-----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, O1Lcjrx+KjBWKxHG1oNfoB+S/PuuZ3ZlkbO7UDIjy2R9gvdIOTrVsM9eRj0oMguZ jS4sX1SHCpn7Z7L+eEbxew== 0000043300-99-000006.txt : 19990520 0000043300-99-000006.hdr.sgml : 19990520 ACCESSION NUMBER: 0000043300-99-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990227 FILED AS OF DATE: 19990519 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREAT ATLANTIC & PACIFIC TEA CO INC CENTRAL INDEX KEY: 0000043300 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 131890974 STATE OF INCORPORATION: MD FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04141 FILM NUMBER: 99630396 BUSINESS ADDRESS: STREET 1: 2 PARAGON DR CITY: MONTVALE STATE: NJ ZIP: 07645 BUSINESS PHONE: 2015739700 MAIL ADDRESS: STREET 1: 2 PARAGON DRIVE CITY: MONTVALE STATE: NJ ZIP: 07645 10-K 1 Conformed Copy SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year Commission file number 1-4141 ended February 27, 1999 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. (Exact name of registrant as specified in its charter) MARYLAND 13-1890974 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2 Paragon Drive, Montvale, New Jersey 07645 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 201-573-9700 Securities registered pursuant to Section 12 (b) of the Act: Name of each exchange on Title of each class which registered Common Stock - $1 par value New York Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the Registrant at May 3, 1999 was $546,085,554. The number of shares of common stock outstanding at May 3, 1999 was 38,290,716. Documents Incorporated by Reference The information required by Part I, Items 1(d) and 3, and Part II, Items 5, 6, 7 and 8 are incorporated by reference from the Registrant's 1998 Annual Report to Shareholders. The Registrant has filed with the S.E.C. since the close of its last fiscal year ended February 27, 1999, a definitive proxy statement. Certain information required by Part III, Items 10, 11, 12 and 13 is incorporated by reference from the proxy statement in this Form 10-K. PART I ITEM 1. Business General The Great Atlantic & Pacific Tea Company, Inc. ("A&P" or the "Company") is engaged in the retail food business. The Company operated 839 stores averaging approximately 35,247 square feet per store as of February 27, 1999. In addition, the Company began franchising its Canadian Food Basics stores in fiscal 1995. As of February 27, 1999, the Company had 55 Food Basics Franchise stores in Canada averaging approximately 27,953 square feet per store. On the basis of reported sales for fiscal 1998, the Company believes that it is one of the ten largest retail food chains in the United States and that it had the largest market share in metropolitan New York and Detroit, and the second largest market share in the Province of Ontario, the Company's largest single markets in the United States and Canada. Operating under the trade names A&P, Super Fresh, Sav-A-Center, Farmer Jack, Kohl's, Food Emporium, Waldbaum's, Super Food Mart, Ultra Mart, Dominion, and Food Basics, the Company sells groceries, meats, fresh produce and other items commonly offered in supermarkets. In addition, many stores have bakery, delicatessen, pharmacy, floral, fresh fish and cheese departments, and on-site banking. National, regional and local brands are sold as well as private label merchandise. In support of its retail operations, the Company also operates one coffee roasting plant in the United States. Through its Compass Foods Division, the Company manufactures and distributes a line of whole bean coffees under the Eight O'Clock, Bokar and Royale labels, for sale through its own stores as well as other food and convenience retailers. The other private label products sold in the Company's stores are sold under the Company's own brand names which include America's Choice, Master Choice, Health Pride, Savings Plus and The Farm. Building upon a broad base of A&P supermarkets, the Company has expanded and diversified within the retail food business through the acquisition of other supermarket chains and the development of several alternative store types. The Company now operates its stores with merchandise, pricing and identities tailored to appeal to different segments of the market, including buyers seeking gourmet and ethnic foods, unusual produce, a wide variety of premium quality private label goods and health and beauty aids along with the array of traditional grocery products. Modernization of Facilities The Company is engaged in a continuing program of modernizing its operations and retail stores. During fiscal 1998, the Company expended approximately $438 million for capital projects which included 46 new supermarkets, 3 new Food Basics franchised stores and 69 remodels or enlargements. The Company's plans for fiscal 1999 anticipate capital expenditures of approximately $500 million, which include the opening of 55 new supermarkets and the remodeling or expansion of 75 stores. In addition, the Company is developing plans to open approximately 65 new supermarkets in fiscal 2000 and approximately 70 to 80 new supermarkets per year thereafter for several years. Further, the Company expects to remodel or enlarge an average of 75 stores per year for the next several years. Sources of Supply The Company obtains the merchandise sold in its stores from a variety of suppliers located primarily in the United States and Canada. The Company has long-standing and satisfactory relationships with its suppliers. The Company maintains a processing facility that produces coffee products. The main ingredients for coffee products are purchased principally from Brazilian and Central American sources. Other ingredients are obtained from domestic suppliers. Employees As of February 27, 1999, the Company had approximately 83,400 employees, of which 70% were employed on a part-time basis. Approximately 88% of the Company's employees are covered by union contracts. Competition The supermarket business is highly competitive throughout the marketing areas served by the Company and is generally characterized by low profit margins on sales with earnings primarily dependent upon rapid inventory turnover, effective cost controls and the ability to achieve high sales volume. The Company competes for sales and store locations with a number of national and regional chains as well as with many independent and cooperative stores and markets. Foreign Operations The information required is contained in the 1998 Annual Report to Shareholders on pages 30, 31, 33, 34, 36, 39 and 40 and is herein incorporated by reference. ITEM 2. Properties At February 27, 1999, the Company operated 839 retail stores and serviced 55 franchised stores. Approximately 7% of the Company's stores are owned, while the remainder are leased. These stores are geographically located as follows: The Great Atlantic & Pacific Tea Company, Inc. ("A&P" or the "Company") is engaged in the retail food business. The Company operated 839 stores averaging approximately 35,247 square feet per store as of February 27, 1999. In addition, the Company began franchising its Canadian Food Basics stores in fiscal 1995. As of February 27, 1999, the Company had 55 Food Basics Franchise stores in Canada averaging approximately 27,953 square feet per store. On the basis of reported sales for fiscal 1998, the Company believes that it is one of the ten largest retail food chains in the United States and that it had the largest market share in metropolitan New York and Detroit, and the second largest market share in the Province of Ontario, the Company's largest single markets in the United States and Canada. Operating under the trade names A&P, Super Fresh, Sav-A-Center, Farmer Jack, Kohl's, Food Emporium, Waldbaum's, Super Food Mart, Ultra Mart, Dominion, and Food Basics, the Company sells groceries, meats, fresh produce and other items commonly offered in supermarkets. In addition, many stores have bakery, delicatessen, pharmacy, floral, fresh fish and cheese departments, and on-site banking. National, regional and local brands are sold as well as private label merchandise. In support of its retail operations, the Company also operates one coffee roasting plant in the United States. Through its Compass Foods Division, the Company manufactures and distributes a line of whole bean coffees under the Eight O'Clock, Bokar and Royale labels, for sale through its own stores as well as other food and convenience retailers. The other private label products sold in the Company's stores are sold under the Company's own brand names which include America's Choice, Master Choice, Health Pride, Savings Plus and The Farm. Building upon a broad base of A&P supermarkets, the Company has expanded and diversified within the retail food business through the acquisition of other supermarket chains and the development of several alternative store types. The Company now operates its stores with merchandise, pricing and identities tailored to appeal to different segments of the market, including buyers seeking gourmet and ethnic foods, unusual produce, a wide variety of premium quality private label goods and health and beauty aids along with the array of traditional grocery products. Modernization of Facilities The Company is engaged in a continuing program of modernizing its operations and retail stores. During fiscal 1998, the Company expended approximately $438 million for capital projects which included 46 new supermarkets, 3 new Food Basics franchised stores and 69 remodels or enlargements. The Company's plans for fiscal 1999 anticipate capital expenditures of approximately $500 million, which include the opening of 55 new supermarkets and the remodeling or expansion of 75 stores. In addition, the Company is developing plans to open approximately 65 new supermarkets in fiscal 2000 and approximately 70 to 80 new supermarkets per year thereafter for several years. Further, the Company expects to remodel or enlarge an average of 75 stores per year for the next several years. Sources of Supply The Company obtains the merchandise sold in its stores from a variety of suppliers located primarily in the United States and Canada. The Company has long-standing and satisfactory relationships with its suppliers. The Company maintains a processing facility that produces coffee products. The main ingredients for coffee products are purchased principally from Brazilian and Central American sources. Other ingredients are obtained from domestic suppliers. Employees As of February 27, 1999, the Company had approximately 83,400 employees, of which 70% were employed on a part-time basis. Approximately 88% of the Company's employees are covered by union contracts. Competition The supermarket business is highly competitive throughout the marketing areas served by the Company and is generally characterized by low profit margins on sales with earnings primarily dependent