4, 1999, the Company recorded an additional pretax charge of $11 million for severance related to the 132 stores. No additional charges were recorded during the 40 week period of fiscal 2000. 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 was comprised of severance of $6 million and 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 was included in "Store operating, general and administrative expense". The Company paid $28 million of the total net severance charges from the time of the original charges through the third quarter of fiscal 2000 which resulted from the termination of approximately 3,400 employees. The remaining severance payments to individuals will be made by the end of fiscal 2000. The following reconciliation summarizes the activity related to the aforementioned charges since the beginning of fiscal 1999: Severance Store Fixed and Facilities Occupancy Assets Benefits Occupancy Total --------- ------ -------- ---------- ----- (Dollars in thousands) Reserve Balance at Feb. 27, 1999 $114,532 $ - $10,066 $4,038 $128,636 Addition (1) 15,730 - 17,060 3,188 35,978 Utilization (4,614)(2) (295) (19,626) (3,659) (28,194) Adjustment (3) (22,195) 295 - - (21,900) ------- --- ------- ------ -------- Reserve Balance at Feb. 26, 2000 103,453 - 7,500 3,567 114,520 Addition (4) 3,997 - - - 3,997 Utilization (5) (21,277) - (4,580) (463) (26,320) Adjustment (3) - - - (3,061) (3,061) -------- ----- ------ ------- ------- Reserve Balance at Dec. 2, 2000 $86,173 $ - $ 2,920 $ 43 $89,136 ======= ===== ======= ====== ======= (1)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). (2)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 determining the original charge recorded during fiscal 1998. (3)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. 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. Additionally, in the first quarter of fiscal 2000, the Company recorded a net reduction in "Store operating, general and administrative expense" of $3.1 million to reverse a portion of the $215 million restructuring charge recorded in fiscal 1998. The reversal is a result of a change in estimate resulting from the sale of one of the Company's warehouses sold during the first quarter of fiscal 2000. (4)The addition of $4.0 million to store occupancy during the first three quarters of fiscal 2000 represents the present value of accrued interest related to lease obligations. (5)Store occupancy utilization of $21.3 million and facilities occupancy of $0.5 million represent lease and other occupancy payments made during the 40 week period ended December 2, 2000. Based upon current available information, Management evaluated the reserve balance of $89.1 million as of December 2, 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. At December 2, 2000, approximately $28 million of the reserve is included in "Other accruals" and the remaining amount 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 (including 31 stores in the Richmond, Virginia market) and the 34 Atlanta stores which the Company has exited. The operating results of these stores are as follows: (In thousands) 12 Weeks Ended 40 Weeks Ended -------------------------- ------------------------ December 2, December 4, December 2, December 4, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Sales $ 138 $13,451 $ 515 $198,473 ====== ======= ====== ======== Operating Loss $ (44) $(3,559) $ (115) $(29,690) ====== ======= ====== ======== As of the end of fiscal 1999, the Company had closed 165 stores, including 34 stores in the Atlanta, Georgia market and 31 stores in the Richmond, Virginia market. 6. Defined Benefit Plan Transfer 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 resulting 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. The agreement was subject to the approval of the CCWIPP trustees and the appropriate regulatory bodies. During the first quarter of fiscal 2000, the Company received final approval of the agreement. Under the terms of this agreement, CCWIPP assumed the assets and defined benefit liabilities of the three pension plans and the Company is required to make defined contributions to CCWIPP based upon hours worked by employees who are members of CCWIPP. As a result of this transfer, during the first quarter of fiscal 2000, the Company recorded a $0.4 million net expense and a $2.7 million adjustment to the minimum pension liability. 7. Operating Segments 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 the 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 included in the Company's Fiscal 1999 Annual Report. The Company measures segment performance based upon operating profit. Interim information on segments is as follows: (Dollars in thousands) 12 Weeks Ended 40 Weeks Ended ------------------------- ------------------------ December 2, December 4, December 2, December 4, 2000 1999 2000 1999 ------------------------- ------------------------ Sales U.S. Retail $1,883,595 $1,812,210 $6,268,609 $6,105,177 Canada Retail 393,467 392,216 1,313,545 1,238,089 Canada Wholesale 151,728 127,702 485,990 386,964 ---------- ---------- ---------- ---------- Total Company $2,428,790 $2,332,128 $8,068,144 $7,730,230 ========== ========== ========== ========== Depreciation and amortization U.S. Retail $ 52,285 $47,505 $170,672 $155,528 Canada Retail 7,311 6,801 24,375 21,080 Canada Wholesale - - - - ---------- ------- -------- -------- Total Company $ 59,596 $54,306 $195,047 $176,608 ========== ======= ======== ======== (Loss) income from operations U.S. Retail $ (9,281) $45,328 $ 14,191 $ 41,843 Canada Retail 1,554 5,479 17,681 18,093 Canada Wholesale 5,543 5,277 16,166 12,806 ---------- ------- -------- -------- Total Company $ (2,184) $56,084 $ 48,038 $ 72,742 ========== ======= ======== ======== (Loss) income before income taxes U.S. Retail $ (29,282) $28,232 $(48,929) $(10,063) Canada Retail (518) 3,414 10,320 11,265 Canada Wholesale 5,848 5,399 17,101 13,536 ---------- ------- -------- -------- Total Company $ (23,952) $37,045 $(21,508) $ 14,738 ========== ======= ======== ======== Capital expenditures U.S. Retail $ 74,334 $87,279 $277,223 $315,340 Canada Retail 9,752 23,777 48,506 52,482 Canada Wholesale - - - - ---------- -------- -------- -------- Total Company $ 84,086 $111,056 $325,729 $367,822 ========== ======== ======== ======== December 2, February 26, 2000 2000 ------------ ------------ Total assets U.S. Retail $2,827,136 $2,684,624 Canada Retail 539,604 567,573 Canada Wholesale 84,909 83,328 ---------- ---------- Total Company $3,451,649 $3,335,525 ========== ========== 8. Environmental Liability During the first quarter of fiscal 2000, the Company became aware of environmental issues at one of its non-retail real estate locations. The Company obtained an environmental remediation report to enable it to assess the potential environmental liability related to this property. Factors considered in determining the liability included, among others, the following: whether the Company had been designated as a potentially responsible party, the number of potentially responsible parties designated at the site, the stage of the proceedings and the available environmental technology. During the first quarter of fiscal 2000, the Company assessed the likelihood that a loss had been incurred at this site as probable and based on findings included in remediation reports and discussion with legal counsel, estimated the potential loss to be approximately $3 million on an undiscounted basis. Accordingly, such amount was accrued at that time. At each balance sheet date the Company assesses its exposure with respect to this environmental remediation based on current available information. During the third quarter of fiscal 2000, with respect to such review, it was determined that additional costs amounting to approximately $1 million would be incurred to remedy these environmental issues, and accordingly, this additional amount was accrued. The total accrued liability of approximately $4 million is included in "Other non-current liabilities" in the Consolidated Balance Sheets. 9. Project Financing Agreement During the 40 weeks ended December 2, 2000, the Company entered into an agreement with IBM Credit Corporation ("IBM Credit") whereby IBM Credit will provide financing for software purchases and hardware leases primarily relating to the Company's Great Renewal - Phase II supply chain and business process initiative. Under this agreement, IBM Credit will finance software purchases and hardware leases in the aggregate up to $71 million at an effective rate of 8.49% per annum. The software purchases and hardware leases will occur from time to time over the next four years. The Company is committed to make equal monthly payments of $1.4 million through May 2005. Such payments are subject to change based upon the timing and amount of funding from IBM Credit. As of December 2, 2000, IBM Credit has funded $22.5 million for software purchases and has leased hardware to the Company with a total fair market value of $10.5 million. The leasing of the hardware under this agreement is being accounted for as an operating lease in accordance with SFAS No. 13, "Accounting for Leases." 10. Sale-Leaseback Transaction On December 29, 2000, the Company entered into an agreement to sell certain properties and subsequently lease them back from the purchaser. The properties subject to this agreement have a carrying value of $18.9 million. Proceeds received by the Company related to this transaction amounted to $26.4 million. The resulting gain of $7.5 million will be deferred and amortized over the life of the respective leases as a reduction of rental expense. The resulting leases have terms of 20 years, with options to renew for additional periods, and are being accounted for as operating leases in accordance with SFAS No. 13, "Accounting for Leases." Future minimum lease payments for these operating leases are as follows: (Dollars in thousands) Remainder of fiscal 2000 $ 487 Fiscal 2001 2,768 Fiscal 2002 2,768 Fiscal 2003 2,768 Fiscal 2004 2,768 Fiscal 2005 2,768 Thereafter 43,810 ------- Total $58,137 ======= ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations 12 Weeks Ended December 2, 2000 Compared to 12 Weeks Ended December 4, 1999 Sales for the third quarter ended December 2, 2000 of $2.4 billion increased $97 million or 4.1% from the prior year third quarter amount. The increase is detailed in the following table: Increase/ Increase/ (Decrease) (Decrease) $ % --------- -------- New stores (44) $115 4.9% Same store sales 32 1.4 Wholesale sales 26 1.1 Canadian exchange rate (17) (0.7) Closed stores (48) (59) (2.6) ---- ----- Total $ 97 4.1% ==== === Average weekly sales per supermarket were approximately $260,100 in the third quarter of fiscal 2000 versus $247,100 for the corresponding period of the prior year, an increase of 5.3%. Same store sales for Canadian operations increased 4.2% from the prior year and same store sales for U.S. operations increased 0.8% from the prior year. Gross margin as a percent of sales decreased 65 basis points to 28.35% in the third quarter of fiscal 2000 from 29.00% for the third quarter of fiscal 1999. This decrease was due to the increasingly competitive supermarket environment and promotional programs that were less successful in generating the desired sales expected from those types of programs. The gross margin dollar increase of $12 million resulted from an increase in sales volume partially offset by a decrease in the gross margin rate as well as a decrease in the Canadian exchange rate. The U.S. operations gross margin increase of $15 million resulted from an increase of $22 million due to higher sales volume partially offset by a decrease of $7 million due to a lower gross margin rate. The Canadian operations gross margin decrease of $3 million resulted from a decrease of $9 million due to a lower gross margin rate and a decrease of $4 million in the Canadian exchange rate partially offset by an increase of $10 million due to higher sales volume. Store operating, general and administrative ("SG&A") expense was $691 million for the third quarter of fiscal 2000 compared to $620 million for the corresponding period in the prior year. As a percentage of sales, SG&A expense increased from 26.59% in the third quarter of fiscal 1999 to 28.44% in the third quarter of fiscal 2000. The SG&A expense for the third quarter of fiscal 1999 included a net credit of approximately $5 million relating to the Company's Great Renewal - Phase I store closure initiatives ("GR I") as described in Footnote 5 of the Company's Consolidated Financial Statements for the 12 and 40 week periods ended December 2, 2000. This net credit consisted of reversals of previously recorded restructuring charges due to favorable progress in marketing and subleasing the closed stores of approximately $22 million offset by approximately $11 million of costs related to the store exiting charges and approximately $6 million of store operating, general and administrative expense of the stores identified for closure. The SG&A expense for the third quarter of fiscal 2000 included approximately $18 million relating to the Company's Great Renewal - Phase II supply chain and business process initiative ("GR II"). Such costs consisted primarily of professional consulting fees and salaries, including related benefits, of employees working full-time on the initiative. Excluding the GR I and GR II charges noted above, as a percentage of sales, SG&A expense increased from 26.97% in the third quarter of fiscal 1999 to 27.69% in the third quarter of fiscal 2000. The increase of 72 basis points is primarily due to higher occupancy and labor costs associated with the Company's new store development program. Interest expense increased $2.9 million or 14.4% from the corresponding period of the prior year, primarily due to increased borrowings from banks. The loss before income taxes for the third quarter ended December 2, 2000 was $24 million compared to income before income taxes of $37 million for the comparable period in the prior year for a decrease of $61 million. The loss was attributable principally to lower gross margin, higher store operating, general and administrative expense and increased interest expense. The income tax benefit/provision recorded in the third quarter of fiscal years 2000 and 1999 reflect the Company's estimated expected annual tax rates applied to its respective domestic and foreign financial results. 40 Weeks Ended December 2, 2000 Compared to 40 Weeks Ended December 4, 1999 Sales for the 40 weeks ended December 2, 2000 of $8.1 billion increased $338 million or 4.4% from the prior year. The increase is detailed in the following table: Increase/ Increase/ (Decrease) (Decrease) $ % ---------- ---------- New stores (59) $444 5.7% Same store sales 137 2.0 Wholesale sales 103 1.3 Canadian exchange rate (9) (0.1) Closed stores (151) (337) (4.5) ---- ----- Total $338 4.4% ==== ===== Average weekly sales per supermarket were approximately $259,800 for the 40 week period of fiscal 2000 versus $241,100 for the corresponding period of the prior year, an increase of 7.8%. Same store sales for Canadian operations increased 4.0% from the prior year and same store sales for U.S. operations increased 1.5% from the prior year. Gross margin as a percent of sales increased 8 basis points to 28.66% for the 40 week period of fiscal 2000 from 28.58% for the 40 week period of fiscal 1999. The gross margin dollar increase of $103 million resulted from increases in sales volume and the gross margin rate partially offset by a decrease in the Canadian exchange rate. The U.S. operations gross margin increase of $82 million resulted from an increase of $49 million due to higher sales volume and $33 million due to a higher gross margin rate. The Canadian operations gross margin increase of $21 million resulted from an increase of $42 million due to higher sales volume partially offset by a decrease of $19 million due to a lower gross margin rate and a decrease of $2 million in the Canadian exchange rate. SG&A expense was $2.3 billion for the 40 week period ended December 2, 2000 compared to $2.1 billion for the corresponding period of the prior year. As a percentage of sales, SG&A expense increased from 27.64% in fiscal 1999 to 28.06% in fiscal 2000. The SG&A expense for the 40 week period of fiscal 1999 included approximately $101 million relating to GR I, including approximately $56 million of costs related to the store exiting charges and approximately $67 million of store operating, general and administrative expense of the stores identified for closure, partially offset by reversals of previously recorded restructuring charges due to favorable progress in marketing and subleasing the closed stores of approximately $22 million. The SG&A expense for the 40 week period of fiscal 2000 included approximately $52 million relating to GR II. Such costs included primarily professional consulting fees and salaries, including related benefits, of employees working full-time on the initiative. Also included in the fiscal 2000 expense was approximately $4 million of estimated environmental clean up costs for a non-retail property. Partially offsetting the fiscal 2000 expense was a reversal of approximately $3.1 million of GR I charges originally recorded in fiscal 1998 resulting from a change in estimate related to the sale of one of the Company's warehouses sold during the first quarter of fiscal 2000. Excluding the charges noted above, as a percentage of sales, SG&A expense increased from 26.88% for the 40 week period of fiscal 1999 to 27.40% for the 40 week period of fiscal 2000. The increase of 52 basis points is primarily due to litigation and severance charges as well as higher labor and occupancy costs in fiscal 2000. Interest expense increased $11.7 million or 18.7% from the corresponding period of the prior year, primarily due to the issuance of $200 million 9.375% Senior Quarterly Interest Bonds on August 6, 1999 and increased borrowings from banks. The loss before income taxes for the 40 week period ended December 2, 2000 was $21 million compared to income before income taxes of $15 million for the comparable period in the prior year, a decrease of $36 million. The loss is attributable principally to the increases in store operating, general and administrative expense and interest expense partially offset by higher gross margin. The income tax benefit/provision recorded in the first three quarters of 2000 and 1999 reflect the Company's estimated expected annual tax rates applied to its respective domestic and foreign financial results. Liquidity and Capital Resources The Company ended the third quarter of fiscal 2000 with working capital of $91 million compared to $98 million at the beginning of the fiscal year. The Company had cash and short-term investments aggregating $104 million at the end of the third quarter of fiscal 2000 compared to $125 million as of fiscal 1999 year end. Short-term investments were approximately $6 million and $27 million at December 2, 2000 and February 26, 2000, respectively. The decrease in working capital is attributable primarily to decreases in cash, short-term investments and accounts receivable, and an increase in accounts payable partially offset by an increase in inventories. 