upon rapid inventory turnover, effective cost controls and the ability to achieve high sales volume. The Company competes for sales and store locations with a number of national and regional chains as well as with many independent and cooperative stores and markets. Foreign Operations The information required is contained in the 1998 Annual Report to Shareholders on pages 30, 31, 33, 34, 36, 39 and 40 and is herein incorporated by reference. ITEM 2. Properties At February 27, 1999, the Company operated 839 retail stores and serviced 55 franchised stores. Approximately 7% of the Company's stores are owned, while the remainder are leased. These stores are geographically located as follows: Company Stores: New England States: Connecticut 43 Massachusetts 19 New Hampshire 1 Vermont 2 ---- Total 65 Middle Atlantic States: District of Columbia 1 Delaware 8 Maryland 48 New Jersey 105 New York 167 Pennsylvania 41 ---- Total 370 Mid-Western States: Michigan 100 Wisconsin 43 ---- Total 143 Southern States: Alabama 2 Georgia 36 Louisiana 20 Mississippi 5 North Carolina 3 South Carolina 2 Virginia 11 ---- Total 79 ---- Total United States 657 ---- Ontario, Canada 182 ---- Total Stores 839 ==== Franchised Stores: Ontario, Canada 55 ---- Total Franchised Stores 55 ==== The total area of all retail stores is approximately 28.7 million square feet averaging approximately 34,250 square feet per store. Excluding liquor stores and Food Emporium stores the average store size is approximately 35,247. The total area of all franchised stores is approximately 1.5 million square feet averaging approximately 27,953 square feet per store. The 46 new supermarkets opened in fiscal 1998 had a range in size from 25,037 to 65,078 square feet, with an average size of approximately 49,389 square feet. The stores built by the Company over the past several years and those planned for fiscal 1999, generally range in size from 45,000 to 65,000 square feet with an average of approximately 55,000 square feet. The selling area of the store is approximately 74% of the total square footage. The Company operates one coffee roasting plant in the United States. In addition, the Company maintains 14 warehouses that service its store network. These warehouses are geographically located as follows: Company Warehouses: Georgia 1 Indiana 1 Louisiana 1 Maryland 1 Michigan 2 New Jersey 2 New York 2 Pennsylvania 1 Wisconsin 1 ---- Total United States 12 ---- Ontario, Canada 2 ---- Total Warehouses 14 ==== The net book value of real estate pledged as collateral for all mortgage loans amounted to approximately $9 million as of February 27, 1999. ITEM 3. Legal Proceedings The information required is contained in the 1998 Annual Report to Shareholders on page 39 and is herein incorporated by reference. ITEM 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 1998. PART II ITEM 5. Market for the Registrant's Common Stock and Related Security Holder Matters The information required is contained in the 1998 Annual Report to Shareholders on pages 41 and 43 and is herein incorporated by reference. ITEM 6. Selected Financial Data The information required is contained on page 43 of the 1998 Annual Report to Shareholders and is herein incorporated by reference. ITEM 7. Management's Discussion and Analysis The information required is contained in the 1998 Annual Report to Shareholders on pages 15 through 22 and is herein incorporated by reference. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk The information required is contained in the 1998 Annual Report to Shareholders on page 21 and is herein incorporated by reference. ITEM 8. Financial Statements and Supplementary Data (a) Financial Statements: The financial statements required to be filed herein are described in Part IV, Item 14 of this report. Except for the pages included herein by reference, the Company's 1998 Annual Report to Shareholders is not deemed to be filed as part of this report. (b) Selected Quarterly Financial Data: The information required is contained on page 41 of the 1998 Annual Report to Shareholders and is herein incorporated by reference. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III ITEMS 10 and 11. Directors and Executive Officers of the Registrant and Executive Compensation Executive Officers of the Company Name Age Current Position Christian W.E. Haub 34 President and Chief Executive Officer Fred Corrado 59 Vice Chairman of the Board and Chief Financial Officer Michael J. Larkin 57 Senior Executive Vice President - Chief Operating Officer Aaron Malinsky 50 Vice Chairman - Development and Strategic Planning George Graham 49 Executive Vice President - Chief Merchandising Officer Peter J. O'Gorman 60 Executive Vice President - International Store and Product Development Laurane S. Magliari 48 Senior Vice President - People Resources and Services Cheryl M. Palmer 41 Senior Vice President - Strategic Marketing John Dunne 60 Chairman and Co-Chief Executive Officer - The Great Atlantic & Pacific Company of Canada, Limited Brian Piwek 52 Vice Chairman and Co-Chief Executive Officer - The Great Atlantic & Pacific Company of Canada Limited Craig C. Sturken 55 Chairman and Chief Executive Officer - Mid-West Operations Robert G. Ulrich 64 Senior Vice President - General Counsel and Secretary Executive officers of the Company are chosen annually and serve at the pleasure of the Chief Executive Officer with the consent of the Board of Directors. Mr. Haub was elected President and Chief Executive Officer on May 1, 1998. Prior to assuming his present position he was President and Co-Chief Executive Officer from April 2, 1997 to April 30, 1998. Prior thereto he was President and Chief Operating Officer of the Company since December 7, 1993 and served as Corporate Vice President, Development and Strategic Planning, since joining the Company in 1991. Mr. Haub has been a member of the Board of Directors of the Company since December 3, 1991 and an ex officio member of the Executive, Finance and Retirement Benefits Committees. Mr. Corrado was elected Vice Chairman of the Board on October 6, 1992. He also serves as Chief Financial Officer since joining the Company in January 1987. Mr. Corrado also served as Treasurer of the Company in 1987 and from April 18, 1989 through December 5, 1995. Mr. Corrado has been a member of the Board of Directors of the Company since December 4, 1990, and is currently the Vice Chairman of the Executive Committee and a member of the Finance and Retirement Benefits Committees. Mr. Larkin was elected Senior Executive Vice President - Chief Operating Officer on June 30, 1997. Prior to rejoining the Company, Mr. Larkin owned and operated two supermarkets in the Pennsylvania area from April 1995 through June 1997. Prior thereto and for the past five years, Mr. Larkin was Executive Vice President - Operations with the Company. Mr. Malinsky was appointed Vice Chairman of the Company on July 28, 1998. Upon rejoining the Company on August 1, 1996, he was elected Executive Vice President, Development and Strategic Planning. For the five years prior thereto, Mr. Malinsky was Chairman and President of Victory Markets, Inc. and New Almacs, Inc. Mr. Graham was elected Executive Vice President - Chief Merchandising Officer on August 1, 1997. Prior to assuming his present position and for the past five years, he was successively Executive Vice President - U.S. Operations, and Senior Vice President - Chief Merchandising Officer. Mr. O'Gorman was elected Executive Vice President - International Store and Product Development on June 26, 1995. During the past five years he was Executive Vice President - Development and Strategic Planning, and Executive Vice President - Development. Ms. Magliari was elected Senior Vice President, People Resources and Services on February 16, 1999. Prior to joining the Company and for the past five years, Ms. Magliari was Vice President, Human Resources - Publishers Clearing House and Vice President, Global Marketing - The Chase Manhattan Bank. Ms. Palmer was appointed Senior Vice President, Strategic Marketing May 3, 1999. Prior to joining the Company and for the past five years, Ms. Palmer was Group Vice President/General Manager for Allied Domecq Spirits & Wines and held various management positions for Cadbury Beverages, Inc. Mr. Dunne was elected by The Great Atlantic & Pacific Company of Canada, Limited as Chairman and Co-Chief Executive Officer on October 5, 1997. Prior thereto and for the past five years, Mr. Dunne was successively Chairman and Chief Executive Officer, President and Chief Operating Officer, and Vice Chairman and Chief Merchandising Officer of The Great Atlantic & Pacific Company of Canada, Limited. Mr. Dunne also served as Chairman and Chief Executive Officer of Food Basics Limited from December 1995 through September 1996. Mr. Piwek was elected by The Great Atlantic & Pacific Company of Canada, Limited as Vice Chairman and Co-Chief Executive Officer on October 2, 1997. Prior thereto and for the past five years, Mr. Piwek was President of Overwaitea Food Group, a retailer and franchisor in British Columbia and Alberta, Canada. Mr. Sturken was appointed Chairman and Chief Executive Officer - Mid-West Operations on April 7, 1997. Prior thereto and for the past five years Mr. Sturken was successively Group Vice President Michigan and Chairman and Chief Executive Officer - The Great Atlantic & Pacific Company of Canada, Limited. Mr. Ulrich was elected Senior Vice President and General Counsel and Secretary on March 26, 1999. Prior thereto he served as Senior Vice President and General Counsel since April 1981. Mr. James Wood was elected Chairman of the Board and Chief Executive Officer on April 29, 1980. On April 2, 1997 he was elected Co-Chief Executive Officer and retired from that office on April 30, 1998. He is Chairman of the Executive Committee of the Board of Directors. Mr. William Louttit was appointed Chairman and Chief Executive Officer - Greater Metro New York Operations on April 7, 1997. Prior thereto and for the past five years Mr. Louttit was Executive Vice President and Chief Operating Officer of the Grand Union Company. Mr. Louttit resigned from the Company effective May 17, 1999. Mr. Joseph McCaig was appointed Executive Assistant to the Chief Executive Officer on September 8, 1997. Prior thereto and for the past five years he was President and Chief Executive Officer of the Grand Union Company. Mr. McCaig resigned from the Company effective March 12, 1999. Dr. Ivan Szathmary was elected Executive Vice President and Chief Services Officer on July 11, 1996. Prior thereto, he was Senior Vice President and Chief Services Officer since July 1986. Effective April 11, 1998 Dr. Szathmary resigned from the Company. The Company has filed with the Commission since the close of its fiscal year ended February 27, 1999 a definitive proxy statement pursuant to Regulation 14A, involving the election of directors. Accordingly, the information required in Items 10 and 11, except as provided above, appears on pages 1 through 12 and is incorporated by reference from the proxy statement. ITEM 12. Security Ownership of Certain Beneficial Owners and Management The information required is contained in the Company's fiscal 1998 definitive proxy statement on pages 1 and 5 and is herein incorporated by reference. ITEM 13. Certain Relationships and Related Transactions The information required is contained in the Company's fiscal 1998 definitive proxy statement on pages 1, 6 and 7 and is herein incorporated by reference. PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents filed as part of this report 1) Financial Statements: The financial statements required by Item 8, are included in the fiscal 1998 Annual Report to Shareholders. The following required items, appearing on pages 23 through 42 of the 1998 Annual Report to Shareholders, are herein incorporated by reference: Statements of Consolidated Operations Statements of Consolidated Shareholders' Equity and Comprehensive (Loss) Income Consolidated Balance Sheets Statements of Consolidated Cash Flows Notes to Consolidated Financial Statements Independent Auditors' Report 2) Financial Statement Schedules are omitted because they are not required or do not apply, or the information is included elsewhere in the financial statements or notes thereto. 