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 $493 million revolving 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. As of December 2, 2000, the Credit Agreement was comprised of the U.S. credit agreement amounting to $415 million and the Canadian credit agreement amounting to C$121 million (U.S. $78 million). As of December 2, 2000, the Company had $320 million of borrowings under the Credit Agreement. Accordingly, as of December 2, 2000, the Company had $173 million available under the Credit Agreement. Borrowings under the agreement bears interest at the weighted average rate of 7.15% as of December 2, 2000 based on the variable LIBOR pricing. In addition to the Credit Agreement, the Company also has various uncommitted lines of credit with numerous banks totaling $55 million. As of December 2, 2000, the Company had $10 million outstanding and $45 million available in uncommitted lines of credit. As described in Footnote 9 of the Company's Consolidated Financial Statements for the 12 and 40 week periods ended December 2, 2000, the Company entered into an agreement with IBM Credit Corporation ("IBM Credit") whereby IBM Credit will provide financing for software purchases and hardware leases primarily related to GR II. Under this agreement, IBM Credit will finance software purchases and hardware leases in the aggregate up to $71 million at an effective rate of 8.49% per annum. As of December 2, 2000, IBM Credit has funded $22.5 million for software purchases and has leased hardware to the Company with a total fair market value of $10.5 million. On November 1, 2000, the Company's Canadian subsidiary, The Great Atlantic & Pacific Company of Canada, Limited, repaid its outstanding $75 million 5 year Notes denominated in U.S. dollars. The repayment of these Notes was funded by the Credit Agreement at an average rate of 6.55%. 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 December 2, 2000 at terms determined by market conditions at the time of sale. The Company's loan agreements and certain of its notes contain various financial covenants which require, among other things, minimum net worth and maximum levels of indebtedness and lease commitments. The Company is in compliance with all such covenants as of December 2, 2000. The Company is currently negotiating a new, secured revolving credit agreement to replace its existing facility that is expected to have covenants, terms and conditions which reflect the Company's current operating environment and capital programs. Although the Company cannot be certain of the final timing and terms of such agreement, it expects to have the agreement in place prior to its fiscal year end. On September 7, 2000, Standard & Poor's Ratings Group ("S&P") lowered its rating on the Company's debt to BB stable. At December 2, 2000, the Company's existing senior unsecured debt rating was Ba1 with negative implications with Moody's Investors Service ("Moody's") and BB stable with S&P. On December 15, 2000, Moody's lowered its rating on the Company's debt to Ba3 under continued review. On December 22, 2000, S&P lowered its rating on the Company's debt to BB with negative implications. These rating changes raise the cost of borrowing under the Credit Agreement by 50 basis points on the borrowed amount and 12 1/2 basis points on the entire commitment. Future rating changes could affect the availability and cost of financing to the Company. For the 40 weeks ended December 2, 2000, capital expenditures totaled $326 million, which included 35 new stores and 37 major remodels and enlargements. Capital expenditures are expected to be approximately $400 million for the entire year. As described in Footnote 10 of the Company's Consolidated Financial Statements for the 12 and 40 week periods ended December 2, 2000, on December 29, 2000, the Company entered into an agreement to sell certain properties and subsequently lease them back from the purchaser. The properties subject to this agreement have a carrying value of $18.9 million. Proceeds received by the Company related to this transaction amounted to $26.4 million. The resulting gain of $7.5 million will be deferred and amortized over the life of the respective leases as a reduction of rental expense. The Company is currently in discussions to enter similar transactions with other owned properties. On December 5, 2000, the Company's Board of Directors voted to discontinue payment of the quarterly cash dividend on its common stock. The Company believes that its anticipated cash resources will be sufficient for GR II and other capital expenditure programs, as well as mandatory scheduled debt repayments throughout fiscal 2000. 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 $700 million in notes as of December 2, 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 December 2, 2000, a 1% change in LIBOR would result in interest expense fluctuating approximately $3.3 million per year. Foreign Exchange Risk The Company is exposed to foreign exchange risk to the extent of adverse fluctuations in the Canadian dollar. For the 12 and 40 week periods ended December 2, 2000, a change in the Canadian currency of 10% would have resulted in a fluctuation in net income of $0.3 million and $1.5 million, respectively. The Company does not believe that a change in the Canadian currency of 10% will have a material effect on the financial position or cash flows of the Company. 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 programs 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. PART II. OTHER INFORMATION ITEM 1 - Legal Proceedings On January 8, 2001, the United States Supreme Court denied the plaintiffs' petition for certiorari in Shirley A. Lang, et al. v. Kohl's Food Stores, Inc. and The Great Atlantic & Pacific Tea Company, Inc., which favorably concludes this litigation for the Company. On January 13, 2000, the Attorney General of the State of New York filed an action in New York Supreme Court, County 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. In December 2000, the plaintiffs in the federal court action accepted a $3 million offer of judgment made by the Company, such offer being conditional upon the federal court entering an order certifying a class consisting of the individuals who are the subject of a pending motion by the plaintiffs for class certification. In the event the Court enters the class certification order, this judgment will also resolve all related claims of the New York Attorney General. For a description of other legal matters previously reported during fiscal 2000, reference should be made to the Company's filings on Form 10-Q for the quarters ended June 17, 2000 and September 2, 2000. ITEM 2 - Changes in Securities None ITEM 3 - Defaults Upon Senior Securities None ITEM 4 - Submission of Matters to a Vote of Security Holders None - Matters were previously reported in the first quarter ended June 17, 2000, Form 10-Q report filed with the Commission. ITEM 5 - Other Information None ITEM 6 - Exhibits and Reports on Form 8-K (a) Exhibits required by item 601 of Regulation S-K Management Employment Agreements - Exhibit 10 (b) Reports on Form 8-K None The Great Atlantic & Pacific Tea Company, Inc. SIGNATURES Pursuant to the requirements 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. Date: January 16, 2001 By: /s/ Kenneth A. Uhl Kenneth A. Uhl, Vice President and Controller (Chief Accounting Officer) EX-10 2 0002.txt EMPLOYMENT CONTRACTS EMPLOYMENT AGREEMENT AGREEMENT, made and entered into as of the 1st day of November, 2000, by and between THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. (the "Company"), and LAURANE MAGLIARI. (the "Employee"). W I T N E S S E T H WHEREAS, the Company and the Employee (the "Parties") have agreed to enter into this agreement (the "Agreement) relating to the employment of the Employee by the Company; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Parties, intending to be legally bound, agree as follows: 1. Term of Employment. (a) The Company agrees to continue to employ the Employee, and the Employee agrees to remain in the employment of the Company, in accordance with the terms and provisions of this Agreement, for the period set forth below (the "Employment Period"). (b) The Employment Period under this Agreement shall commence as of November 1, 2000 and, subject only to the provisions of Sections 7, 8 and 9 below relating to termination of employment, shall continue until (i) the close of business on October 31, 2003 or (ii) such later date as shall result from the operation of subparagraph (c) below (the "Terminal Date"). (c) Commencing on May 1, 2002, and on the first business day of each month thereafter (such date and each such first business day, the "Renewal Date") the Terminal Date set forth in subparagraph (b) above shall be extended so as to occur eighteen months from the Renewal Date unless either the Company or the Employee shall have given written notice to the other Party on or before such Renewal Date that the Terminal Date is not to be extended. 2. Duties. It is the intention of the Parties that during the term of her employment under this Agreement, the Employee will serve as Senior Vice President, People Resources and Services of the Company. The Employee will devote her full business time and attention to the affairs of the Company and her duties as its Senior Vice President, People Resources and Services. The Employee will have such duties as are appropriate to her position as Senior Vice President, People Resources and Services, and will have such authority as required to enable her to perform these duties. Consistent with the foregoing, the Employee shall comply with all reasonable instructions of the President and Chief Executive Officer of the Company. The Employee will be based in Montvale, New Jersey and her services will be rendered there except insofar as travel may be involved in connection with her regular duties. The Employee will report directly to the President and Chief Executive Officer of the Company. 3. Salary and Bonus. 3.1 Salary. The Company will pay the Employee a base salary at an initial annual rate of not less than $335,000, which base salary as in effect from time to time will not be reduced and will be reviewed periodically (at intervals of not more than eighteen (18) months) by the Compensation Committee of the Board of Directors (the "Board") for the purpose of considering increases thereof. In evaluating increases in the Employee's base salary, the Compensation Committee of the Board will take into account such factors as corporate performance, individual merit, and such other considerations as it deems appropriate. The Employee's base salary will be paid in accordance with the standard practices for other corporate executives of the Company. 3.2 Bonuses. The Employee will be eligible to receive annually or otherwise any bonus awards, whether payable in cash, shares of common stock of the Company or otherwise, which the Company, the Compensation Committee of the Board or such other authorized committee of the Board determines to award or grant. 4. Benefit Programs. The Employee will receive such benefits and awards, including without limitation stock options and restricted share awards, as the Compensation Committee of the Board shall determine and will be eligible to participate in all employee benefit plans and programs of the Company from time to time in effect for the benefit of senior executives of the Company, including, but not limited to, pension and other retirement plans, group life insurance, hospitalization and surgical and major medical coverages, sick leave, salary continuation arrangements, vacations and holidays, long-term disability, and such other benefits as are or may be made available from time to time to senior executives of the Company. 5. Business Expenses and Perquisites. The Employee will be reimbursed for all reasonable expenses incurred by her in connection with the conduct of the business of the Company, provided she properly accounts therefor in accordance with the Company's policies. She will also be entitled to such other perquisites as are customary for senior executives of the Company. 6. Office and Services Furnished. The Company shall furnish the Employee with office space, secretarial assistance and such other facilities and services as shall be suitable to the Employee's position and adequate for the performance of her duties hereunder. 7. Termination of Employment by the Company. 7.1 Involuntary Termination by the Company Other Than For Permanent and Total Disability or For Cause. The Company may terminate the Employee's employment at any time and for any reason by giving her a written notice of termination to that effect at least 45 days before the date of termination. In the event the Company terminates the Employee's employment for any reason other than for Permanent and Total Disability, as provided in Section 7.2, below, or for Cause, as provided in Section 7.3, below, the Employee shall be entitled to the benefits described in Section 10 or Section 11, whichever is applicable. 7.2 Termination Due to Permanent and Total Disability. If the Employee incurs a Permanent and Total Disability, as defined below, the Company may terminate the Employee's employment by giving her written notice of termination at least 45 days before the date of such termination. In the event of such termination of the Employee's employment because of Permanent and Total Disability, the Employee shall be entitled to receive (i) her base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination of employment at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. For purposes of this Agreement, the Employee shall be considered to have incurred a Permanent and Total Disability if she is unable to substantially carry out her duties under this Agreement by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. The existence of such Permanent and Total Disability shall be evidenced by such medical certification as the Secretary of the Company shall require and shall be subject to the approval of the Compensation Committee of the Board of Directors of the Company. 7.3 Termination for Cause. The Company may terminate the Employee's employment for Cause if (i) the Employee willfully, substantially, and continually fails to perform the duties for which she is employed by the Company, (ii) the Employee willfully fails to comply with the reasonable instructions of the President and Chief Executive Officer of the Company, (iii) the Employee willfully engages in conduct which is or would reasonably be expected to be materially and demonstrably injurious to the Company, (iv) the Employee willfully engages in an act or acts of dishonesty resulting in material personal gain to the Employee at the expense of the Company, (v) the Employee is convicted of a felony, (vi) the Employee engages in an act or acts of gross malfeasance in connection with her employment hereunder, (vii) the Employee commits a material breach of the confidentiality provision set forth in Section 15, or (viii) the Employee exhibits demonstrable evidence of alcohol or drug abuse having a substantial adverse effect on her job performance hereunder. The Company shall exercise its right to terminate the Employee's employment for Cause by giving her written notice of termination at least 45 days before the date of such termination specifying in reasonable detail the circumstances constituting such Cause. In the event of such termination of the Employee's employment for Cause, the Employee shall be entitled to receive (i) her base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits and (ii) any amounts owed under the reimbursement policy of Section 5. 8. Termination of Employment by the Employee. (a) Good Reason. The Employee may terminate her employment for Good Reason by giving the Company a written notice of termination at least 45 days before the date of such termination specifying in reasonable detail the circumstances constituting such Good Reason. In the event of the Employee's termination of her employment for Good Reason, the Employee shall be entitled to the benefits described in Section 10 or Section 11, whichever is applicable. For purposes of this Agreement, Good Reason shall mean (i) a significant reduction in the scope of the Employee's authority, functions, duties or responsibilities from that which is contemplated by this Agreement, (ii) the Employee being required to report directly to someone other than the President and Chief Executive Officer of the Company, (iii) the relocation of the Employee's office location to a location more than 50 miles away from the Employee's principal place of employment on November 1, 2000, (iv) any reduction in the Employee's base salary, or (v) a significant reduction in the employee benefits provided to the Employee other than in connection with an across-the-board reduction similarly affecting substantially all senior executives of the Company. If an event constituting a ground for termination of employment for Good Reason occurs, and the Employee fails to give notice of termination within 3 months after the occurrence of such event, the Employee shall be deemed to have waived her right to terminate employment for Good Reason in connection with such event (but not for any other event for which the 3-month period has not expired). (b) Other. The Employee may terminate her employment at any time and for any reason, other than pursuant to subsection (a) above, by giving the Company a written notice of termination to that effect at least 45 days before the date of termination. In the event of the Employee's termination of her employment pursuant to this subsection (b), the Employee shall be entitled to receive (i) her base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. 9. Termination of Employment By Death. In the event of the death of the Employee during the course of her employment hereunder, the Employee's estate shall be entitled to receive (i) her base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any other benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. In addition, in the event of such death, the Employee's beneficiaries shall receive any death benefits owed to them under the Company's employee benefit plans. 10. Benefits Upon Termination Without Cause or For Good Reason (No Change of Control). If (a) the Employee's employment with the Company shall terminate (i) because of termination by the Company pursuant to Section 7.1 other than for Cause and other than because of Permanent and Total Disability, or (ii) because of termination by the Employee for Good Reason pursuant to Section 8(a), and (b) such termination of employment does not occur within 13 months following a "Change of Control" of the Company (as defined in Section 12), the Employee shall be entitled to the following: (a) The Company shall pay to the Employee her base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee under this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits. (b) The Company shall pay the Employee any reimbursement amounts owing under Section 5. (c) The Company shall pay to the Employee as a severance benefit for each month during the 18 month period beginning with the month next following the date of termination of the Employee's employment an amount equal to one-twelfth of the sum of (i) her annual rate of base salary immediately preceding her termination of employment, and (ii) the average of her three highest annual bonuses awarded under the Company's annual management incentive bonus plan for any of the five calendar years preceding her termination of employment (or, if she was not eligible for a bonus for at least three calendar years in such five-year period, then the average of such bonuses for all of the calendar years in such five-year period for which she was eligible, and if she was not eligible for such a bonus in any previous year, then 100% of her target annual bonus for the year of termination of her employment), with any deferred bonuses counting for the year earned rather than the year paid. Each such monthly benefit shall be paid no later than the last day of the applicable month. In the event that the Employee dies before the end of such 18-month period, the payments for the remainder of such period shall be made to the Employee's estate. (d) The Company shall pay to the Employee as a bonus for the year of termination of her employment an amount equal to a portion (determined as provided in the next sentence) of the bonus that the Employee would actually have received under the Company's annual management incentive bonus plan for the calendar year of termination of the Employee's employment if her employment had not terminated (determined on the basis of her actual bonus opportunity and the actual degree of achievement of the applicable performance goals) or, if no bonus opportunity for that year had been established for the Employee at the time of such termination of employment, such portion of the bonus awarded to her under the Company's annual management incentive bonus plan for the calendar year immediately preceding the calendar year of the termination of her employment, with deferred bonuses counting for the year earned rather than the year paid. Such portion shall be determined by dividing the number of days of the Employee's employment during such calendar year up to her termination of employment by 365 (366 if a leap year). Such payment shall be made on or about the date on which bonuses for the applicable year are paid to executives of the Company generally under the Company's annual management incentive bonus plan, and the Employee shall have no right to any further bonuses under said plan. (e) During the period of 18 months beginning on the date of the Employee's termination of employment, the Employee shall remain covered by the medical, dental, vision, life insurance, and, if reasonably commercially available through nationally reputable insurance carriers, long-term disability plans of the Company that covered her immediately prior to her termination of employment as if she had remained in employment for such period. In the event that the Employee's participation in any such plan is barred, the Company shall arrange to provide the Employee with substantially similar benefits (but, in the case of long-term disability benefits, only if reasonably commercially available). Any medical insurance coverage for such 18-month period pursuant to this subsection (e) shall become secondary upon the earlier of (i) the date on which the Employee begins to be covered by comparable medical coverage provided by a new employer, or (ii) the earliest date upon which the Employee becomes eligible for Medicare or a comparable Government insurance program. 11. Benefits Upon Termination Without Cause or For Good Reason (Change of Control). If (a) the Employee's employment with the Company shall terminate (i) because of termination by the Company pursuant to Section 7.1 other than for Cause and other than because of Permanent and Total Disability, (ii) because of termination by the Employee for Good Reason pursuant to Section 8(a), or (iii) for any reason during the 30 days beginning on the first anniversary of a Change of Control, and (b) such termination of employment occurs within 13 months following a "Change of Control" of the Company (as defined in Section 12), the Employee shall be entitled to the following: (a) The Company shall pay to the Employee her base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee under this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits. (b) The Company shall pay the Employee any reimbursement amounts owing under Section 5. (c) The Company shall pay to the Employee as a severance benefit an amount equal to three (3) times the sum of (i) her annual rate of base salary immediately preceding her termination of employment, and (ii) the average of her three highest annual bonuses awarded under the Company's annual management incentive bonus plan for any of the five calendar years preceding her termination of employment (or, if she was not eligible for a bonus for at least three calendar years in such five-year period, then the average of such bonuses for all of the calendar years in such five-year period for which she was eligible, and if she was not eligible for such a bonus in any previous year, then 100% of her target annual bonus for the year of termination of her employment), with any deferred bonuses counting for the year earned rather than the year paid. Such severance benefit shall be paid in a lump sum within 45 days after the date of such termination of employment. (d) The Company shall pay to the Employee as a bonus for the year of termination of her employment an amount equal to a portion (determined as provided in the next sentence) of the bonus that the Employee would actually have received under the Company's annual management incentive bonus plan for the calendar year of termination of the Employee's employment if her employment had not terminated (determined on the basis of her actual bonus opportunity and the actual degree of achievement of the applicable performance goals) or, if no bonus opportunity for that year had been established for the Employee at the time of such termination of employment, such portion of the bonus awarded to her under the Company's annual management incentive bonus plan for the calendar year immediately preceding the calendar year of the termination of her employment, with deferred bonuses counting for the year earned rather than the year paid. Such portion shall be determined by dividing the number of days of the Employee's employment during such calendar year up to her termination of employment by 365 (366 if a leap year). Such payment shall be made on or about the date on which bonuses for the applicable year are paid to executives of the Company generally under the Company's annual management incentive bonus plan, and the Employee shall have no right to any further bonuses under said plan. (e) During the period of 36 months beginning on the date of the Employee's termination of employment, the Employee shall remain covered by the medical, dental, vision, life insurance, and, if reasonably commercially available through nationally reputable insurance carriers, long-term disability plans of the Company that covered her immediately prior to her termination of employment as if he had remained in employment for such period. In the event that the Employee's participation in any such plan is barred, the Company shall arrange to provide the Employee with substantially similar benefits (but, in the case of long-term disability benefits, only if reasonably commercially available). Any medical insurance coverage for such 36-month period pursuant to this subsection (e) shall become secondary upon the earlier of (i) the date on which the Employee begins to be covered by comparable medical coverage provided by a new employer, or (ii) the earliest date upon which the Employee becomes eligible for Medicare or a comparable Government insurance program. 12. Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if (a) any person or persons acting together which would constitute a "group" for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (other than the Company, any subsidiary of the Company, and Tengelmann Warenhandelsgesellschaft (a partnership organized under the laws of the Federal Republic of Germany or any successor to such partnership, hereinafter "Tengelmann")) shall beneficially own (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, at least 30% of the total voting power of all classes of capital stock of the Company entitled to vote generally in the election of the Board and such voting power exceeds the then current voting power of Tengelmann; (b) control of Tengelmann is acquired by any person or persons other than family members or entities controlled by family members of Erivan Haub; (c) Current Directors (as herein defined) shall cease for any reason to constitute at least a majority of the members of the Board (for this purpose, a "Current Director" shall mean any member of the Board as of the date hereof and any successor of a Current Director whose election, or nomination for election by the Company's shareholders, was approved by at least two-thirds of the Current Directors then on the Board); (d) the shareholders of the Company approve (i) a plan of complete liquidation of the Company or (ii) an agreement providing for the merger or consolidation of the Company other than a merger or consolidation in which (x) the holders of the common stock of the Company immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger or (y) the Board immediately prior to the merger or consolidation would, immediately after the merger or consolidation, constitute a majority of the board of directors of the continuing or surviving corporation; or (e) the shareholders of the Company approve an agreement (or agreements) providing for the sale or other disposition (in one transaction or a series of transactions) of all or substantially all of the assets of the Company. 13. Entitlement to Other Benefits. Except as otherwise provided in this Agreement, this Agreement shall not be construed as limiting in any way any rights or benefits that the Employee or her spouse, dependents or beneficiaries may have pursuant to any other plan or program of the Company. 14. Non-Competition. The Employee agrees that during the term of this Agreement and for a period of two years following termination of her employment, the Employee will not, within any of the geographical areas of the United States or Canada in which the Company is then conducting business (either directly or through franchisees), directly or indirectly, own, manage, operate, control, be employed by, participate in, provide consulting services to, or be connected in any manner with the ownership, management, operation or control of any business similar to any of the types of businesses conducted by the Company to any significant extent during her employment or on the date of termination of her employment, except the Employee may own for investment purposes up to 1% of the capital stock of any company whose stock is publicly traded, and during such two year period following termination of her employment the Employee will not contact or solicit employees of the Company for the purpose of inducing such employees to leave the employ of the Company. 15. Confidential Information and Trade Secrets. The Employee hereby acknowledges that she will have access to and become acquainted with various trade secrets and proprietary information of the Company and other confidential information relating to the Company. The Employee covenants that she will not, directly or indirectly, disclose or use such information except as is necessary and appropriate in connection with her employment by the Company and that she will otherwise adhere in all respects to the Company's policies against the use or disclosure of such information. 16. Arbitration; Injunctive Relief. Any controversy or claim arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof, will be settled by arbitration in accordance with the rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The arbitration will be held in New York, New York, or such other place as may be agreed upon at the time by the parties to the arbitration. The parties shall bear their own expenses in connection with any arbitration or proceeding arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof; provided, however, that in the event that the Employee substantially prevails, the Company agrees promptly to reimburse the Employee for all expenses (including costs and fees of witnesses, evidence and attorneys fees and expenses) reasonably incurred by her in investigating, prosecuting, defending, or preparing to prosecute or defend any action, proceeding or claim arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof. The parties acknowledge and agree that a breach of Employee's obligations under Sections 14 or 15 could cause irreparable harm to Company for which Company would have no adequate remedy at law, and further agree that, notwithstanding the agreement of the parties to arbitrate controversies or claims as set forth above, the Company may apply to a court of competent jurisdiction to seek to enjoin preliminarily or permanently any breach or threatened breach of the Employee's obligations under Sections 14 and 15. 17. Indemnification. The Company shall indemnify and hold the Employee harmless to the fullest extent legally permissible under the laws of the State of Maryland, against any and all expenses, liabilities and losses (including attorney's fees, judgments, fines and amounts paid in settlement) reasonably incurred or suffered by her by reason of any claim or cause of action asserted against her because of her service at any time as a director or officer of the Company. The Company shall advance to the Employee the amount of her expenses incurred in connection with any proceeding relating to such service to the fullest extent legally permissible under the laws of the State of Maryland. Notwithstanding the foregoing, the Company's obligations pursuant to this Section 17 shall not apply in the case of any claim or cause of action by or in the right of the Company or any subsidiary thereof. 18. Liability Insurance. To the extent that Company maintains a directors and officers liability insurance policy in effect, the Company will take all steps necessary to ensure that the Employee is covered under such policy for her service as a director or officer of the Company or any subsidiary of the Company with respect to claims made at any time with respect to such service. 19. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution made, or benefit provided (including, without limitation, the acceleration of any payment, distribution or benefit and the accelerated exercisability of any stock option), to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 19) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (or any similar excise tax) or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive from the Company an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes (including any Excise Tax, income tax or employment tax and taking into account any lost or reduced tax deductions on account of such Gross-Up Payment) imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, the Employee retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 19(c), all determinations required to be made under this Section 19, including determination of whether a Gross-Up Payment is required and of the amount of any such Gross-up Payment, shall be made by Deloitte & Touche LLP (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Employee within 15 business days of the date of termination of the Employee's employment, if applicable, or such earlier time as is requested by the Company, provided that any determination that an Excise Tax is payable by the Employee shall be made on the basis of substantial authority. The initial Gross-Up Payment, if any, as determined pursuant to this Section 19(b), shall be paid to the Employee within five business days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Employee, it shall furnish the Employee with a written opinion that he has substantial authority not to report any Excise Tax on her Federal income tax return. Any determination by the Accounting Firm meeting the requirements of this Section 19(b) shall be binding upon the Company and the Employee; subject only to payments pursuant to the following sentence based on a determination that additional Gross-Up Payments should have been made, consistent with the calculations required to be made hereunder (the amount of such additional payments is referred to herein as the "Gross-Up Underpayment"). In the event that the Company exhausts its remedies pursuant to Section 19(c) and the Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Gross-Up Underpayment that has occurred and any such Gross-Up Underpayment shall be promptly paid by the Company to or for the benefit of the Employee. The fees and disbursements of the Accounting Firm shall be paid by the Company. (c) The Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but not later than ten business days after the Employee receives written notice of such claim and shall apprise the Company of the nature of such claim and the date on which such Claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim and that it will bear the costs and provide the indemnification as required by this sentence, the Employee shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax, income tax or employment tax (taking into account any lost or reduced tax deductions on account of such payments), including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 19(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Employee on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax, income tax or employment tax (taking into account any lost or reduced tax deductions on account of such advance), including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to the payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 19(c), the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of Section 19(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 19(c), a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then any obligation of the Employee to repay such advance shall be forgiven and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 20. No Duty to Seek Employment. The Employee shall not be under any duty or obligation to seek or accept other employment following termination of employment, and no amount, payment or benefits due to the Employee hereunder shall be reduced or suspended if the Employee accepts subsequent employment. 21. Deductions and Withholding. All amounts payable or which become payable under any provision of this Agreement shall be subject to any deductions authorized by the Employee and any deductions and withholdings required by law. 22. Governing Law. The validity, interpretation and performance of this Agreement will be governed by the laws of the State of New Jersey without regard to the conflict of law provisions. 23. Notice. Any written notice required to be given by one Party to the other Party hereunder will be deemed effected if mailed by registered mail: To the Company at: The Great Atlantic & Pacific Tea Company 2 Paragon Drive Montvale, New Jersey 07645 Attention: General Counsel To the Employee at: 445 West 19th Street PHA New York, NY 10011 or such other address as may be stated in a notice given as herein before provided. 24. Severability. If any one or more of the provisions contained in this Agreement is held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect any other provision hereof. 25. Successors and Assigns. This Agreement will be binding upon and inure to the benefit of the Parties hereto and their personal representatives, and, in the case of the Company, its successors and assigns. To the extent the Company's obligations under this Agreement are transferred to any successor or assign, such successor or assign shall be treated as the "Company" for purposes of this Agreement. Other than as contemplated by this Agreement, the Employee may not assign her rights or duties under this Agreement. 26. Continuing Effect. Wherever appropriate to the intention of the Parties hereto, the respective rights and obligations of the Parties, including the obligations referred to in Sections 10, 11, 14, 15 and 19, hereof, will survive any termination or expiration of the term of this Agreement. 27. Entire Agreement. This Agreement constitutes the entire agreement between the Parties and supersedes any and all other agreements and understandings between the Parties in respect of the matters addressed in this Agreement. 28. Amendment and Waiver. No amendment or waiver of any provision of this Agreement shall be effective, unless the same shall be in writing and signed by the Parties, and then such amendment, waiver or consent shall be effective only in the specific instance or for the specific purpose for which such amendment, waiver or consent was given. 29. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Employee has hereunto set her hand as of the day and year first above written. THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. By: Name: Title: LAURANE MAGLIARI. EMPLOYMENT AGREEMENT AGREEMENT, made and entered into as of the 1st day of November, 2000, by and between THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. (the "Company"), and NICHOLAS IOLI, JR. (the "Employee"). W I T N E S S E T H WHEREAS, the Company and the Employee (the "Parties") have agreed to enter into this agreement (the "Agreement) relating to the employment of the Employee by the Company; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Parties, intending to be legally bound, agree as follows: 30. Term of Employment. (a) The Company agrees to continue to employ the Employee, and the Employee agrees to remain in the employment of the Company, in accordance with the terms and provisions of this Agreement, for the period set forth below (the "Employment Period"). (b) The Employment Period under this Agreement shall commence as of November 1, 2000 and, subject only to the provisions of Sections 7, 8 and 9 below relating to termination of employment, shall continue until (i) the close of business on October 31, 2003 or (ii) such later date as shall result from the operation of subparagraph (c) below (the "Terminal Date"). (c) Commencing on May 1, 2002, and on the first business day of each month thereafter (such date and each such first business day, the "Renewal Date") the Terminal Date set forth in subparagraph (b) above shall be extended so as to occur eighteen months from the Renewal Date unless either the Company or the Employee shall have given written notice to the other Party on or before such Renewal Date that the Terminal Date is not to be extended. 