3) Exhibits: Exhibit Incorporation by reference Numbers Description (If applicable) 2) Not Applicable 3) Articles of Incorporation and By-Laws a) Articles of Incorporation Exhibit 3)a) to Form 10-K as amended through for fiscal year ended July 1987 February 27, 1988 b) By-Laws as amended through Exhibit 3)b) to Form 10-K March 1989 for fiscal year ended February 25, 1989 4) Instruments defining the Exhibit A to Form 10-Q rights of security holders, for the quarter ended including indentures August 27, 1977; and Registration Statement No. 33-14624 on Form S-3 filed May 29, 1987 9) Not Applicable 10) Material Contracts a) Management Compensation Exhibit 10)b) to Form 10-K Agreements for the fiscal years ended February 25, 1989, February 24, 1990, and Exhibit 10)a) for the fiscal years ended February 26, 1994, February 25, 1995, February 22, 1997, February 28, 1998 and attached b) Supplemental Executive Exhibit 10)b) to Form 10-K Retirement Plan, amended for the fiscal year ended and restated February 27, 1993 c) 1975 Stock Option Plan, Exhibit 10) to Form 10-K for as amended the fiscal year ended February 23, 1985 Incorporated by reference (If applicable) 10)d) 1984 Stock Option Plan, Exhibit 10)e) to Form 10-K as amended for the fiscal year ended February 23, 1991 e) 1994 Stock Option Plan Exhibit 10)e) to Form 10-K for the fiscal year ended February 25, 1995 f) 1994 Stock Option Plan Exhibit 10)f) to Form 10-K for Non-Employee Directors for the fiscal year ended February 25, 1995 g) Competitive Advance and Exhibit 10) to Form 10-Q Revolving Credit Facilities for the quarter ended Agreement dated as of December 2, 1995, filed on December 12, 1995. Form SE. h) Directors' Deferred Exhibit 10)h) to Form 10-K Payment Plan for the fiscal year ended February 22, 1997. i) Competitive Advance and Exhibit 10) to Form 8-K Revolving Credit Facilities filed on June 12, 1997; Agreement dated as of and attached June 10, 1997 and amendment dated February 17, 1999. j) Project Great Renewal Exhibit 99.1) to Form 8-K dated as of December 8, 1998 filed December 9, 1998 k) 1998 Long Term Incentive Attached and Share Award plan Exhibit Incorporation by reference Numbers Description (If applicable) 11) Not Applicable 12) Not Applicable 13) 1998 Annual Report to Shareholders 18) Not Applicable 21) Subsidiaries of Registrant 22) Not Applicable 23) Independent Auditors' Consent 24) Not Applicable 27) Financial Data Schedule 28) Not Applicable (b) Reports on Form 8-K Report on Form 8-K with respect to the Company's "Project Great Renewal" was filed on December 9, 1998. The project was embarked upon as of December 8, 1998, and encompasses a program of strategic initiatives designed for growth, improved shareholder value and to position the Company as a leader in North America food retailing. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The Great Atlantic & Pacific Tea Company, Inc. (registrant) Date: May 11, 1999 By: /s/ Fred Corrado (Signature) Fred Corrado Vice Chairman of the Board and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and as of the date indicated. /s/ James Wood Chairman of the Board and Director James Wood /s/ Christian W.E. Haub President, Chief Executive Officer and Christian W.E. Haub Director /s/ Fred Corrado Vice Chairman of the Board, Fred Corrado Chief Financial Officer and Director /s/ John D. Barline Director John D. Barline /s/ Rosemarie Baumeister Director Rosemarie Baumeister /s/ Christopher F. Edley Director Christopher F. Edley /s/ Helga Haub Director Helga Haub /s/ Barbara Barnes Hauptfuhrer Director Barbara Barnes Hauptfuhrer /s/ William A. Liffers Director William A. Liffers /s/ Fritz Teelen Director Fritz Teelen /s/ R.L. "Sam" Wetzel Director R.L. "Sam" Wetzel The above-named persons signed this report on behalf of the registrant on May 11, 1999. /s/ Kenneth A. Uhl Vice President, Controller May 18, 1999 Kenneth A. Uhl Date EX-13 2 COMPARATIVE HIGHLIGHTS The Great Atlantic & Pacific Tea Company, Inc. (Dollars in thousands, except per share amounts) - ------------------------------------------------ Fiscal 1998 Fiscal 1997 Fiscal 1996 (52 weeks) (53 weeks) (52 weeks) ----------- ----------- ----------- Sales $10,179,358 $10,262,243 $10,089,014 (Loss) income from operations (164,391) 155,259 169,303 (Loss) income before extraordinary item (67,164) 63,586 73,032 Net (loss) income (67,164) 63,042 73,032 Net (loss)income per share before extraordinary item - basic and diluted (1.75) 1.66 1.91 Net (loss) income per share - basic and diluted (1.75) 1.65 1.91 Cash dividends per share .40 .40 .20 Expenditures for property 438,345 267,623 296,878 Depreciation and amortization 233,663 234,236 230,748 Working capital 89,974 262,097 215,374 Shareholders' equity 837,257 926,632 890,072 Debt to total capitalization .51 .48 .49 Book value per share 21.87 24.22 23.27 New store openings 46 40 30 Number of stores at year end 839 936 973 Number of franchised stores served at year end 55 52 49 NOTE: The comparative highlights for the fiscal 1998 52-week period ended February 27, 1999 includes a pre-tax store and facilities exit charge of $224,580. (See the "Store and Facilities Exit Costs" footnote to the Consolidated Financial Statements). Company Profile The Great Atlantic & Pacific Tea Company, Inc. ("the Company"), based in Montvale, New Jersey, operates combination food and drug stores, conventional supermarkets and limited assortment food stores in 18 U.S. states, the District of Columbia and Ontario, Canada, under the A&P, Waldbaum's, Super Foodmart, Food Emporium, Super Fresh, Farmer Jack, Kohl's, Sav-A-Center, Dominion, Ultra Mart and Food Basics trade names. As of fiscal year ended February 27, 1999, the Company operated 839 stores and served 55 franchised stores. Through its Compass Foods Division, the Company also manufactures and distributes a line of whole bean coffees under the Eight O'Clock, Bokar and Royale labels, both for sale through its own stores as well as other food and convenience retailers. MANAGEMENT'S DISCUSSION AND ANALYSIS OPERATING RESULTS Fiscal 1998 Compared with 1997 Sales for fiscal 1998 were $10,179 million, a net decrease of $83 million or 0.8% when compared to fiscal 1997 (a 53-week year) sales of $10,262 million. Total Company same store sales, which include replacement stores ("same store sales" referred to herein includes replacement stores) for fiscal 1998 increased 1.9% from the prior year. Average weekly sales per supermarket were approximately $210,500 in fiscal 1998 versus $199,400 in fiscal 1997, resulting in a 5.6% increase. During fiscal 1998, the Company opened 46 new supermarkets, remodeled or expanded 69 stores and closed 143 stores. The Company serviced 55 Food Basics franchised stores at the end of fiscal 1998, versus 52 at the end of fiscal 1997. The sales decrease of $83 million from last year was the result of the extra week in fiscal 1997 coupled with a decline in the Canadian exchange rate. The extra week of sales in fiscal 1997 amounted to approximately $174 million and the lower Canadian exchange rate reduced fiscal 1998 sales by approximately $131 million. Excluding the impact of the extra week in fiscal 1997 and the lower Canadian exchange rate, sales increased approximately $222 million or 2.2% from fiscal 1997. This increase is the result of new store openings and an increase in comparable store sales partially offset by store closures. The opening of 44 new stores, excluding 40 replacement stores, since the beginning of fiscal 1997 increased sales by approximately $274 million or 2.7% in fiscal 1998. In addition, the increase in comparable store sales of 1.9% increased sales by $177 million and wholesale sales to the Food Basics franchised stores increased $47 million or 13.8% to $387 million for fiscal 1998, which increased total Company sales by 0.5%. These sales increases were partially offset by the closure of 178 stores, excluding replacement stores, which reduced sales by $327 million or 3.2%. Included in the 178 store closures and $327 million sales impact are 66 stores relating to the exit stores that were closed during the fourth quarter which had an impact of $44 million. U.S. sales decreased $68 million or 0.8% compared to fiscal 1997. U.S. same store sales increased 1.4% from the prior year. In Canada, sales decreased $15 million or 0.8% from fiscal 1997 to $1,903 million. Canada same store sales increased 4.6% from the prior year. Gross margin as a percent of sales increased 0.1% to 28.7% from 28.6% for the prior year. The gross margin dollar decrease of $16 million is primarily the result of a lower Canadian exchange rate which decreased margin by $31 million, offset by an increase in sales volume which had an impact of increasing margin by $8 million and an increase in gross margin rates of $7 million. The U.S. gross margin decreased $3 million principally as a result of a decrease in sales volume which had an impact of decreasing margin by $20 million and an increase in gross margin rates of $17 million. The Canadian operations gross margin decreased $13 million, which was primarily the result of the lower Canadian exchange rate. Store operating, general and administrative expense of $3,084 million in fiscal 1998 increased by approximately $304 million from fiscal 1997. As a percent of sales, store operating, general and administrative expense for fiscal 1998 increased to 30.3% from 27.1% for the prior year. Included in fiscal 1998 store operating, general and administrative expenses are charges