31. Duties. It is the intention of the Parties that during the term of his employment under this Agreement, the Employee will serve as Senior Vice President, Chief Information Officer of the Company. The Employee will devote his full business time and attention to the affairs of the Company and his duties as its Senior Vice President, Chief Information Officer. The Employee will have such duties as are appropriate to his position as Senior Vice President, Chief Information Officer, and will have such authority as required to enable him to perform these duties. Consistent with the foregoing, the Employee shall comply with all reasonable instructions of the President and Chief Executive Officer of the Company. The Employee will be based in Montvale, New Jersey and his services will be rendered there except insofar as travel may be involved in connection with his regular duties. The Employee will report directly to the President and Chief Executive Officer of the Company. 32. Salary and Bonus. 32.1 Salary. The Company will pay the Employee a base salary at an initial annual rate of not less than $225,000, which base salary as in effect from time to time will not be reduced and will be reviewed periodically (at intervals of not more than eighteen (18) months) by the Compensation Committee of the Board of Directors (the "Board") for the purpose of considering increases thereof. In evaluating increases in the Employee's base salary, the Compensation Committee of the Board will take into account such factors as corporate performance, individual merit, and such other considerations as it deems appropriate. The Employee's base salary will be paid in accordance with the standard practices for other corporate executives of the Company. 32.2 Bonuses. The Employee will be eligible to receive annually or otherwise any bonus awards, whether payable in cash, shares of common stock of the Company or otherwise, which the Company, the Compensation Committee of the Board or such other authorized committee of the Board determines to award or grant. 33. Benefit Programs. The Employee will receive such benefits and awards, including without limitation stock options and restricted share awards, as the Compensation Committee of the Board shall determine and will be eligible to participate in all employee benefit plans and programs of the Company from time to time in effect for the benefit of senior executives of the Company, including, but not limited to, pension and other retirement plans, group life insurance, hospitalization and surgical and major medical coverages, sick leave, salary continuation arrangements, vacations and holidays, long-term disability, and such other benefits as are or may be made available from time to time to senior executives of the Company. 34. Business Expenses and Perquisites. The Employee will be reimbursed for all reasonable expenses incurred by him in connection with the conduct of the business of the Company, provided he properly accounts therefor in accordance with the Company's policies. He will also be entitled to such other perquisites as are customary for senior executives of the Company. 35. Office and Services Furnished. The Company shall furnish the Employee with office space, secretarial assistance and such other facilities and services as shall be suitable to the Employee's position and adequate for the performance of his duties hereunder. 36. Termination of Employment by the Company. 36.1 Involuntary Termination by the Company Other Than For Permanent and Total Disability or For Cause. The Company may terminate the Employee's employment at any time and for any reason by giving him a written notice of termination to that effect at least 45 days before the date of termination. In the event the Company terminates the Employee's employment for any reason other than for Permanent and Total Disability, as provided in Section 7.2, below, or for Cause, as provided in Section 7.3, below, the Employee shall be entitled to the benefits described in Section 10 or Section 11, whichever is applicable. 36.2 Termination Due to Permanent and Total Disability. If the Employee incurs a Permanent and Total Disability, as defined below, the Company may terminate the Employee's employment by giving him written notice of termination at least 45 days before the date of such termination. In the event of such termination of the Employee's employment because of Permanent and Total Disability, the Employee shall be entitled to receive (i) his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination of employment at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. For purposes of this Agreement, the Employee shall be considered to have incurred a Permanent and Total Disability if he is unable to substantially carry out his duties under this Agreement by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. The existence of such Permanent and Total Disability shall be evidenced by such medical certification as the Secretary of the Company shall require and shall be subject to the approval of the Compensation Committee of the Board of Directors of the Company. 36.3 Termination for Cause. The Company may terminate the Employee's employment for Cause if (i) the Employee willfully, substantially, and continually fails to perform the duties for which he is employed by the Company, (ii) the Employee willfully fails to comply with the reasonable instructions of the President and Chief Executive Officer of the Company, (iii) the Employee willfully engages in conduct which is or would reasonably be expected to be materially and demonstrably injurious to the Company, (iv) the Employee willfully engages in an act or acts of dishonesty resulting in material personal gain to the Employee at the expense of the Company, (v) the Employee is convicted of a felony, (vi) the Employee engages in an act or acts of gross malfeasance in connection with his employment hereunder, (vii) the Employee commits a material breach of the confidentiality provision set forth in Section 15, or (viii) the Employee exhibits demonstrable evidence of alcohol or drug abuse having a substantial adverse effect on his job performance hereunder. The Company shall exercise its right to terminate the Employee's employment for Cause by giving him written notice of termination at least 45 days before the date of such termination specifying in reasonable detail the circumstances constituting such Cause. In the event of such termination of the Employee's employment for Cause, the Employee shall be entitled to receive (i) his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits and (ii) any amounts owed under the reimbursement policy of Section 5. 37. Termination of Employment by the Employee. (a) Good Reason. The Employee may terminate his employment for Good Reason by giving the Company a written notice of termination at least 45 days before the date of such termination specifying in reasonable detail the circumstances constituting such Good Reason. In the event of the Employee's termination of his employment for Good Reason, the Employee shall be entitled to the benefits described in Section 10 or Section 11, whichever is applicable. For purposes of this Agreement, Good Reason shall mean (i) a significant reduction in the scope of the Employee's authority, functions, duties or responsibilities from that which is contemplated by this Agreement, (ii) the Employee being required to report directly to someone other than the President and Chief Executive Officer of the Company, (iii) the relocation of the Employee's office location to a location more than 50 miles away from the Employee's principal place of employment on November 1, 2000, (iv) any reduction in the Employee's base salary, or (v) a significant reduction in the employee benefits provided to the Employee other than in connection with an across-the-board reduction similarly affecting substantially all senior executives of the Company. If an event constituting a ground for termination of employment for Good Reason occurs, and the Employee fails to give notice of termination within 3 months after the occurrence of such event, the Employee shall be deemed to have waived his right to terminate employment for Good Reason in connection with such event (but not for any other event for which the 3-month period has not expired). (b) Other. The Employee may terminate his employment at any time and for any reason, other than pursuant to subsection (a) above, by giving the Company a written notice of termination to that effect at least 45 days before the date of termination. In the event of the Employee's termination of his employment pursuant to this subsection (b), the Employee shall be entitled to receive (i) his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. 38. Termination of Employment By Death. In the event of the death of the Employee during the course of his employment hereunder, the Employee's estate shall be entitled to receive (i) his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any other benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. In addition, in the event of such death, the Employee's beneficiaries shall receive any death benefits owed to them under the Company's employee benefit plans. 39. Benefits Upon Termination Without Cause or For Good Reason (No Change of Control). If (a) the Employee's employment with the Company shall terminate (i) because of termination by the Company pursuant to Section 7.1 other than for Cause and other than because of Permanent and Total Disability, or (ii) because of termination by the Employee for Good Reason pursuant to Section 8(a), and (b) such termination of employment does not occur within 13 months following a "Change of Control" of the Company (as defined in Section 12), the Employee shall be entitled to the following: (a) The Company shall pay to the Employee his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee under this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits. (b) The Company shall pay the Employee any reimbursement amounts owing under Section 5. (c) The Company shall pay to the Employee as a severance benefit for each month during the 18 month period beginning with the month next following the date of termination of the Employee's employment an amount equal to one-twelfth of the sum of (i) his annual rate of base salary immediately preceding his termination of employment, and (ii) the average of his three highest annual bonuses awarded under the Company's annual management incentive bonus plan for any of the five calendar years preceding his termination of employment (or, if he was not eligible for a bonus for at least three calendar years in such five-year period, then the average of such bonuses for all of the calendar years in such five-year period for which he was eligible, and if he was not eligible for such a bonus in any previous year, then 100% of his target annual bonus for the year of termination of his employment), with any deferred bonuses counting for the year earned rather than the year paid. Each such monthly benefit shall be paid no later than the last day of the applicable month. In the event that the Employee dies before the end of such 18-month period, the payments for the remainder of such period shall be made to the Employee's estate. (d) The Company shall pay to the Employee as a bonus for the year of termination of his employment an amount equal to a portion (determined as provided in the next sentence) of the bonus that the Employee would actually have received under the Company's annual management incentive bonus plan for the calendar year of termination of the Employee's employment if his employment had not terminated (determined on the basis of his actual bonus opportunity and the actual degree of achievement of the applicable performance goals) or, if no bonus opportunity for that year had been established for the Employee at the time of such termination of employment, such portion of the bonus awarded to him under the Company's annual management incentive bonus plan for the calendar year immediately preceding the calendar year of the termination of his employment, with deferred bonuses counting for the year earned rather than the year paid. Such portion shall be determined by dividing the number of days of the Employee's employment during such calendar year up to his termination of employment by 365 (366 if a leap year). Such payment shall be made on or about the date on which bonuses for the applicable year are paid to executives of the Company generally under the Company's annual management incentive bonus plan, and the Employee shall have no right to any further bonuses under said plan. (e) During the period of 18 months beginning on the date of the Employee's termination of employment, the Employee shall remain covered by the medical, dental, vision, life insurance, and, if reasonably commercially available through nationally reputable insurance carriers, long-term disability plans of the Company that covered him immediately prior to his termination of employment as if he had remained in employment for such period. In the event that the Employee's participation in any such plan is barred, the Company shall arrange to provide the Employee with substantially similar benefits (but, in the case of long-term disability benefits, only if reasonably commercially available). Any medical insurance coverage for such 18-month period pursuant to this subsection (e) shall become secondary upon the earlier of (i) the date on which the Employee begins to be covered by comparable medical coverage provided by a new employer, or (ii) the earliest date upon which the Employee becomes eligible for Medicare or a comparable Government insurance program. 40. Benefits Upon Termination Without Cause or For Good Reason (Change of Control). If (a) the Employee's employment with the Company shall terminate (i) because of termination by the Company pursuant to Section 7.1 other than for Cause and other than because of Permanent and Total Disability, (ii) because of termination by the Employee for Good Reason pursuant to Section 8(a), or (iii) for any reason during the 30 days beginning on the first anniversary of a Change of Control, and (b) such termination of employment occurs within 13 months following a "Change of Control" of the Company (as defined in Section 12), the Employee shall be entitled to the following: (a) The Company shall pay to the Employee his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee under this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits. (b) The Company shall pay the Employee any reimbursement amounts owing under Section 5. (c) The Company shall pay to the Employee as a severance benefit an amount equal to three (3) times the sum of (i) his annual rate of base salary immediately preceding his termination of employment, and (ii) the average of his three highest annual bonuses awarded under the Company's annual management incentive bonus plan for any of the five calendar years preceding his termination of employment (or, if he was not eligible for a bonus for at least three calendar years in such five-year period, then the average of such bonuses for all of the calendar years in such five-year period for which he was eligible, and if he was not eligible for such a bonus in any previous year, then 100% of his target annual bonus for the year of termination of his employment), with any deferred bonuses counting for the year earned rather than the year paid. Such severance benefit shall be paid in a lump sum within 45 days after the date of such termination of employment. (d) The Company shall pay to the Employee as a bonus for the year of termination of his employment an amount equal to a portion (determined as provided in the next sentence) of the bonus that the Employee would actually have received under the Company's annual management incentive bonus plan for the calendar year of termination of the Employee's employment if his employment had not terminated (determined on the basis of his actual bonus opportunity and the actual degree of achievement of the applicable performance goals) or, if no bonus opportunity for that year had been established for the Employee at the time of such termination of employment, such portion of the bonus awarded to him under the Company's annual management incentive bonus plan for the calendar year immediately preceding the calendar year of the termination of his employment, with deferred bonuses counting for the year earned rather than the year paid. Such portion shall be determined by dividing the number of days of the Employee's employment during such calendar year up to his termination of employment by 365 (366 if a leap year). Such payment shall be made on or about the date on which bonuses for the applicable year are paid to executives of the Company generally under the Company's annual management incentive bonus plan, and the Employee shall have no right to any further bonuses under said plan. (e) During the period of 36 months beginning on the date of the Employee's termination of employment, the Employee shall remain covered by the medical, dental, vision, life insurance, and, if reasonably commercially available through nationally reputable insurance carriers, long-term disability plans of the Company that covered him immediately prior to his termination of employment as if he had remained in employment for such period. In the event that the Employee's participation in any such plan is barred, the Company shall arrange to provide the Employee with substantially similar benefits (but, in the case of long-term disability benefits, only if reasonably commercially available). Any medical insurance coverage for such 36-month period pursuant to this subsection (e) shall become secondary upon the earlier of (i) the date on which the Employee begins to be covered by comparable medical coverage provided by a new employer, or (ii) the earliest date upon which the Employee becomes eligible for Medicare or a comparable Government insurance program. 41. Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if (a) any person or persons acting together which would constitute a "group" for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (other than the Company, any subsidiary of the Company, and Tengelmann Warenhandelsgesellschaft (a partnership organized under the laws of the Federal Republic of Germany or any successor to such partnership, hereinafter "Tengelmann")) shall beneficially own (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, at least 30% of the total voting power of all classes of capital stock of the Company entitled to vote generally in the election of the Board and such voting power exceeds the then current voting power of Tengelmann; (b) control of Tengelmann is acquired by any person or persons other than family members or entities controlled by family members of Erivan Haub; (c) Current Directors (as herein defined) shall cease for any reason to constitute at least a majority of the members of the Board (for this purpose, a "Current Director" shall mean any member of the Board as of the date hereof and any successor of a Current Director whose election, or nomination for election by the Company's shareholders, was approved by at least two-thirds of the Current Directors then on the Board); (d) the shareholders of the Company approve (i) a plan of complete liquidation of the Company or (ii) an agreement providing for the merger or consolidation of the Company other than a merger or consolidation in which (x) the holders of the common stock of the Company immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger or (y) the Board immediately prior to the merger or consolidation would, immediately after the merger or consolidation, constitute a majority of the board of directors of the continuing or surviving corporation; or (e) the shareholders of the Company approve an agreement (or agreements) providing for the sale or other disposition (in one transaction or a series of transactions) of all or substantially all of the assets of the Company. 42. Entitlement to Other Benefits. Except as otherwise provided in this Agreement, this Agreement shall not be construed as limiting in any way any rights or benefits that the Employee or his spouse, dependents or beneficiaries may have pursuant to any other plan or program of the Company. 43. Non-Competition. The Employee agrees that during the term of this Agreement and for a period of two years following termination of his employment, the Employee will not, within any of the geographical areas of the United States or Canada in which the Company is then conducting business (either directly or through franchisees), directly or indirectly, own, manage, operate, control, be employed by, participate in, provide consulting services to, or be connected in any manner with the ownership, management, operation or control of any business similar to any of the types of businesses conducted by the Company to any significant extent during his employment or on the date of termination of his employment, except the Employee may own for investment purposes up to 1% of the capital stock of any company whose stock is publicly traded, and during such two year period following termination of his employment the Employee will not contact or solicit employees of the Company for the purpose of inducing such employees to leave the employ of the Company. 44. Confidential Information and Trade Secrets. The Employee hereby acknowledges that he will have access to and become acquainted with various trade secrets and proprietary information of the Company and other confidential information relating to the Company. The Employee covenants that he will not, directly or indirectly, disclose or use such information except as is necessary and appropriate in connection with his employment by the Company and that he will otherwise adhere in all respects to the Company's policies against the use or disclosure of such information. 45. Arbitration; Injunctive Relief. Any controversy or claim arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof, will be settled by arbitration in accordance with the rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The arbitration will be held in New York, New York, or such other place as may be agreed upon at the time by the parties to the arbitration. The parties shall bear their own expenses in connection with any arbitration or proceeding arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof; provided, however, that in the event that the Employee substantially prevails, the Company agrees promptly to reimburse the Employee for all expenses (including costs and fees of witnesses, evidence and attorneys fees and expenses) reasonably incurred by him in investigating, prosecuting, defending, or preparing to prosecute or defend any action, proceeding or claim arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof. The parties acknowledge and agree that a breach of Employee's obligations under Sections 14 or 15 could cause irreparable harm to Company for which Company would have no adequate remedy at law, and further agree that, notwithstanding the agreement of the parties to arbitrate controversies or claims as set forth above, the Company may apply to a court of competent jurisdiction to seek to enjoin preliminarily or permanently any breach or threatened breach of the Employee's obligations under Sections 14 and 15. 46. Indemnification. The Company shall indemnify and hold the Employee harmless to the fullest extent legally permissible under the laws of the State of Maryland, against any and all expenses, liabilities and losses (including attorney's fees, judgments, fines and amounts paid in settlement) reasonably incurred or suffered by him by reason of any claim or cause of action asserted against him because of his service at any time as a director or officer of the Company. The Company shall advance to the Employee the amount of his expenses incurred in connection with any proceeding relating to such service to the fullest extent legally permissible under the laws of the State of Maryland. Notwithstanding the foregoing, the Company's obligations pursuant to this Section 17 shall not apply in the case of any claim or cause of action by or in the right of the Company or any subsidiary thereof. 47. Liability Insurance. To the extent that Company maintains a directors and officers liability insurance policy in effect, the Company will take all steps necessary to ensure that the Employee is covered under such policy for his service as a director or officer of the Company or any subsidiary of the Company with respect to claims made at any time with respect to such service. 48. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution made, or benefit provided (including, without limitation, the acceleration of any payment, distribution or benefit and the accelerated exercisability of any stock option), to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 19) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (or any similar excise tax) or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive from the Company an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes (including any Excise Tax, income tax or employment tax and taking into account any lost or reduced tax deductions on account of such Gross-Up Payment) imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, the Employee retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 19(c), all determinations required to be made under this Section 19, including determination of whether a Gross-Up Payment is required and of the amount of any such Gross-up Payment, shall be made by Deloitte & Touche LLP (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Employee within 15 business days of the date of termination of the Employee's employment, if applicable, or such earlier time as is requested by the Company, provided that any determination that an Excise Tax is payable by the Employee shall be made on the basis of substantial authority. The initial Gross-Up Payment, if any, as determined pursuant to this Section 19(b), shall be paid to the Employee within five business days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Employee, it shall furnish the Employee with a written opinion that he has substantial authority not to report any Excise Tax on his Federal income tax return. Any determination by the Accounting Firm meeting the requirements of this Section 19(b) shall be binding upon the Company and the Employee; subject only to payments pursuant to the following sentence based on a determination that additional Gross-Up Payments should have been made, consistent with the calculations required to be made hereunder (the amount of such additional payments is referred to herein as the "Gross-Up Underpayment"). In the event that the Company exhausts its remedies pursuant to Section 19(c) and the Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Gross-Up Underpayment that has occurred and any such Gross-Up Underpayment shall be promptly paid by the Company to or for the benefit of the Employee. The fees and disbursements of the Accounting Firm shall be paid by the Company. (c) The Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but not later than ten business days after the Employee receives written notice of such claim and shall apprise the Company of the nature of such claim and the date on which such Claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim and that it will bear the costs and provide the indemnification as required by this sentence, the Employee shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax, income tax or employment tax (taking into account any lost or reduced tax deductions on account of such payments), including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 19(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Employee on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax, income tax or employment tax (taking into account any lost or reduced tax deductions on account of such advance), including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to the payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 19(c), the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of Section 19(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 19(c), a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then any obligation of the Employee to repay such advance shall be forgiven and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 49. No Duty to Seek Employment. The Employee shall not be under any duty or obligation to seek or accept other employment following termination of employment, and no amount, payment or benefits due to the Employee hereunder shall be reduced or suspended if the Employee accepts subsequent employment. 50. Deductions and Withholding. All amounts payable or which become payable under any provision of this Agreement shall be subject to any deductions authorized by the Employee and any deductions and withholdings required by law. 51. Governing Law. The validity, interpretation and performance of this Agreement will be governed by the laws of the State of New Jersey without regard to the conflict of law provisions. 52. Notice. Any written notice required to be given by one Party to the other Party hereunder will be deemed effected if mailed by registered mail: To the Company at: The Great Atlantic & Pacific Tea Company 2 Paragon Drive Montvale, New Jersey 07645 Attention: General Counsel To the Employee at: 14 Crooked Hill Oakland, NJ 07436 or such other address as may be stated in a notice given as herein before provided. 53. Severability. If any one or more of the provisions contained in this Agreement is held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect any other provision hereof. 54. Successors and Assigns. This Agreement will be binding upon and inure to the benefit of the Parties hereto and their personal representatives, and, in the case of the Company, its successors and assigns. To the extent the Company's obligations under this Agreement are transferred to any successor or assign, such successor or assign shall be treated as the "Company" for purposes of this Agreement. Other than as contemplated by this Agreement, the Employee may not assign his rights or duties under this Agreement. 55. Continuing Effect. Wherever appropriate to the intention of the Parties hereto, the respective rights and obligations of the Parties, including the obligations referred to in Sections 10, 11, 14, 15 and 19, hereof, will survive any termination or expiration of the term of this Agreement. 56. Entire Agreement. This Agreement constitutes the entire agreement between the Parties and supersedes any and all other agreements and understandings between the Parties in respect of the matters addressed in this Agreement. 57. Amendment and Waiver. No amendment or waiver of any provision of this Agreement shall be effective, unless the same shall be in writing and signed by the Parties, and then such amendment, waiver or consent shall be effective only in the specific instance or for the specific purpose for which such amendment, waiver or consent was given. 58. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Employee has hereunto set his hand as of the day and year first above written. THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. By: Name: Title: NICHOLAS IOLI, JR. EMPLOYMENT AGREEMENT AGREEMENT, made and entered into as of the 1st day of November, 2000, by and between THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. (the "Company"), and WILLIAM P. COSTANTINI (the "Employee"). W I T N E S S E T H WHEREAS, the Company and the Employee (the "Parties") have agreed to enter into this agreement (the "Agreement) relating to the employment of the Employee by the Company; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Parties, intending to be legally bound, agree as follows: 59. Term of Employment. (a) The Company agrees to continue to employ the Employee, and the Employee agrees to remain in the employment of the Company, in accordance with the terms and provisions of this Agreement, for the period set forth below (the "Employment Period"). (b) The Employment Period under this Agreement shall commence as of November 1, 2000 and, subject only to the provisions of Sections 7, 8 and 9 below relating to termination of employment, shall continue until (i) the close of business on October 31, 2003 or (ii) such later date as shall result from the operation of subparagraph (c) below (the "Terminal Date"). (c) Commencing on May 1, 2002, and on the first business day of each month thereafter (such date and each such first business day, the "Renewal Date") the Terminal Date set forth in subparagraph (b) above shall be extended so as to occur eighteen months from the Renewal Date unless either the Company or the Employee shall have given written notice to the other Party on or before such Renewal Date that the Terminal Date is not to be extended. 60. Duties. It is the intention of the Parties that during the term of his employment under this Agreement, the Employee will serve as Senior Vice President, General Counsel and Secretary of the Company. The Employee will devote his full business time and attention to the affairs of the Company and his duties as its Senior Vice President, General Counsel and Secretary. The Employee will have such duties as are appropriate to his position as Senior Vice President, General Counsel and Secretary, and will have such authority as required to enable him to perform these duties. Consistent with the foregoing, the Employee shall comply with all reasonable instructions of the Vice Chairman, Chief Financial Officer of the Company. The Employee will be based in Montvale, New Jersey and his services will be rendered there except insofar as travel may be involved in connection with his regular duties. The Employee will report directly to the Vice Chairman, Chief Financial Officer of the Company. 61. Salary and Bonus. 61.1 Salary. The Company will pay the Employee a base salary at an initial annual rate of not less than $335,000, which base salary as in effect from time to time will not be reduced and will be reviewed periodically (at intervals of not more than eighteen (18) months) by the Compensation Committee of the Board of Directors (the "Board") for the purpose of considering increases thereof. In evaluating increases in the Employee's base salary, the Compensation Committee of the Board will take into account such factors as corporate performance, individual merit, and such other considerations as it deems appropriate. The Employee's base salary will be paid in accordance with the standard practices for other corporate executives of the Company. 61.2 Bonuses. The Employee will be eligible to receive annually or otherwise any bonus awards, whether payable in cash, shares of common stock of the Company or otherwise, which the Company, the Compensation Committee of the Board or such other authorized committee of the Board determines to award or grant. 62. Benefit Programs. The Employee will receive such benefits and awards, including without limitation stock options and restricted share awards, as the Compensation Committee of the Board shall determine and will be eligible to participate in all employee benefit plans and programs of the Company from time to time in effect for the benefit of senior executives of the Company, including, but not limited to, pension and other retirement plans, group life insurance, hospitalization and surgical and major medical coverages, sick leave, salary continuation arrangements, vacations and holidays, long-term disability, and such other benefits as are or may be made available from time to time to senior executives of the Company. 63. Business Expenses and Perquisites. The Employee will be reimbursed for all reasonable expenses incurred by him in connection with the conduct of the business of the Company, provided he properly accounts therefor in accordance with the Company's policies. He will also be entitled to such other perquisites as are customary for senior executives of the Company. 64. Office and Services Furnished. The Company shall furnish the Employee with office space, secretarial assistance and such other facilities and services as shall be suitable to the Employee's position and adequate for the performance of his duties hereunder. 65. Termination of Employment by the Company. 65.1 Involuntary Termination by the Company Other Than For Permanent and Total Disability or For Cause. The Company may terminate the Employee's employment at any time and for any reason by giving him a written notice of termination to that effect at least 45 days before the date of termination. In the event the Company terminates the Employee's employment for any reason other than for Permanent and Total Disability, as provided in Section 7.2, below, or for Cause, as provided in Section 7.3, below, the Employee shall be entitled to the benefits described in Section 10 or Section 11, whichever is applicable. 65.2 Termination Due to Permanent and Total Disability. If the Employee incurs a Permanent and Total Disability, as defined below, the Company may terminate the Employee's employment by giving him written notice of termination at least 45 days before the date of such termination. In the event of such termination of the Employee's employment because of Permanent and Total Disability, the Employee shall be entitled to receive (i) his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination of employment at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. For purposes of this Agreement, the Employee shall be considered to have incurred a Permanent and Total Disability if he is unable to substantially carry out his duties under this Agreement by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. The existence of such Permanent and Total Disability shall be evidenced by such medical certification as the Secretary of the Company shall require and shall be subject to the approval of the Compensation Committee of the Board of Directors of the Company. 65.3 Termination for Cause. The Company may terminate the Employee's employment for Cause if (i) the Employee willfully, substantially, and continually fails to perform the duties for which he is employed by the Company, (ii) the Employee willfully fails to comply with the reasonable instructions of the Vice Chairman, Chief Financial Officer of the Company, (iii) the Employee willfully engages in conduct which is or would reasonably be expected to be materially and demonstrably injurious to the Company, (iv) the Employee willfully engages in an act or acts of dishonesty resulting in material personal gain to the Employee at the expense of the Company, (v) the Employee is convicted of a felony, (vi) the Employee engages in an act or acts of gross malfeasance in connection with his employment hereunder, (vii) the Employee commits a material breach of the confidentiality provision set forth in Section 15, or (viii) the Employee exhibits demonstrable evidence of alcohol or drug abuse having a substantial adverse effect on his job performance hereunder. The Company shall exercise its right to terminate the Employee's employment for Cause by giving him written notice of termination at least 45 days before the date of such termination specifying in reasonable detail the circumstances constituting such Cause. In the event of such termination of the Employee's employment for Cause, the Employee shall be entitled to receive (i) his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits and (ii) any amounts owed under the reimbursement policy of Section 5. 