recorded in both the third and fourth quarters relating to the Company's store and facilities exit program which amounted to $225 million. The store and facilities exit program relates to a decision made in both the third and fourth quarters of fiscal 1998 to exit the market areas of 132 underperforming stores and to exit four facilities (see "Store and Facilities Exit Costs" footnote for further discussion). Excluding the store and facilities exit charges, store operating, general and administrative expense increased $79 million from fiscal 1997 and a rate to sales basis of 28.1% for fiscal 1998 as compared to 27.1% in fiscal 1997. Also included in store operating, general and administrative expense for fiscal 1998 are shut-down costs of stores and facilities amounting to approximately $9 million relating to 66 stores and three facilities closed in the third and fourth quarters of fiscal 1998, and $6 million of incurred professional fees associated with the identification and implementation of the store and facilities exit program. Further, store operating, general and administrative expense for fiscal 1998 also includes a $7 million write-down of a property no longer held for a potential store site and a $4 million litigation charge. During fiscal 1998, the Company accelerated its store modernization program and closed an additional 77 stores, for total store closures in fiscal 1998 of 143. As a result of the 77 store closures, the Company incurred $25 million of higher store closing charges in fiscal 1998 than the prior year. The remaining increase from the prior year of $28 million is mainly related to the occupancy costs of the new generation superstores which increased $20 million from the prior year. In May 1998, the Company named a sole Chief Executive Officer of the Company. Following such announcement, the Company initiated a vigorous assessment of all aspects of its business operations in order to identify the Page 15 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, a coffee plant and a bakery plant in Canada. In connection with the exit plan, the Company recorded a charge of approximately $11 million which is included in "Store operating, general and administrative expense" in the accompanying Statements of Consolidated Operations. The $11 million charge was comprised of $7 million of severance, $3 million of facilities occupancy costs for the period subsequent to closure and $1 million to write-down the facilities to their estimated fair value. The Company has paid $3 million of the severance cost as of February 27, 1999, and expects the remainder to be paid by the end of fiscal 1999. As of February 27, 1999, the Company has paid $0.3 million of occupancy costs. At February 27, 1999, the Company had closed and terminated operations with respect to the warehouses and the coffee plant. The volume associated with the two warehouses has been transferred to other warehouses in close geographic proximity. Further, the manufacturing processes of the coffee plant have been transferred to the Company's remaining coffee processing facility. The processing associated with the Canadian bakery has been outsourced effective January 1999. In addition, on December 8, 1998, the Company's Board of Directors approved a plan which included the exit of 127 underperforming stores throughout the United States and Canada and the disposal of two other properties. Included in the 127 stores are 31 stores representing the entire Richmond, Virginia market. Further on January 28, 1999, the Board of Directors approved the closure of five additional underperforming stores. In connection with the Company's plan to exit these 132 stores and the write- down of two properties, the Company recorded a fourth quarter charge of approximately $215 million. This $215 million charge was comprised of $8 million of severance, $1 million of facilities occupancy costs, $114 million of store occupancy costs, which principally relates to the present value of future lease obligations, net of anticipated sublease recoveries, which extend through fiscal 2028, an $83 million write-down of store fixed assets and a $9 million write-down to estimated fair value of the two properties which are held for sale. To the extent fixed assets included in those stores identified for closure could be utilized in other continuing store locations, the Company has or will transfer such assets to those continuing stores. To the extent such fixed assets cannot be transferred, the Company will scrap such fixed assets, and accordingly, the write-down was calculated utilizing an estimated scrap value. This fourth quarter charge of $215 million was reduced by approximately $2 million due to changes in estimates of pension withdrawal liabilities and fixed asset write-downs from the time the original charge was recorded. The net charge of $213 million is included in "Store operating, general and administrative expense" in the accompanying Statement of Operations. The Company has paid $1 million of the severance costs as of February 27, 1999 and expects the remainder to be paid by May 2000. In addition, the Company also paid $1 million of store occupancy costs since the date of closure of the 66 stores closed as of February 27, 1999. The total severance charge of approximately $15 million resulted from the termination of 1,273 employees. As of February 27, 1999, the Company has closed 66 of the 132 stores identified, including all 31 stores in the Richmond, Virginia market. The remaining 66 stores will be closed over the next three quarters of fiscal 1999. Further, during the first three quarters of fiscal 1999, the Company expects to incur pre-tax losses related to this plan in the range of $80 to $100 million which are currently not accruable. Such amount principally represents operating losses of the identified stores prior to closure, the potential impact of selling inventory at reduced prices and employee termination costs which have not been communicated to such employees as of February 27, 1999. On April 26, 1999, the Company announced that it had reached definitive agreements to sell 14 stores in the Atlanta market, two of which were previously included in the Company's store exit program (see "Store and Facilities Exit Costs" footnote). 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, the Company expects to record a fiscal 1999 first quarter pre-tax charge, net of proceeds from asset sales, in the range of $15 million to $20 million. This charge will include fixed and intangible asset write-offs, severance and lease commitments, and will be recorded as "store operating, general and administrative expense". In addition to the charge, during the first quarter of fiscal 1999, the Company will incur pre-tax costs in the range of $10 million to $20 million. The amount principally represents the cost to close the identified stores and distribution center and the potential impact of selling inventory at reduced prices. Interest expense decreased $9 million from the previous year, primarily due to a decrease in average debt of approximately Page 16 $55 million. The decrease in debt is mainly the result of the Company issuing $300 million 10-year notes in April 1997 to refinance 10-year notes that were becoming due in January 1998. Accordingly, the Company had higher debt throughout fiscal 1997 until the fourth quarter of fiscal 1997 when the $200 million 10-year notes were paid. Interest income decreased $1 million from the previous year, primarily due to a lower amount of short-term investments. Loss before taxes and extraordinary item for fiscal 1998 was $229 million as compared to income of $83 million in fiscal 1997 for a decrease of $312 million. The loss before income taxes for fiscal 1998 includes the store and facilities exit charge of $225 million and other costs noted in store operating, general and administrative expense. Loss before taxes for U.S. operations amounted to $244 million, which was a decrease of $290 million from income of $46 million in fiscal 1997. Excluding the store and facilities exit charge, the U.S. loss before income taxes was $30 million for fiscal 1998 resulting in a $76 million decrease from fiscal 1997. The U.S. decrease of $75 million is the result of the charges noted in store operating, general and administrative expense relating to the property write- down, litigation, professional fees, shut-down costs and higher store closing costs which in total amounted to $46 million. The Canadian income before taxes for fiscal 1998 amounted to $15 million, which was a decrease of $22 million from the fiscal 1997 amount of $37 million. The $22 million decrease includes $10 million of the store and facilities exit charge and $6 million of higher store closing costs as noted in store operating, general and administrative expense. The Company recorded income tax benefits amounting to $162 million in fiscal 1998 as compared to income tax provision of $19 million for fiscal 1997. The fiscal 1998 benefit of $162 million includes reversals of the Canadian operations deferred tax valuation allowance. During the first three quarters of fiscal 1998, the Company reversed approximately $9 million of the Canadian valuation allowance to the extent that the Canadian operations had taxable income. In addition, at the beginning of the fourth quarter of fiscal 1998, the Company concluded that it was more likely than not that the net deferred tax assets related to the Canadian operations would be realized and accordingly, the Company reversed the remaining portion of the Canadian deferred tax valuation allowance amounting to approximately $60 million. The deferred tax benefit recorded for U.S. operations of approximately $103 million mainly relates to book and tax differences of the store and facilities exit costs recorded in fiscal 1998. The fiscal 1997 income tax provision includes a reversal of the Canadian valuation allowance of $17 million. The reversal was recorded to the extent that the Canadian operations had taxable income. However, Management had still concluded that it was more likely than not that the Canadian net deferred tax assets would not be realized and through the end of fiscal 1997, the Company provided a full valuation allowance for its Canadian net deferred tax assets, principally net operating loss carryforwards. During the first three quarters of fiscal 1998, the Company continued to fully reserve its Canadian net deferred tax assets. At the beginning of the fourth quarter of fiscal 1998, based upon Management's plan to close underperforming stores in Canada (see "Store and Facilities Exit Costs" footnote), the implementation of certain tax strategies and the continued performance improvements of the Canadian operations, Management has concluded that it is more likely than not that the Canadian deferred tax assets will be realized. As such, as of December 6, 1998, the Company reversed the remaining