66. Termination of Employment by the Employee. (a) Good Reason. The Employee may terminate his employment for Good Reason by giving the Company a written notice of termination at least 45 days before the date of such termination specifying in reasonable detail the circumstances constituting such Good Reason. In the event of the Employee's termination of his employment for Good Reason, the Employee shall be entitled to the benefits described in Section 10 or Section 11, whichever is applicable. For purposes of this Agreement, Good Reason shall mean (i) a significant reduction in the scope of the Employee's authority, functions, duties or responsibilities from that which is contemplated by this Agreement, (ii) the Employee being required to report directly to someone other than the Vice Chairman, Chief Financial Officer of the Company, (iii) the relocation of the Employee's office location to a location more than 50 miles away from the Employee's principal place of employment on November 1, 2000, (iv) any reduction in the Employee's base salary, or (v) a significant reduction in the employee benefits provided to the Employee other than in connection with an across-the-board reduction similarly affecting substantially all senior executives of the Company. If an event constituting a ground for termination of employment for Good Reason occurs, and the Employee fails to give notice of termination within 3 months after the occurrence of such event, the Employee shall be deemed to have waived his right to terminate employment for Good Reason in connection with such event (but not for any other event for which the 3-month period has not expired). (b) Other. The Employee may terminate his employment at any time and for any reason, other than pursuant to subsection (a) above, by giving the Company a written notice of termination to that effect at least 45 days before the date of termination. In the event of the Employee's termination of his employment pursuant to this subsection (b), the Employee shall be entitled to receive (i) his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. 67. Termination of Employment By Death. In the event of the death of the Employee during the course of his employment hereunder, the Employee's estate shall be entitled to receive (i) his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any other benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. In addition, in the event of such death, the Employee's beneficiaries shall receive any death benefits owed to them under the Company's employee benefit plans. 68. Benefits Upon Termination Without Cause or For Good Reason (No Change of Control). If (a) the Employee's employment with the Company shall terminate (i) because of termination by the Company pursuant to Section 7.1 other than for Cause and other than because of Permanent and Total Disability, or (ii) because of termination by the Employee for Good Reason pursuant to Section 8(a), and (b) such termination of employment does not occur within 13 months following a "Change of Control" of the Company (as defined in Section 12), the Employee shall be entitled to the following: (a) The Company shall pay to the Employee his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee under this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits. (b) The Company shall pay the Employee any reimbursement amounts owing under Section 5. (c) The Company shall pay to the Employee as a severance benefit for each month during the 18 month period beginning with the month next following the date of termination of the Employee's employment an amount equal to one-twelfth of the sum of (i) his annual rate of base salary immediately preceding his termination of employment, and (ii) the average of his three highest annual bonuses awarded under the Company's annual management incentive bonus plan for any of the five calendar years preceding his termination of employment (or, if he was not eligible for a bonus for at least three calendar years in such five-year period, then the average of such bonuses for all of the calendar years in such five-year period for which he was eligible, and if he was not eligible for such a bonus in any previous year, then 100% of his target annual bonus for the year of termination of his employment), with any deferred bonuses counting for the year earned rather than the year paid. Each such monthly benefit shall be paid no later than the last day of the applicable month. In the event that the Employee dies before the end of such 18-month period, the payments for the remainder of such period shall be made to the Employee's estate. (d) The Company shall pay to the Employee as a bonus for the year of termination of his employment an amount equal to a portion (determined as provided in the next sentence) of the bonus that the Employee would actually have received under the Company's annual management incentive bonus plan for the calendar year of termination of the Employee's employment if his employment had not terminated (determined on the basis of his actual bonus opportunity and the actual degree of achievement of the applicable performance goals) or, if no bonus opportunity for that year had been established for the Employee at the time of such termination of employment, such portion of the bonus awarded to him under the Company's annual management incentive bonus plan for the calendar year immediately preceding the calendar year of the termination of his employment, with deferred bonuses counting for the year earned rather than the year paid. Such portion shall be determined by dividing the number of days of the Employee's employment during such calendar year up to his termination of employment by 365 (366 if a leap year). Such payment shall be made on or about the date on which bonuses for the applicable year are paid to executives of the Company generally under the Company's annual management incentive bonus plan, and the Employee shall have no right to any further bonuses under said plan. (e) During the period of 18 months beginning on the date of the Employee's termination of employment, the Employee shall remain covered by the medical, dental, vision, life insurance, and, if reasonably commercially available through nationally reputable insurance carriers, long-term disability plans of the Company that covered him immediately prior to his termination of employment as if he had remained in employment for such period. In the event that the Employee's participation in any such plan is barred, the Company shall arrange to provide the Employee with substantially similar benefits (but, in the case of long-term disability benefits, only if reasonably commercially available). Any medical insurance coverage for such 18-month period pursuant to this subsection (e) shall become secondary upon the earlier of (i) the date on which the Employee begins to be covered by comparable medical coverage provided by a new employer, or (ii) the earliest date upon which the Employee becomes eligible for Medicare or a comparable Government insurance program. 69. Benefits Upon Termination Without Cause or For Good Reason (Change of Control). If (a) the Employee's employment with the Company shall terminate (i) because of termination by the Company pursuant to Section 7.1 other than for Cause and other than because of Permanent and Total Disability, (ii) because of termination by the Employee for Good Reason pursuant to Section 8(a), or (iii) for any reason during the 30 days beginning on the first anniversary of a Change of Control, and (b) such termination of employment occurs within 13 months following a "Change of Control" of the Company (as defined in Section 12), the Employee shall be entitled to the following: (a) The Company shall pay to the Employee his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee under this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits. (b) The Company shall pay the Employee any reimbursement amounts owing under Section 5. (c) The Company shall pay to the Employee as a severance benefit an amount equal to three (3) times the sum of (i) his annual rate of base salary immediately preceding his termination of employment, and (ii) the average of his three highest annual bonuses awarded under the Company's annual management incentive bonus plan for any of the five calendar years preceding his termination of employment (or, if he was not eligible for a bonus for at least three calendar years in such five-year period, then the average of such bonuses for all of the calendar years in such five-year period for which he was eligible, and if he was not eligible for such a bonus in any previous year, then 100% of his target annual bonus for the year of termination of his employment), with any deferred bonuses counting for the year earned rather than the year paid. Such severance benefit shall be paid in a lump sum within 45 days after the date of such termination of employment. (d) The Company shall pay to the Employee as a bonus for the year of termination of his employment an amount equal to a portion (determined as provided in the next sentence) of the bonus that the Employee would actually have received under the Company's annual management incentive bonus plan for the calendar year of termination of the Employee's employment if his employment had not terminated (determined on the basis of his actual bonus opportunity and the actual degree of achievement of the applicable performance goals) or, if no bonus opportunity for that year had been established for the Employee at the time of such termination of employment, such portion of the bonus awarded to him under the Company's annual management incentive bonus plan for the calendar year immediately preceding the calendar year of the termination of his employment, with deferred bonuses counting for the year earned rather than the year paid. Such portion shall be determined by dividing the number of days of the Employee's employment during such calendar year up to his termination of employment by 365 (366 if a leap year). Such payment shall be made on or about the date on which bonuses for the applicable year are paid to executives of the Company generally under the Company's annual management incentive bonus plan, and the Employee shall have no right to any further bonuses under said plan. (e) During the period of 36 months beginning on the date of the Employee's termination of employment, the Employee shall remain covered by the medical, dental, vision, life insurance, and, if reasonably commercially available through nationally reputable insurance carriers, long-term disability plans of the Company that covered him immediately prior to his termination of employment as if he had remained in employment for such period. In the event that the Employee's participation in any such plan is barred, the Company shall arrange to provide the Employee with substantially similar benefits (but, in the case of long-term disability benefits, only if reasonably commercially available). Any medical insurance coverage for such 36-month period pursuant to this subsection (e) shall become secondary upon the earlier of (i) the date on which the Employee begins to be covered by comparable medical coverage provided by a new employer, or (ii) the earliest date upon which the Employee becomes eligible for Medicare or a comparable Government insurance program. 70. Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if (a) any person or persons acting together which would constitute a "group" for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (other than the Company, any subsidiary of the Company, and Tengelmann Warenhandelsgesellschaft (a partnership organized under the laws of the Federal Republic of Germany or any successor to such partnership, hereinafter "Tengelmann")) shall beneficially own (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, at least 30% of the total voting power of all classes of capital stock of the Company entitled to vote generally in the election of the Board and such voting power exceeds the then current voting power of Tengelmann; (b) control of Tengelmann is acquired by any person or persons other than family members or entities controlled by family members of Erivan Haub; (c) Current Directors (as herein defined) shall cease for any reason to constitute at least a majority of the members of the Board (for this purpose, a "Current Director" shall mean any member of the Board as of the date hereof and any successor of a Current Director whose election, or nomination for election by the Company's shareholders, was approved by at least two-thirds of the Current Directors then on the Board); (d) the shareholders of the Company approve (i) a plan of complete liquidation of the Company or (ii) an agreement providing for the merger or consolidation of the Company other than a merger or consolidation in which (x) the holders of the common stock of the Company immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger or (y) the Board immediately prior to the merger or consolidation would, immediately after the merger or consolidation, constitute a majority of the board of directors of the continuing or surviving corporation; or (e) the shareholders of the Company approve an agreement (or agreements) providing for the sale or other disposition (in one transaction or a series of transactions) of all or substantially all of the assets of the Company. 71. Entitlement to Other Benefits. Except as otherwise provided in this Agreement, this Agreement shall not be construed as limiting in any way any rights or benefits that the Employee or his spouse, dependents or beneficiaries may have pursuant to any other plan or program of the Company. 72. Non-Competition. The Employee agrees that during the term of this Agreement and for a period of two years following termination of his employment, the Employee will not, within any of the geographical areas of the United States or Canada in which the Company is then conducting business (either directly or through franchisees), directly or indirectly, own, manage, operate, control, be employed by, participate in, provide consulting services to, or be connected in any manner with the ownership, management, operation or control of any business similar to any of the types of businesses conducted by the Company to any significant extent during his employment or on the date of termination of his employment, except the Employee may own for investment purposes up to 1% of the capital stock of any company whose stock is publicly traded, and during such two year period following termination of his employment the Employee will not contact or solicit employees of the Company for the purpose of inducing such employees to leave the employ of the Company. 73. Confidential Information and Trade Secrets. The Employee hereby acknowledges that he will have access to and become acquainted with various trade secrets and proprietary information of the Company and other confidential information relating to the Company. The Employee covenants that he will not, directly or indirectly, disclose or use such information except as is necessary and appropriate in connection with his employment by the Company and that he will otherwise adhere in all respects to the Company's policies against the use or disclosure of such information. 74. Arbitration; Injunctive Relief. Any controversy or claim arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof, will be settled by arbitration in accordance with the rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The arbitration will be held in New York, New York, or such other place as may be agreed upon at the time by the parties to the arbitration. The parties shall bear their own expenses in connection with any arbitration or proceeding arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof; provided, however, that in the event that the Employee substantially prevails, the Company agrees promptly to reimburse the Employee for all expenses (including costs and fees of witnesses, evidence and attorneys fees and expenses) reasonably incurred by him in investigating, prosecuting, defending, or preparing to prosecute or defend any action, proceeding or claim arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof. The parties acknowledge and agree that a breach of Employee's obligations under Sections 14 or 15 could cause irreparable harm to Company for which Company would have no adequate remedy at law, and further agree that, notwithstanding the agreement of the parties to arbitrate controversies or claims as set forth above, the Company may apply to a court of competent jurisdiction to seek to enjoin preliminarily or permanently any breach or threatened breach of the Employee's obligations under Sections 14 and 15. 75. Indemnification. The Company shall indemnify and hold the Employee harmless to the fullest extent legally permissible under the laws of the State of Maryland, against any and all expenses, liabilities and losses (including attorney's fees, judgments, fines and amounts paid in settlement) reasonably incurred or suffered by him by reason of any claim or cause of action asserted against him because of his service at any time as a director or officer of the Company. The Company shall advance to the Employee the amount of his expenses incurred in connection with any proceeding relating to such service to the fullest extent legally permissible under the laws of the State of Maryland. Notwithstanding the foregoing, the Company's obligations pursuant to this Section 17 shall not apply in the case of any claim or cause of action by or in the right of the Company or any subsidiary thereof. 76. Liability Insurance. To the extent that Company maintains a directors and officers liability insurance policy in effect, the Company will take all steps necessary to ensure that the Employee is covered under such policy for his service as a director or officer of the Company or any subsidiary of the Company with respect to claims made at any time with respect to such service. 77. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution made, or benefit provided (including, without limitation, the acceleration of any payment, distribution or benefit and the accelerated exercisability of any stock option), to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 19) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (or any similar excise tax) or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive from the Company an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes (including any Excise Tax, income tax or employment tax and taking into account any lost or reduced tax deductions on account of such Gross-Up Payment) imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, the Employee retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 19(c), all determinations required to be made under this Section 19, including determination of whether a Gross-Up Payment is required and of the amount of any such Gross-up Payment, shall be made by Deloitte & Touche LLP (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Employee within 15 business days of the date of termination of the Employee's employment, if applicable, or such earlier time as is requested by the Company, provided that any determination that an Excise Tax is payable by the Employee shall be made on the basis of substantial authority. The initial Gross-Up Payment, if any, as determined pursuant to this Section 19(b), shall be paid to the Employee within five business days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Employee, it shall furnish the Employee with a written opinion that he has substantial authority not to report any Excise Tax on his Federal income tax return. Any determination by the Accounting Firm meeting the requirements of this Section 19(b) shall be binding upon the Company and the Employee; subject only to payments pursuant to the following sentence based on a determination that additional Gross-Up Payments should have been made, consistent with the calculations required to be made hereunder (the amount of such additional payments is referred to herein as the "Gross-Up Underpayment"). In the event that the Company exhausts its remedies pursuant to Section 19(c) and the Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Gross-Up Underpayment that has occurred and any such Gross-Up Underpayment shall be promptly paid by the Company to or for the benefit of the Employee. The fees and disbursements of the Accounting Firm shall be paid by the Company. (c) The Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but not later than ten business days after the Employee receives written notice of such claim and shall apprise the Company of the nature of such claim and the date on which such Claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim and that it will bear the costs and provide the indemnification as required by this sentence, the Employee shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax, income tax or employment tax (taking into account any lost or reduced tax deductions on account of such payments), including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 19(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Employee on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax, income tax or employment tax (taking into account any lost or reduced tax deductions on account of such advance), including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to the payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 19(c), the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of Section 19(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 19(c), a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then any obligation of the Employee to repay such advance shall be forgiven and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 78. No Duty to Seek Employment. The Employee shall not be under any duty or obligation to seek or accept other employment following termination of employment, and no amount, payment or benefits due to the Employee hereunder shall be reduced or suspended if the Employee accepts subsequent employment. 79. Deductions and Withholding. All amounts payable or which become payable under any provision of this Agreement shall be subject to any deductions authorized by the Employee and any deductions and withholdings required by law. 80. Governing Law. The validity, interpretation and performance of this Agreement will be governed by the laws of the State of New Jersey without regard to the conflict of law provisions. 81. Notice. Any written notice required to be given by one Party to the other Party hereunder will be deemed effected if mailed by registered mail: To the Company at: The Great Atlantic & Pacific Tea Company 2 Paragon Drive Montvale, New Jersey 07645 Attention: General Counsel To the Employee at: 64 Bouton Road South Salem, NY 10590 or such other address as may be stated in a notice given as herein before provided. 82. Severability. If any one or more of the provisions contained in this Agreement is held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect any other provision hereof. 83. Successors and Assigns. This Agreement will be binding upon and inure to the benefit of the Parties hereto and their personal representatives, and, in the case of the Company, its successors and assigns. To the extent the Company's obligations under this Agreement are transferred to any successor or assign, such successor or assign shall be treated as the "Company" for purposes of this Agreement. Other than as contemplated by this Agreement, the Employee may not assign his rights or duties under this Agreement. 84. Continuing Effect. Wherever appropriate to the intention of the Parties hereto, the respective rights and obligations of the Parties, including the obligations referred to in Sections 10, 11, 14, 15 and 19, hereof, will survive any termination or expiration of the term of this Agreement. 85. Entire Agreement. This Agreement constitutes the entire agreement between the Parties and supersedes any and all other agreements and understandings between the Parties in respect of the matters addressed in this Agreement. 86. Amendment and Waiver. No amendment or waiver of any provision of this Agreement shall be effective, unless the same shall be in writing and signed by the Parties, and then such amendment, waiver or consent shall be effective only in the specific instance or for the specific purpose for which such amendment, waiver or consent was given. 87. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Employee has hereunto set his hand as of the day and year first above written. THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. By: Name: Title: William P. Costantini EMPLOYMENT AGREEMENT AGREEMENT, made and entered into as of the 8th day of January, 2001, by and between THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. (the "Company"), and Elizabeth R. Culligan (the "Employee"). W I T N E S S E T H WHEREAS, the Company and the Employee (the "Parties") have agreed to enter into this agreement (the "Agreement) relating to the employment of the Employee by the Company; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Parties, intending to be legally bound, agree as follows: 88. Term of Employment. (a) The Company agrees to employ the Employee, and the Employee agrees to be employed by the Company, in accordance with the terms and provisions of this Agreement, for the period set forth below (the "Employment Period"). (b) The Employment Period under this Agreement shall commence as of January 8, 2001 and, subject only to the provisions of Sections 7, 8 and 9 below relating to termination of employment, shall continue until (i) the close of business on January 8, 2004 or (ii) such later date as shall result from the operation of subparagraph (c) below (the "Terminal Date"). (c) Commencing on July 8, 2002, and on the first business day of each month thereafter (such date and each such first business day, the "Renewal Date") the Terminal Date set forth in subparagraph (b) above shall be extended so as to occur eighteen months from the Renewal Date unless either the Company or the Employee shall have given written notice to the other Party on or before such Renewal Date that the Terminal Date is not to be extended. 89. Duties. It is the intention of the Parties that during the term of her employment under this Agreement, the Employee will serve as Executive Vice President and Chief Operating Officer of the Company. The Employee will devote her full business time and attention to the affairs of the Company and her duties as its Executive Vice President and Chief Operating Officer; provided that, subject to the provisions of Section 14, nothing herein shall preclude the Employee from (i) serving on the board of directors of any other corporation with the consent of the Chief Executive Officer of the Company, (ii) engaging in charitable activities and community affairs, and (iii) managing her personal investments and affairs, so long as such activities, individually or collectively, do not consume an unreasonable amount of time and do not materially interfere with the proper performance of her duties and responsibilities hereunder. The Employee will have such duties as are appropriate to her position as Executive Vice President and Chief Operating Officer, and will have such authority as required to enable her to perform these duties. Consistent with the foregoing, the Employee shall comply with all reasonable instructions of the Chief Executive Officer of the Company. The Employee will be based in Montvale, New Jersey and her services will be rendered there except insofar as travel may be involved in connection with her regular duties. The Employee will report directly to the Chief Executive Officer of the Company. 90. Salary and Bonus. 90.1 Salary. The Company will pay the Employee a base salary at an initial annual rate of not less than Five Hundred Thousand Dollars ($500,000.00), which base salary as in effect from time to time will not be reduced and will be reviewed periodically (at intervals of not more than eighteen (18) months) by the Compensation Committee of the Board of Directors (the "Board") for the purpose of considering increases thereof. In evaluating increases in the Employee's base salary, the Compensation Committee of the Board will take into account such factors as corporate performance, individual merit, and such other considerations as it deems appropriate. The Employee's base salary will be paid in accordance with the standard practices for other corporate executives of the Company. 90.2 Bonuses. The Employee shall be eligible to participate in the Company's Management Incentive Plan (or any successor annual incentive plan) at a level determined by the Compensation Committee of the Board (or any other authorized committee of the Board) and on a basis commensurate with her position with the Company, provided that for each year of her employment, the Employee shall have a target bonus opportunity at least equal to 50% of her then current annual base salary and her bonus in such plan for the fiscal year 2001 shall be guaranteed. 91. Benefit Programs. The Employee will receive such benefits and awards, including without limitation stock options and restricted share awards, as the Compensation Committee of the Board (or any other authorized committee of the Board) shall determine from time to time on a basis commensurate with her position with the Company and taking into account the awards made to other senior executives. The Employee shall also be eligible to participate in all employee benefit plans and programs of the Company from time to time in effect for the benefit of senior executives of the Company, including, but not limited to, pension and other retirement plans, group life insurance, hospitalization and surgical and major medical coverages, sick leave, salary continuation arrangements, vacations and holidays, long-term disability, and such other benefits as are or may be made available from time to time to senior executives of the Company. In addition to the foregoing, the Employee will be provided with an automobile allowance in accordance in accordance with the Company's Automobile Policy. 92. Business Expenses and Perquisites. The Employee will be reimbursed for all reasonable expenses incurred by her in connection with the conduct of the business of the Company, provided she properly accounts therefor in accordance with the Company's policies. She will also be entitled to such other perquisites as are customary for senior executives of the Company. 93. Office and Services Furnished. The Company shall furnish the Employee with office space, secretarial assistance and such other facilities and services as shall be suitable to the Employee's position and adequate for the performance of her duties hereunder. 94. Termination of Employment by the Company. 94.1 Involuntary Termination by the Company Other Than For Permanent and Total Disability or For Cause. The Company may terminate the Employee's employment at any time and for any reason by giving her a written notice of termination to that effect at least 45 days before the date of termination. In the event the Company terminates the Employee's employment for any reason other than for Permanent and Total Disability, as provided in Section 7.2, below, or for Cause, as provided in Section 7.3, below, the Employee shall be entitled to the benefits described in Section 10 or Section 11, whichever is applicable. 94.2 Termination Due to Permanent and Total Disability. If the Employee incurs a Permanent and Total Disability, as defined below, the Company may terminate the Employee's employment by giving her written notice of termination at least 45 days before the date of such termination. In the event of such termination of the Employee's employment because of Permanent and Total Disability, the Employee shall be entitled to receive (i) her base salary pursuant to Section 3.1 and any other compensation and benefits to the extent vested or otherwise actually earned by the Employee pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination of employment at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. For purposes of this Agreement, the Employee shall be considered to have incurred a Permanent and Total Disability if she is unable to substantially carry out her duties under this Agreement by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. The existence of such Permanent and Total Disability shall be evidenced by such medical certification as the Secretary of the Company shall require and shall be subject to the approval of the Compensation Committee of the Board of Directors of the Company. 94.3 Termination for Cause. The Company may terminate the Employee's employment for Cause if (i) the Employee willfully, substantially, and continually fails to perform the duties for which she is employed by the Company, (ii) the Employee willfully fails to comply with the reasonable instructions of the Chief Executive Officer of the Company, (iii) the Employee willfully engages in conduct which is or would reasonably be expected to be materially and demonstrably injurious to the Company, (iv) the Employee willfully engages in an act or acts of dishonesty resulting in material personal gain to the Employee at the expense of the Company, (v) the Employee is convicted of a felony, (vi) the Employee engages in an act or acts of gross malfeasance in connection with his employment hereunder, (vii) the Employee commits a material breach of the confidentiality provision set forth in Section 15, or (viii) the Employee exhibits demonstrable evidence of alcohol or drug abuse having a substantial adverse effect on her job performance hereunder. The Company shall exercise its right to terminate the Employee's employment for Cause by giving her written notice of termination at least 45 days before the date of such termination specifying in reasonable detail the circumstances constituting such Cause. In the event of such termination of the Employee's employment for Cause, the Employee shall be entitled to receive (i) her base salary pursuant to Section 3.1 and any other compensation and benefits to the extent vested or otherwise actually earned pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits and (ii) any amounts owed under the reimbursement policy of Section 5. 95. Termination of Employment by the Employee. (a) Good Reason. The Employee may terminate her employment for Good Reason by giving the Company a written notice of termination at least 45 days before the date of such termination specifying in reasonable detail the circumstances constituting such Good Reason. In the event of the Employee's termination of her employment for Good Reason, the Employee shall be entitled to the benefits described in Section 10 or Section 11, whichever is applicable. For purposes of this Agreement, Good Reason shall mean (i) a significant reduction in the scope of the Employee's authority, functions, duties or responsibilities from those set forth in Section 2 of this Agreement, (ii) the Employee being required to report directly to someone other than the Chief Executive Office of the Company, (iii) the relocation of the Employee's office location to a location more than 50 miles away from the Employee's principal place of employment on January 8, 2001, (iv) any reduction in the Employee's base salary, or (v) a significant reduction in the employee benefits provided to the Employee other than in connection with an across-the-board reduction similarly affecting substantially all senior executives of the Company. If an event constituting a ground for termination of employment for Good Reason occurs, and the Employee fails to give notice of termination within 3 months after the occurrence of such event (or the last event in a series of events that collectively result in the occurrence of the circumstances described in subclauses (i) or (v) above), the Employee shall be deemed to have waived her right to terminate employment for Good Reason in connection with such event (but not for any other event for which the 3-month period has not expired). (b) Other. The Employee may terminate her employment at any time and for any reason, other than pursuant to subsection (a) above, by giving the Company a written notice of termination to that effect at least 45 days before the date of termination. In the event of the Employee's termination of her employment pursuant to this subsection (b), the Employee shall be entitled to receive (i) her base salary pursuant to Section 3.1 and any other compensation and benefits to the extent vested or otherwise actually earned by the Employee pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. 96. Termination of Employment By Death. In the event of the death of the Employee during the course of her employment hereunder, the Employee's estate shall be entitled to receive (i) her base salary pursuant to Section 3.1 and any other compensation and benefits to the extent vested or otherwise actually earned by the Employee pursuant to this Agreement or any other benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. In addition, in the event of such death, the Employee's beneficiaries shall receive any death benefits owed to them under the Company's employee benefit plans. 97. Benefits Upon Termination Without Cause or For Good Reason (No Change of Control). If (a) the Employee's employment with the Company shall terminate (i) because of termination by the Company pursuant to Section 7.1 other than for Cause and other than because of Permanent and Total Disability, or (ii) because of termination by the Employee for Good Reason pursuant to Section 8(a), and (b) such termination of employment does not occur within 13 months following a "Change of Control" of the Company (as defined in Section 12), the Employee shall be entitled to the following: (a) The Company shall pay to the Employee her base salary pursuant to Section 3.1 and any other compensation and benefits to the extent vested or otherwise actually earned by the Employee under this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits. (b) The Company shall pay the Employee any reimbursement amounts owing under Section 5. (c) The Company shall pay to the Employee as a severance benefit for each month during the 18 month period beginning with the month next following the date of termination of the Employee's employment an amount equal to one-twelfth of the sum of (i) her annual rate of base salary immediately preceding his termination of employment, and (ii) the average of her three highest annual bonuses awarded under the Company's annual management incentive bonus plan for any of the five calendar years preceding his termination of employment (or, if she was not eligible for a bonus for at least three calendar years in such five-year period, then the average of such bonuses for all of the calendar years in such five-year period for which she was eligible, and if he was not eligible for such a bonus in any previous year, then 100% of her target annual bonus for the year of termination of her employment), with any deferred bonuses counting for the year earned rather than the year paid. Each such monthly benefit shall be paid no later than the last day of the applicable month. In the event that the Employee dies before the end of such 18-month period, the payments for the remainder of such period shall be made to the Employee's estate. (d) The Company shall pay to the Employee as a bonus for the year of termination of her employment an amount equal to a portion (determined as provided in the next sentence) of the bonus that the Employee would actually have received under the Company's annual management incentive bonus plan for the calendar year of termination of the Employee's employment if her employment had not terminated (determined on the basis of her actual bonus opportunity and the actual degree of achievement of the applicable performance goals) or, if no bonus opportunity for that year had been established for the Employee at the time of such termination of employment, such portion of the bonus awarded to her under the Company's annual management incentive bonus plan for the calendar year immediately preceding the calendar year of the termination of her employment, with deferred bonuses counting for the year earned rather than the year paid. Such portion shall be determined by dividing the number of days of the Employee's employment during such calendar year up to his termination of employment by 365 (366 if a leap year). Such payment shall be made on or about the date on which bonuses for the applicable year are paid to executives of the Company generally under the Company's annual management incentive bonus plan, and the Employee shall have no right to any further bonuses under said plan. (e) During the period of 18 months beginning on the date of the Employee's termination of employment, the Employee shall remain covered by the medical, dental, vision, life insurance, and, if reasonably commercially available through nationally reputable insurance carriers, long-term disability plans of the Company that covered her immediately prior to her termination of employment as if she had remained in employment for such period. In the event that the Employee's participation in any such plan is barred, the Company shall arrange to provide the Employee with substantially similar benefits (but, in the case of long-term disability benefits, only if reasonably commercially available). Any medical insurance coverage for such 18-month period pursuant to this subsection (e) shall become secondary upon the earlier of (i) the date on which the Employee begins to be covered by comparable medical coverage provided by a new employer, or (ii) the earliest date upon which the Employee becomes eligible for Medicare or a comparable Government insurance program. 