deferred tax asset valuation allowance amounting to approximately $60 million. (See "Income Taxes" footnote for further discussion). Net loss for fiscal 1998 was $67 million or $1.75 per share - basic and diluted, as compared to net income of $63 million or $1.65 per share - basic and diluted, after recording an extraordinary charge of $0.01 per share - basic and diluted for fiscal 1997. The decrease in net income of $130 million to a net loss of $67 million in fiscal 1998 is mainly the result of the store and facilities exit costs pre-tax charge of $225 million, partially offset by the reversal of the remaining Canadian valuation allowance. Fiscal 1997 Compared with 1996 Sales for fiscal 1997 were $10,262 million, a net increase of $173 million or 1.7% when compared to fiscal 1996 sales of $10,089 million. Total Company same store sales, which include replacement stores ("same store sales" referred to herein includes replacement stores), for fiscal 1997 decreased 1.6% from the prior year. Average weekly sales per supermarket were approximately $199,400 in fiscal 1997 versus $195,200 in fiscal 1996 for a 2.2% increase. During fiscal 1997, the Company opened 33 new supermarkets, 3 new liquor stores and 4 new Food Basics franchised stores, remodeled or expanded 45 stores, and closed 74 stores, of which 11 in the Carolina market were sold. The sales increase of $173 million from last year was mainly the result of new store openings and an extra week of sales in fiscal 1997. The Company opened 36 stores, excluding 32 stores that replaced 32 older, outmoded stores, since the beginning of fiscal 1996, which increased sales by approximately $262 million or 2.6% in fiscal 1997. In addition, wholesale sales to the Food Basics franchised stores increased $135 million or 66% to $340 million for fiscal Page 17 1997, which increased total Company sales by 1.3%. In fiscal 1997, sales increased $174 million or 1.7% as a result of an extra week of sales during this 53-week year compared to a 52-week year in fiscal 1996. These increases were partially offset by the closure of 114 stores, excluding replacement stores, since the beginning of fiscal 1996, of which 11 were sold in the Carolina market, reducing total sales by approximately $218 million or 2.1% in fiscal 1997. The store closures include 24 stores that were subsequently converted to Food Basics franchised stores. The 1.6% decrease in same store sales resulted in a sales decrease of $153 million in fiscal 1997, while a lower Canadian exchange rate resulted in a sales decrease of $45 million in fiscal 1997. U.S. sales increased $62 million or 0.8% compared to fiscal 1996. U.S. same store sales were 2.0% below the prior year. In Canada, sales increased $111 million or 6.1% from fiscal 1996 to $1,918 million. Canada same store sales were up 0.6% from the prior year. Gross margin as a percent of sales decreased 0.4% to 28.6% from 29.0% for the prior year resulting primarily from the increase of the lower margin wholesale sales from 2.0% to 3.3% of total Company sales in fiscal 1997, partially offset by an increase in the retail supermarket margin rate in the U.S. The gross margin percentage in the retail stores remained flat from the prior year. The gross margin dollar increase of $13 million is primarily the result of an increase in sales volume which had an impact of increasing margin by $66 million, partially offset by a decrease in gross margin rates of $40 million and a lower Canadian exchange rate which decreased margin by $13 million. The U.S. gross margin increased $24 million principally as a result of an increase in sales volume, which had an impact of increasing margin by $19 million and an increase in gross margin rates of $5 million. The Canadian operations gross margin decreased $11 million, which was primarily the result of the lower margin wholesale sales which increased from the prior year. Store operating, general and administrative expense of $2,780 million in fiscal 1997 increased by approximately $27 million from fiscal 1996. As a percent of sales, store operating, general and administrative expense for fiscal 1997 decreased to 27.1% from 27.3% for the prior year. U.S. expenses increased $36 million, principally as a result of increased store labor and occupancy costs of the new superstores opened in fiscal 1997. In addition, store closing costs increased by $8 million which were offset by gains on sales of real estate of $11 million. Canadian expenses decreased $9 million, principally as a result of reduced store labor and occupancy costs due to converting 24 stores to Food Basics franchised stores. Interest expense increased $7 million from the previous year, primarily due to an increase in average debt of approximately $95 million. The increase in debt is mainly the result of the Company issuing $300 million 10- year notes in April 1997 to refinance 10-year notes that were becoming due in January 1998. The debt outstanding in April 1997 subsequent to the issuance of the $300 million 10-year notes was approximately $862 million, which was reduced to $712 million at February 28, 1998. Interest income increased $3 million from the previous year, primarily due to interest income on equipment leases relating to the Food Basics franchise business and higher interest income on short-term investments. The interest income on short-term investments was mainly the result of the Company investing a portion of the proceeds from the $300 million 10-year notes in April 1997 prior to the use of the cash to refinance the bonds due in January 1998. Income before taxes and extraordinary item for fiscal 1997 was $83 million as compared to $101 million in fiscal 1996 for a decrease of $18 million or 18%. Income before taxes for U.S. operations decreased $23 million from $68 million in fiscal 1996 to $45 million in fiscal 1997. The U.S. decrease was partially offset by an increase in Canadian operations income before taxes of $5 million to $37 million in fiscal 1997 from $32 million in fiscal 1996. The effective tax rate for fiscal 1997 was 23.3% as compared to an effective tax rate of 27.4% in fiscal 1996. During fiscal 1997, since the Canadian operations generated pretax earnings, the Company reversed approximately $17 million of the valuation allowance, which was an increase of $3 million from the fiscal 1996 reversal of $14 million. Accordingly, the decrease in the effective tax rate is mainly attributable to the change in the Canadian income tax valuation allowance. The Company is reversing the income tax valuation allowance to the extent that its Canadian operations generate taxable income. Although Canada generated pretax earnings in fiscal 1997 of $37 million and $32 million in fiscal 1996, the Company was unable to conclude that the Canadian deferred tax assets were more likely than not to be realized. This conclusion was based in part on Management's assessment of the competitive Canadian marketplace and the level of the Canadian earnings. Accordingly, at February 28, 1998, the Company continued to fully reserve its Canadian net deferred tax asset. The Canadian pretax income for financial statement purposes is higher than the taxable income for tax purposes due to certain differences between the financial statement and income tax treatment of certain items. This is of further significance since the largest portion of the Canadian deferred tax asset relates to net operating loss carryforwards which Page 18 expire between fiscal 1999 and fiscal 2002 (see "Income Taxes" footnote for further discussion). In the second quarter of fiscal 1997, the Company recorded an extraordinary charge of $0.5 million, net of a tax benefit of $0.4 million relating to the early extinguishment of debt which amounted to $0.01 per share - basic and diluted. The Company retired at a premium approximately $20 million in mortgages with a weighted average interest rate of 9.4%. Net income for fiscal 1997 after recording an extraordinary charge of $0.01 per share - basic and diluted, was $63 million or $1.65 per share - basic and diluted, as compared to $73 million or $1.91 per share - basic and diluted, for fiscal 1996. The decrease in net income is the result of higher store operating, general and administrative expenses of $27 million, partially offset by higher gross margins of $13 million coupled with a lower effective income tax rate. LIQUIDITY AND CAPITAL RESOURCES The Company ended the 1998 fiscal year with working capital of $90 million compared to $262 million and $215 million at February 28, 1998 and February 22, 1997, respectively. The Company had cash and short-term investments aggregating $137 million at the end of fiscal 1998 compared to $71 million and $99 million at the end of fiscal 1997 and 1996, respectively. On June 10, 1997, the Company executed an unsecured five year $465 million U.S. credit agreement and a five year C$50 million Canadian credit agreement (the "1997 Credit Agreement") with a syndicate of banks, enabling it to borrow funds on a revolving basis sufficient to refinance short-term borrowings. The Company pays a facility fee of 0.25% per annum on the total commitment of the U.S. and Canadian revolving credit facilities. Borrowings under the U.S. revolving credit agreement were $130 million and $90 million at February 27, 1999 and February 28, 1998, respectively. The Canadian subsidiary had no outstanding borrowings at February 27, 1999 or February 28, 1998. As of February 27, 1999, the Company has available $335 million under its U.S. credit agreement and C$50 million (U.S. $33 million at February 27, 1999) under the Canadian credit agreement. As of February 28, 1998, the Company had available $375 million under its U.S. revolver and C$50 million (U.S. $35 million at February 28, 1998) under the Canadian credit agreement. In addition, the U.S. has uncommitted lines of credit with various banks amounting to $211 million and $149 million as of February 27, 1999 and February 28, 1998, respectively. Borrowings under these uncommitted lines of credit amounted to $23 million and $38 million as of February 27, 1999 and February 28, 1998, respectively. As of February 27, 1999, the Company had outstanding a total of $575 million of unsecured, non-callable public debt securities in the form of $75 million 7.78% Notes due November 1, 2000, $200 million 7.70% Notes due January 15, 2004 and $300 million 7.75% Notes due April 15, 2007. As of February 27, 1999, the Company had $368 million available under the 1997 Credit Agreement and $188 million in uncommitted lines of credit. The Company's Canadian subsidiary, The Great Atlantic & Pacific Company of Canada, Ltd. ("A&P Canada"), has outstanding $75 million 5 year Notes denominated in U.S. dollars that were issued in October 1995 and are due on November 1, 2000. In conjunction with the issuance of the notes, A&P Canada entered into a five year cross-currency swap agreement expiring