98. Benefits Upon Termination Without Cause or For Good Reason (Change of Control). If (a) the Employee's employment with the Company shall terminate (i) because of termination by the Company pursuant to Section 7.1 other than for Cause and other than because of Permanent and Total Disability, (ii) because of termination by the Employee for Good Reason pursuant to Section 8(a), or (iii) for any reason during the 30 days beginning on the first anniversary of a Change of Control, and (b) such termination of employment occurs within 13 months following a "Change of Control" of the Company (as defined in Section 12), the Employee shall be entitled to the following: (a) The Company shall pay to the Employee her base salary pursuant to Section 3.1 and any other compensation and benefits to the extent vested or otherwise actually earned by the Employee under this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits. (b) The Company shall pay the Employee any reimbursement amounts owing under Section 5. (c) The Company shall pay to the Employee as a severance benefit an amount equal to three (3) times the sum of (i) her annual rate of base salary immediately preceding her termination of employment, and (ii) the average of her three highest annual bonuses awarded under the Company's annual management incentive bonus plan for any of the five calendar years preceding her termination of employment (or, if she was not eligible for a bonus for at least three calendar years in such five-year period, then the average of such bonuses for all of the calendar years in such five-year period for which she was eligible, and if she was not eligible for such a bonus in any previous year, then 100% of her target annual bonus for the year of termination of her employment), with any deferred bonuses counting for the year earned rather than the year paid. Such severance benefit shall be paid in a lump sum within 30 days after the date of such termination of employment. (d) The Company shall pay to the Employee as a bonus for the year of termination of her employment an amount equal to a portion (determined as provided in the next sentence) of the bonus that the Employee would actually have received under the Company's annual management incentive bonus plan for the calendar year of termination of the Employee's employment if her employment had not terminated (determined on the basis of her actual bonus opportunity and the actual degree of achievement of the applicable performance goals) or, if no bonus opportunity for that year had been established for the Employee at the time of such termination of employment, such portion of the bonus awarded to her under the Company's annual management incentive bonus plan for the calendar year immediately preceding the calendar year of the termination of her employment, with deferred bonuses counting for the year earned rather than the year paid. Such portion shall be determined by dividing the number of days of the Employee's employment during such calendar year up to her termination of employment by 365 (366 if a leap year). Such payment shall be made on or about the date on which bonuses for the applicable year are paid to executives of the Company generally under the Company's annual management incentive bonus plan, and the Employee shall have no right to any further bonuses under said plan. (e) During the period of 36 months beginning on the date of the Employee's termination of employment, the Employee shall remain covered by the medical, dental, vision, life insurance, and, if reasonably commercially available through nationally reputable insurance carriers, long-term disability plans of the Company that covered her immediately prior to her termination of employment as if she had remained in employment for such period. In the event that the Employee's participation in any such plan is barred, the Company shall arrange to provide the Employee with substantially similar benefits (but, in the case of long-term disability benefits, only if reasonably commercially available). Any medical insurance coverage for such 36-month period pursuant to this subsection (e) shall become secondary upon the earlier of (i) the date on which the Employee begins to be covered by comparable medical coverage provided by a new employer, or (ii) the earliest date upon which the Employee becomes eligible for Medicare or a comparable Government insurance program. 99. Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if (a) any person or persons acting together which would constitute a "group" for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (other than the Company, any subsidiary of the Company, and Tengelmann Warenhandelsgesellschaft (a partnership organized under the laws of the Federal Republic of Germany or any successor to such partnership, hereinafter "Tengelmann")) shall beneficially own (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, at least 30% of the total voting power of all classes of capital stock of the Company entitled to vote generally in the election of the Board and such voting power exceeds the then current voting power of Tengelmann; (b) control of Tengelmann is acquired by any person or persons other than family members or entities controlled by family members of Erivan Haub; (c) Current Directors (as herein defined) shall cease for any reason to constitute at least a majority of the members of the Board (for this purpose, a "Current Director" shall mean any member of the Board as of the date hereof and any successor of a Current Director whose election, or nomination for election by the Company's shareholders, was approved by at least two-thirds of the Current Directors then on the Board); (d) the shareholders of the Company approve (i) a plan of complete liquidation of the Company or (ii) an agreement providing for the merger or consolidation of the Company other than a merger or consolidation in which (x) the holders of the common stock of the Company immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger or (y) the Board immediately prior to the merger or consolidation would, immediately after the merger or consolidation, constitute a majority of the board of directors of the continuing or surviving corporation; or (e) the shareholders of the Company approve an agreement (or agreements) providing for the sale or other disposition (in one transaction or a series of transactions) of all or substantially all of the assets of the Company. 100. Entitlement to Other Benefits. Except as otherwise provided in this Agreement, this Agreement shall not be construed as limiting in any way any rights or benefits that the Employee or her spouse, dependents or beneficiaries may have pursuant to any other plan or program of the Company. 101. Non-Competition. The Employee agrees that during the term of this Agreement and for a period of eighteen months following termination of her employment, the Employee will not, within any of the geographical areas of the United States or Canada in which the Company is then conducting business (either directly or through franchisees), directly or indirectly, own, manage, operate, control, be employed by, participate in, provide consulting services to, or be connected in any manner with the ownership, management, operation or control of any business engaged in retail sale of goods and products that are in direct competition with any of the types of businesses conducted by the Company to any significant extent during her employment or on the date of termination of her employment, except the Employee may own for investment purposes up to 1% of the capital stock of any company whose stock is publicly traded, and during such two year period following termination of her employment the Employee will not contact or solicit employees of the Company for the purpose of inducing such employees to leave the employ of the Company. 102. Confidential Information and Trade Secrets. The Employee hereby acknowledges that she will have access to and become acquainted with various trade secrets and proprietary information of the Company and other confidential information relating to the Company. The Employee covenants that she will not, directly or indirectly, disclose or use such information except (i) as is necessary and appropriate in connection with her employment by the Company, (ii) as is required pursuant to a judicial or administrative subpoena or (iii) if such information is already in the public domain (other than by reason of the Employee's breach of her obligations hereunder). Subject to the exceptions set forth above, the Employee also agrees that she will otherwise adhere in all respects to the Company's policies against the use or disclosure of such information. 103. Arbitration; Injunctive Relief. Any controversy or claim arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof, will be settled by arbitration in accordance with the rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The arbitration will be held in New York, New York, or such other place as may be agreed upon at the time by the parties to the arbitration. The parties shall bear their own expenses in connection with any arbitration or proceeding arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof; provided, however, that in the event that the Employee substantially prevails, the Company agrees promptly to reimburse the Employee for all expenses (including costs and fees of witnesses, evidence and attorneys fees and expenses) reasonably incurred by her in investigating, prosecuting, defending, or preparing to prosecute or defend any action, proceeding or claim arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof. The parties acknowledge and agree that a breach of Employee's obligations under Sections 14 or 15 could cause irreparable harm to Company for which Company would have no adequate remedy at law, and further agree that, notwithstanding the agreement of the parties to arbitrate controversies or claims as set forth above, the Company may apply to a court of competent jurisdiction to seek to enjoin preliminarily or permanently any breach or threatened breach of the Employee's obligations under Sections 14 and 15. 104. Indemnification. The Company shall indemnify and hold the Employee harmless to the fullest extent legally permissible under the laws of the State of Maryland, against any and all expenses, liabilities and losses (including attorney's fees, judgments, fines and amounts paid in settlement) reasonably incurred or suffered by him by reason of any claim or cause of action asserted against her because of her service at any time as a director or officer of the Company. The Company shall advance to the Employee the amount of her expenses incurred in connection with any proceeding relating to such service to the fullest extent legally permissible under the laws of the State of Maryland. Notwithstanding the foregoing, the Company's obligations pursuant to this Section 17 shall not apply in the case of any claim or cause of action by or in the right of the Company or any subsidiary thereof. 105. Liability Insurance. To the extent that Company maintains a directors and officers liability insurance policy in effect, the Company will take all steps necessary to ensure that the Employee is covered under such policy for her service as a director or officer of the Company or any subsidiary of the Company with respect to claims made at any time with respect to such service. 106. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution made, or benefit provided (including, without limitation, the acceleration of any payment, distribution or benefit and the accelerated exercisability of any stock option), to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 19) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (or any similar excise tax) or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive from the Company an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes (including any Excise Tax, income tax or employment tax and taking into account any lost or reduced tax deductions on account of such Gross-Up Payment) imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, the Employee retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 19(c), all determinations required to be made under this Section 19, including determination of whether a Gross-Up Payment is required and of the amount of any such Gross-up Payment, shall be made by Deloitte & Touche (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Employee within 15 business days of the date of termination of the Employee's employment, if applicable, or such earlier time as is requested by the Company, provided that any determination that an Excise Tax is payable by the Employee shall be made on the basis of substantial authority. The initial Gross-Up Payment, if any, as determined pursuant to this Section 19(b), shall be paid to the Employee within five business days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Employee, it shall furnish the Employee with a written opinion that she has substantial authority not to report any Excise Tax on her Federal income tax return. Any determination by the Accounting Firm meeting the requirements of this Section 19(b) shall be binding upon the Company and the Employee; subject only to payments pursuant to the following sentence based on a determination that additional Gross-Up Payments should have been made, consistent with the calculations required to be made hereunder (the amount of such additional payments is referred to herein as the "Gross-Up Underpayment"). In the event that the Company exhausts its remedies pursuant to Section 19(c) and the Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Gross-Up Underpayment that has occurred and any such Gross-Up Underpayment shall be promptly paid by the Company to or for the benefit of the Employee. The fees and disbursements of the Accounting Firm shall be paid by the Company. (c) The Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but not later than ten business days after the Employee receives written notice of such claim and shall apprise the Company of the nature of such claim and the date on which such Claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which she gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim and that it will bear the costs and provide the indemnification as required by this sentence, the Employee shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax, income tax or employment tax (taking into account any lost or reduced tax deductions on account of such payments), including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 19(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Employee on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax, income tax or employment tax (taking into account any lost or reduced tax deductions on account of such advance), including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to the payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 19(c), the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of Section 19(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 19(c), a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then any obligation of the Employee to repay such advance shall be forgiven and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 107. No Duty to Seek Employment. The Employee shall not be under any duty or obligation to seek or accept other employment following termination of employment, and no amount, payment or benefits due to the Employee hereunder shall be reduced or suspended if the Employee accepts subsequent employment. 108. Deductions and Withholding. All amounts payable or which become payable under any provision of this Agreement shall be subject to any deductions authorized by the Employee and any deductions and withholdings required by law. 109. Governing Law. The validity, interpretation and performance of this Agreement will be governed by the laws of the State of New Jersey without regard to the conflict of law provisions. 110. Notice. Any written notice required to be given by one Party to the other Party hereunder will be deemed effected if mailed by registered mail: To the Company at: The Great Atlantic & Pacific Tea Company 2 Paragon Drive Montvale, New Jersey 07645 Attention: General Counsel To the Employee at: 17 Worthington Avenue Spring Lake, New Jersey 07762 or such other address as may be stated in a notice given as hereinbefore provided. 111. Severability. If any one or more of the provisions contained in this Agreement is held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect any other provision hereof. 112. Successors and Assigns. This Agreement will be binding upon and inure to the benefit of the Parties hereto and their personal representatives, and, in the case of the Company, its successors and assigns. To the extent the Company's obligations under this Agreement are transferred to any successor or assign, such successor or assign shall be treated as the "Company" for purposes of this Agreement. Other than as contemplated by this Agreement, the Employee may not assign his rights or duties under this Agreement. 113. Continuing Effect. Wherever appropriate to the intention of the Parties hereto, the respective rights and obligations of the Parties, including the obligations referred to in Sections 10, 11, 14, 15 and 19, hereof, will survive any termination or expiration of the term of this Agreement. 114. Entire Agreement. This Agreement constitutes the entire agreement between the Parties and supersedes any and all other agreements and understandings between the Parties in respect of the matters addressed in this Agreement. 115. Amendment and Waiver. No amendment or waiver of any provision of this Agreement shall be effective, unless the same shall be in writing and signed by the Parties, and then such amendment, waiver or consent shall be effective only in the specific instance or for the specific purpose for which such amendment, waiver or consent was given. 116. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Employee has hereunto set his hand as of the day and year first above written. THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. By: Name: Christian Haub Title: Chief Executive Officer Elizabeth R. Culligan -----END PRIVACY-ENHANCED MESSAGE-----