November 1, 2000. The cross-currency swap was executed for protection against the effect of a decrease in Canadian exchange rates on both the semi-annual interest payments and the final principal payment due to the Company's U.S. bondholders. The cross-currency swap enables the Company to pay in Canadian dollars a fixed rate of interest of 9.23% on a notional amount of C$100 million for the $75 million 7.78% Notes denominated in U.S. dollars. The cost of the cross-currency swap of 1.45% is charged to interest expense. The Company records an asset or liability to the extent that an eventual transaction gain or loss is expected to be recorded upon the settlement of the notional amount of the underlying debt. Accordingly, the Company has recorded in other assets the receivable due from the counterparty amounting to approximately $8.4 million and $4.5 million as of February 27, 1999 and February 28, 1998, respectively. The fair value of the cross-currency swap was favorable to the Company by $6.9 million and $1 million as of February 27, 1999 and February 28, 1998, respectively. The Company is exposed to credit losses in the event of nonperformance by the counterparty to its currency swap. However, the Company anticipates that the counterparty will be able to fully satisfy its obligations under the contracts. On April 15, 1997, A&P Canada entered into an interest rate swap agreement with a notional amount of C$100 million expiring November 1, 2000 where A&P Canada receives a fixed rate of interest and pays a variable rate of interest. In August of 1998, A&P Canada assigned the interest rate swap agreement and received consideration of $0.6 million. The consideration received is amortized as a reduction to interest expense until November 1, 2000. Page 19 The fair value of the interest rate swap was favorable to the Company by $1.4 million as of February 28, 1998. The Company's loan agreements and certain of its notes contain various financial covenants which require, among other things, minimum net worth and maximum levels of indebtedness and lease commitments. As a result of the store exit charge recorded on December 8, 1998 (see "Store and Facilities Exit Costs" in the accompanying financial statements), the Company would not have been in compliance with certain of its covenants as of February 27, 1999, relating to the 1997 Credit Agreement. The Company amended the 1997 Credit Agreement prior to February 27, 1999. Accordingly, the Company was in compliance with all such financial covenants, as amended, as of February 27, 1999, and believes that it will continue to be in compliance. During fiscal 1998, the Company funded its capital expenditures, debt repayments and cash dividends through internally generated funds combined with proceeds from bank borrowings. U.S. bank borrowings were $153 million at February 27, 1999 as compared to $128 million at February 28, 1998. U.S. bank borrowings during fiscal 1998 were at an average interest rate of 5.3% compared to 6.0% in fiscal 1997. Pursuant to a Shelf Registration Statement dated January 23, 1998, the Company may offer up to $500 million of debt and equity securities at terms determined by market conditions at the time of sale. Capital expenditures totaled $438 million during fiscal 1998, which included 46 new supermarkets, and 69 remodels and enlargements. For fiscal 1999, the Company has planned capital expenditures of approximately $500 million and plans to open 55 new supermarkets and remodel or expand 75 stores. In addition, in March 1999, the Company signed a definitive agreement to purchase 6 stores in the New Orleans market. The total capital investment, including costs to remodel the stores will be approximately $80 million. The Company expects to complete the transaction during the first quarter of fiscal 1999. It has been the Company's experience over the past several years that it typically takes 12 to 15 months after opening for a new store to recoup its opening costs and become profitable thereafter. Risks inherent in retail real estate investments are primarily associated with competitive pressures in the marketplace. Beginning in fiscal 1999 through fiscal 2000, the Company intends to improve the use of technology to improve customer service, store operations, warehousing/distribution and merchandising and to intensify advertising and promotions. The Company currently expects to close a total of approximately 100 stores in fiscal year 1999 of which 34 stores relate to the Company's store modernization program to replace older outmoded stores and 66 stores relating to the store exit program. The Company plans to open approximately 65 new supermarkets in fiscal 2000 and approximately 70 to 80 new supermarkets per year thereafter for several years, with an attendant increase in square footage of approximately 3% per year. In addition, the Company also plans to remodel or enlarge an average of 70 to 80 stores per year. The Company's concentration will be on larger stores in the 50,000 to 65,000 square foot range. Costs of each project will vary significantly based upon size, marketing format, geographic area and development involvement required from the Company. The planned costs of these projects approximate $4 million for a new store and $1 million for a remodel or enlargement. Traditionally, the Company leases real estate and expends capital on leasehold improvements and store fixtures and fittings. Consistent with the Company's history, most new store activity will be directed into those areas where the Company achieves its best profitability. Remodeling and enlargement programs are normally undertaken based upon competitive opportunities and usually involve updating a store to a more modern and competitive format. The fiscal 1998 quarterly dividend was $0.10 per share and amounted to $15.3 million. The Company expects to maintain the same dividend amount for fiscal 1999. At fiscal year end 1998, the Company's existing senior debt rating was Ba1 with Moody's Investors Service and BBB- with Standard & Poor's Ratings Group. A change in either of these ratings could affect the availability and cost of financing. The Company's current cash resources, together with cash generated from operations, will be sufficient for the Company's 1999 capital expenditure program, mandatory scheduled debt repayments and dividend payments throughout fiscal 1999. MARKET RISK Market risk represents the risk of loss that may impact the consolidated financial position, results of operations or cash flows of the Company. The Company is exposed to market risk in the areas of interest rates and foreign currency exchange rates. Page 20 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 $575 million and $500 million in notes as of February 27, 1999 and February 28, 1998, respectively. However, the Company does have cash flow exposure on its committed and uncommitted bank lines of credit due to its variable LIBOR pricing. Accordingly, as of fiscal 1998, a 1% change in LIBOR will result in interest expense fluctuating approximately $1.5 million. As of fiscal 1997, the Company also had $75 million in notes that had variable pricing. Accordingly, as of fiscal 1997 a 1% change in LIBOR would have resulted in interest expense fluctuating approximately $2.5 million. Foreign Exchange Risk The Company is exposed to foreign exchange risk to the extent of adverse fluctuations in the Canadian dollar. Based upon historical Canadian currency movement, the Company does not believe that reasonably possible near-term change in the Canadian currency of 10% will result in a material effect on future earnings, financial position or cash flows of the Company. The Company entered into a five year cross-currency swap agreement to hedge five year notes in Canada that are denominated in U.S. dollars. The Company does not have any currency risk regarding the Canadian five year notes. The Company is exposed to currency risk in the event of default by the counterparty. Such default is remote, as the counterparty is a widely recognized investment banker. The fair value of the cross-currency swap agreement was favorable to the Company by $6.9 million and $1 million as of February 27, 1999 and February 28, 1998, respectively. A 10% change in Canadian exchange rates would have resulted in the fair value fluctuating approximately $6.7 million in fiscal 1998 and approximately $7.3 million in fiscal 1997. YEAR 2000 COMPLIANCE The Company has formed an ongoing task force to review the entire range of the Company's operations relating to the Year 2000 issues. This task force reports to the Vice Chairman of the Board of Directors. Assessment of those functions of the business that require attention and resources to achieve Year 2000 compliance is in progress throughout the entire organization. Both the Information Technology ("IT") and the non-IT area assessments are 100% complete. The current estimate of the remediation effort (including new programs and components) is approximately 75% complete in the IT area and 35% complete in the non-IT area. Testing of the systems and implementation of renovated and new systems are currently in progress. A number of renovated and new systems that are Year 2000 compliant are currently being used in operations. The costs to address the Company's Year 2000 issues are estimated to be approximately $5 million. Approximately $3.5 million of these costs have been incurred through fiscal 1998. In addition, the Company will incur additional capital expenditures of approximately $5 million in order to replace equipment that is not Year 2000 compliant. To date, the Company has made capital expenditures of $1.5 million for such equipment purchases. Some non-essential IT projects have been deferred due to the Year 2000 project; however, the Company believes that such a deferral will not affect the Company's financial performance. From an IT perspective, the task force is responsible for assessing the extent of affected software/hardware and developing procedures to resolve the potential problems associated with that software/hardware. The procedures developed include making the necessary changes to the affected software, adequately testing the changes and phasing in the Year 2000 compliant programs to limit disruption or delay in the Company's normal business activities. The Company is also in the process of updating vendor software packages to the latest versions to insure all Company software is Year 2000 compliant. Some in-store IT systems as well as other support area IT systems will also need remediation to become Year 2000 compliant. The risks from an IT perspective involves potential business disruption due to software and computer systems not functioning properly. During the latter part of 1999, the IT staff has committed resources to perform extended integrated testing with its key supply chain business partners to address such risks. The risks of Year 2000 issues from a non-IT area are principally as follows: electrical outages resulting in breakdown of point-of-sale systems, lighting and refrigeration equipment and the loss of utility service. In addition, certain store equipment may have embedded chips or microprocessors that are not Year 2000 compliant. The Company has identified such equipment and is either replacing the affected chips or microprocessors or purchasing new equipment Page 21 that is compliant. The events noted above could severely affect Company operations. The Company plans to mitigate the potential effect of such issues by preparing a contingency plan as discussed below. Significant risk also arises out of the possible failure of vendors to respond to Year 2000 issues. The Company is meeting with its major vendors and suppliers to determine their state of readiness and to review the contingency plans that they have developed. Companies that are compliant and have prepared for contingencies will have a status as preferred suppliers. With respect to other vendors that either are not Year 2000 compliant, or do not have adequate contingency or remediation plans, the Company will seek alternative sources when possible. To date, the Company has communicated with all of its major vendors and suppliers all of which have addressed the Year 2000 issue and have contingency plans. With respect to contingencies, the Company has developed a crisis management plan in order to perform necessary functions to fully run the Company's operations. The crisis management plan is being revised on a continuous basis. The Company will continue to expand its contingency plans and detailed procedures in order to mitigate the effects of the Year 2000 issues that might affect the Company. The Company currently believes that the most reasonably likely worst case scenario concerning the Year 2000 involves potential business disruption among third parties with whom it conducts significant business, specifically getting continuous electrical power and communications with the stores and warehouses. The Company believes that it has allocated sufficient resources to resolve all significant Year 2000 issues in a timely manner. Accordingly, the Company plans to be Year 2000 compliant by October 1999. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires that all derivative instruments be measured at fair value and recognized in the statement of financial position 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 statement of operations. Currently the Company has one derivative instrument in the form of a cross-currency swap. The Company will adopt SFAS 133 in the second quarter of fiscal 1999. The cross-currency swap will impact the Company's statement of operations and balance sheet to the extent that there is a change in the fair value of the derivative instrument. CAUTIONARY NOTE This report contains certain forward-looking statements about the future performance of the Company which are based on Management's assumptions and beliefs in light of the information currently available to it. The Company assumes no obligation to update the information contained herein. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements including, but not limited to: competitive practices and pricing in the food industry generally and particularly in the Company's principal markets; the Company's relationships with its employees and the terms of future collective bargaining agreements; the costs and other effects of legal and administrative cases and proceedings; the nature and extent of continued consolidation in the food industry; changes in the financial markets which may affect the Company's cost of capital and the ability of the Company to access the public debt and equity markets to refinance indebtedness and fund the Company's capital expenditure program on satisfactory terms; supply or quality control problems with the Company's vendors; changes in economic conditions which affect the buying patterns of the Company's customers; and the ability of the Company and its vendors, financial institutions and others to resolve Year 2000 processing issues in a timely manner. Page 22 STATEMENTS OF CONSOLIDATED OPERATIONS The Great Atlantic & Pacific Tea Company, Inc. (Dollars in thousands, except per share amounts) ----------------------------------------------- Fiscal 1998 Fiscal 1997 Fiscal 1996 (52 weeks) (53 weeks) (52 weeks) ----------- ------------ ----------- Sales $10,179,358 $10,262,243 $10,089,014 Cost of merchandise sold (7,260,110) (7,327,365) (7,167,315) ----------- ----------- ----------- Gross margin 2,919,248 2,934,878 2,921,699 Store operating, general and administrative expense (3,083,639) (2,779,619) (2,752,396) ----------- ----------- ----------- (Loss) income from operations (164,391) 155,259 169,303 Interest expense (71,497) (80,152) (73,208) Interest income 6,604 7,793 4,496 ----------- ----------- ----------- (Loss) income before income taxes and extraordinary item (229,284) 82,900 100,591 Benefit (provision) for income taxes 162,120 (19,314) (27,559) ----------- ----------- ----------- (Loss) income before extraordinary item (67,164) 63,586 73,032 Extraordinary loss on early extinguishment of debt (net of income tax benefit of $394) - (544) - ----------- ----------- ----------- Net (loss) income $ (67,164) $ 63,042 $ 73,032 =========== =========== =========== Basic (loss) earnings per share: (Loss) income before extraordinary item $ (1.75) $ 1.66 $ 1.91 Extraordinary loss on early extinguishment of debt - (0.01) - ----------- ----------- ----------- Net (loss) income per share - basic $ (1.75) $ 1.65 $ 1.91 =========== =========== =========== Diluted (loss) earnings per share: (Loss) income before extraordinary item $ (1.75) $ 1.66 $ 1.91 Extraordinary loss on early extinguishment of debt - (0.01) - ----------- ----------- ---------- Net (loss) income per share - diluted $ (1.75) $ 1.65 $ 1.91 =========== =========== ========== See Notes to Consolidated Financial Statements. Page 23 STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY AND COMPREHENSIVE (LOSS) INCOME The Great Atlantic & Pacific Tea Company, Inc. (Dollars in thousands, except share amounts) - -------------------------------------------- Fiscal 1998 Fiscal 1997 Fiscal 1996 ----------- ----------- ----------- Common stock: Shares: Issued and outstanding at beginning of year 38,252,966 38,247,716 38,220,333 Stock options exercised 37,750 5,250 27,383 ---------- ---------- --------- Issued and outstanding at end of year 38,290,716 38,252,966 38,247,716 ========== ========== ========== Balance at beginning of year $ 38,253 $ 38,247 $ 38,220 Stock options exercised 38 6 27 ---------- ---------- ---------- Balance at end of year $ 38,291 $ 38,253 $ 38,247 ========== ========== ========== Capital surplus: Balance at beginning of year $ 453,894 $ 453,751 $ 453,121 Stock options exercised 1,077 143 630 ---------- ---------- ---------- Balance at end of year $ 454,971 $ 453,894 $ 453,751 ========== ========== ========== Accumulated other comprehensive (loss) income: Balance at beginning of year $ (61,025) $ (49,694) $ (50,936) Comprehensive (loss) income (8,014) (11,331) 1,242 ---------- ---------- ---------- Balance at end of year $ (69,039) $ (61,025) $ (49,694) ========== ========== ========== Retained earnings: Balance at beginning of year $ 495,510 $ 447,768 $ 382,380 Net (loss) income (67,164) 63,042 73,032 Cash dividends (15,312) (15,300) (7,644) ---------- ---------- ---------- Balance at end of year $ 413,034 $ 495,510 $ 447,768 ========== ========== ========== Comprehensive (loss) income - --------------------------- Net (loss) income $ (67,164) $ 63,042 $ 73,032 ---------- ---------- ---------- Foreign currency translation adjustment (9,936) (5,121) 1,242 Minimum pension liability adjustment 1,922 (6,210) - ---------- ---------- ---------- Accumulated other comprehensive (loss) income (8,014) (11,331) 1,242 ---------- ---------- ---------- Total comprehensive (loss) income $ (75,178) $ 51,711 $ 74,274 ========== ========== ========== See Notes to Consolidated Financial Statements. Page 24 CONSOLIDATED BALANCE SHEETS The Great Atlantic & Pacific Tea Company, Inc. February 27, February 28, (Dollars in thousands) 1999 1998 - --------------------- ------------ ----------- Assets Current assets: Cash and short-term investments $ 136,810 $ 70,937 Accounts receivable 204,700 227,703 Inventories 841,030 882,229 Prepaid expenses and other current assets 41,497 36,358 ---------- ---------- Total current assets 1,224,037 1,217,227 ---------- ---------- Property: Land 141,061 138,139 Buildings 406,122 368,201 Equipment and leasehold improvements 2,147,418 2,122,860 ---------- ---------- Total-at cost 2,694,601 2,629,200 Less accumulated depreciation and amortization (1,097,142) (1,122,381) ---------- ---------- 1,597,459 1,506,819 Property leased under capital leases 89,028 90,058 ---------- ---------- Property-net 1,686,487 1,596,877 Other assets 231,217 181,149 ---------- ---------- $3,141,741 $2,995,253 ========== ========== Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term debt $ 4,956 $ 16,824 Current portion of obligations under capital leases 11,483 12,293 Accounts payable 557,318 441,149 Book overdrafts 160,288 151,846 Accrued salaries, wages and benefits 152,107 146,064 Accrued taxes 54,819 57,856 Other accruals 193,092 129,098 ---------- ---------- Total current liabilities 1,134,063 955,130 ---------- ---------- Long-term debt 728,390 695,292 ---------- ---------- Long-term obligations under capital leases 115,863 120,980 ---------- ---------- Deferred income taxes 23,309 120,618 ---------- ---------- Other non-current liabilities 302,859 176,601 ---------- ---------- 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 38,290,716 and 38,252,966 shares, respectively 38,291 38,253 Capital surplus 454,971 453,894 Accumulated other comprehensive loss (69,039) (61,025) Retained earnings 413,034 495,510 ---------- ---------- Total shareholders' equity 837,257 926,632 ---------- ---------- $3,141,741 $2,995,253 ========== ========== See Notes to Consolidated Financial Statements. Page 25 STATEMENTS OF CONSOLIDATED CASH FLOWS The Great Atlantic & Pacific Tea Company, Inc. (Dollars in thousands) Fiscal 1998 Fiscal 1997 Fiscal 1996 - --------------------- ----------- ----------- ----------- Cash Flows From Operating Activities: Net (loss) income $ (67,164) $ 63,042 $ 73,032 Adjustments to reconcile net (loss) income to cash provided by operating activities: Store/Facilities exit charge and asset write-off 224,580 - - Depreciation and amortization 233,663 234,236 230,748 Deferred income tax provision (benefit) on (loss) income before extraordinary item (165,672) 11,425 (1,067) (Gain) loss on disposal of owned property, and write-down of property, net 4,541 (11,363) 1,338 (Increase) decrease in receivables 19,562 (14,116) (5,615) (Increase) decrease in inventories 34,762 (6,090) (53,672) (Increase) decrease in prepaid expenses and other current assets 6,816 (2,630) 6,401 (Increase) decrease in other assets 2,071 (1,435) (26,753) Increase (decrease) in accounts payable 122,251 (24,542) 15,950 Increase (decrease) in accrued expenses 2,633 8,594 (2,657) Increase (decrease) in other accruals 43,604 4,250 (17,855) Increase (decrease) in non-current other liabilities 28,203 15,906 (4,051) Other, net (2,764) (1,050) 270 --------- --------- --------- Net cash provided by operating activities 487,086 276,227 216,069 --------- --------- --------- Cash Flows From Investing Activities: Expenditures for property (438,345) (267,623) (296,878) Proceeds from disposal of property 12,546 31,783 19,408 --------- --------- --------- Net cash used in investing activities (425,799) (235,840) (277,470) --------- --------- --------- Cash Flows From Financing Activities: Proceeds under revolving lines of credit 451,523 947,148 459,312 Payments on revolving lines of credit (411,632) (991,296) (439,591) Proceeds from long-term borrowings 3,685 304,213 41,978 Payment on long-term borrowings (22,456) (267,848) (6,155) Principal payments on capital leases (12,139) (13,711) (13,166) Increase (decrease) in book overdrafts 12,079 (28,145) 24,901 Deferred financing fees - (2,471) - Proceeds from stock options exercised 1,115 149 657 Cash dividends (15,312) (15,300) (7,644) --------- --------- ---------- Net cash provided by (used in) financing activities 6,863 (67,261) 60,292 --------- --------- --------- Effect of exchange rate changes on cash and short-term investments (2,277) (1,019) 167 --------- --------- --------- Net Increase (Decrease) in Cash and Short-term Investments 65,873 (27,893) (942) Cash and Short-term Investments at Beginning of Year 70,937 98,830 99,772 --------- --------- --------- Cash and Short-term Investments at End of Year $ 136,810 $ 70,937 $ 98,830 ========= ========= ========= See Notes to Consolidated Financial Statements. Page 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. The Company operates retail supermarkets in the United States and Canada. The U.S. operations are mainly in the Eastern part of the U.S. and certain parts of the Midwest. See the following footnotes for additional information on the Canadian Operations: Segment and Geographic Information, Food Basics Franchise Business, Income Taxes and Retirement Plans and Benefits. Revenue Recognition Retail revenue is recognized at point-of-sale while wholesale revenue is recognized when goods are shipped. Fiscal Year The Company's fiscal year ends on the last Saturday in February. Fiscal 1998 ended February 27, 1999, fiscal 1997 ended February 28, 1998 and fiscal 1996 ended February 22, 1997. Fiscal 1998 and fiscal 1996 were each comprised of 52 weeks while fiscal 1997 was comprised of 53 weeks. Common Stock The principal shareholder of the Company, Tengelmann Warenhandelsgesellschaft, owned 54.92% of the Company's common stock as of February 27, 1999. Cash and Short-term Investments Short-term investments that are highly liquid with an original maturity of three months or less are included in cash and short-term investments and are deemed to be cash equivalents. Inventories Store inventories are valued principally at the lower of cost or market with cost determined under the retail method. Warehouse and other inventories are valued primarily at the lower of cost or market with cost determined on a first-in, first-out basis. Inventories of certain acquired companies are valued using the last-in, first-out method, which was their practice prior to acquisition. Advertising Costs Advertising costs are expensed as incurred. The Company recorded advertising expense of $136 million for fiscal 1998 and $138 million for both fiscal years 1997 and 1996. Properties Depreciation and amortization are provided on the straight-line basis over the estimated useful lives of the assets. Buildings are depreciated based on lives varying from twenty to fifty years and equipment based on lives varying from three to ten years. Real property leased under capital leases is amortized over the lives of the respective leases or over their economic useful lives, whichever is less. During fiscal 1998 and 1997, the Company disposed of certain assets which resulted in a pretax gain of $2 million and $11 million, respectively. Pre-opening Costs The costs of opening new stores are expensed in the year incurred. Software Costs The Company capitalizes externally purchased software and amortizes it over three years. Amortization expense for fiscal 1998, fiscal 1997 and fiscal 1996 was $0.8 million, $0.4 million and $0.2 million, respectively. Effective February 29, 1998, the Company early adopted the provisions of the American Institute of Certified Public Accountants' Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Development or Obtained for Internal Use". SOP 98-1 requires the capitalization of certain internally generated software costs. Such software is amortized over three years and for fiscal 1998, the Company capitalized $1.4 million of such software costs and recorded amortization expense of $0.1 million. Earnings Per Share In the fourth quarter of fiscal 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires dual presentation of basic and diluted earnings per share ("EPS") on the face of the statements of consolidated operations and requires a reconciliation of the numerators and denominators of the basic and diluted EPS calculations. Basic EPS is computed by dividing net income by the weighted average shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if options to issue common stock were exercised and converted to common stock. The weighted average shares outstanding utilized in the basic EPS calculation were 38,273,859 for fiscal 1998, 38,249,832 for fiscal 1997 and 38,221,329 for fiscal 1996. The common stock equivalents that were added to the weighted average shares outstanding for purposes of diluted EPS were 19,926 for fiscal 1997 and 66,260 for fiscal 1996. The common stock equivalents for fiscal 1998 would have been 47,772; however, such shares were antidilutive and thus excluded from the diluted EPS calculation for fiscal 1998. Page 27 Excess of Cost over Net Assets Acquired The excess of cost over fair value of net assets acquired is amortized on a straight-line basis over forty years. The Company recorded amortization expense of $1.5 million for each of the three fiscal years in the period ended February 27, 1999. The accumulated amortization relating to goodwill amounted to $13.2 million and $11.7 million at February 27, 1999 and February 28, 1998, respectively. At each balance sheet date, Management reassesses the appropriateness of the goodwill balance based on forecasts of cash flows from operating results on an undiscounted basis. If the results of such comparison indicate that an impairment may exist, the Company will recognize a charge to operations at that time based upon the difference between the present value of the expected cash flows from future operating results (utilizing a discount rate equal to the Company's average cost of funds at that time) and the balance sheet value. The recoverability of goodwill is at risk to the extent the Company is unable to achieve its forecast assumptions regarding cash flows from operating results. At February 27, 1999, the Company estimates that the cash flows projected to be generated by the respective businesses on an undiscounted basis should be sufficient to recover the existing goodwill balance over its remaining life. Long-Lived Assets In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of, the Company reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Such review is based upon groups of assets and the undiscounted estimated future cash flows from such assets to determine if the carrying value of such assets are recoverable from their respective cash flows. The Company recorded impairment losses during the year ended February 27, 1999 (see "Store and Facilities Exit Costs" footnote). Income Taxes The Company provides deferred income taxes on temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Current Liabilities Certain accounts payable checks issued but not presented to banks frequently result in negative book balances for accounting purposes. Such amounts are classified as "Book overdrafts" in the accompanying balance sheets. The Company accrues for vested and non-vested vacation pay. Liabilities for compensated absences of $79 million at both February 27, 1999 and February 28, 1998 are included in the balance sheet caption "Accrued salaries, wages and benefits". Stock-Based Compensation Effective February 25, 1996, the Company adopted SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). In conjunction with the adoption, the Company will continue to apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" with pro forma disclosure of net income and earnings per share as if the fair value based method prescribed by SFAS 123 had been applied. Comprehensive Income Effective March 1, 1998 the Company adopted SFAS No. 130, "Reporting Comprehensive Income". This statement requires that all components of comprehensive income be reported prominently in the financial statements. Currently, the Company has other comprehensive income relating to foreign currency translation adjustment and minimum pension liability adjustment. Accumulated other comprehensive loss as of February 27, 1999 includes foreign currency translation of $64.8 million and an additional minimum pension liability adjustment of $4.3 million, net of income tax benefit of $3.4 million. The accumulated other comprehensive loss as of February 28, 1998 includes foreign currency translation of $54.8 million and an additional minimum pension liability adjustment of $6.2 million. For fiscal 1997, the additional minimum pension liability adjustment related to the Canadian operations and thus no tax benefit was recorded due to the Canadian deferred tax assets being fully reserved by a valuation allowance. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date Page 28 of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accompanying balance sheets include liabilities with respect to self- insured workers' compensation and general liability claims. The Company determines the required liability of such claims based upon various assumptions which include, but are not limited to, the Company's historical loss experience, industry loss standards, projected loss development factors, projected payroll, employee headcount and other internal data. It is reasonably possible that the final resolution of some of these claims may require significant expenditures by the Company in excess of its existing reserves, over an extended period of time and in a range of amounts that cannot be reasonably estimated. Reclassifications Certain reclassifications have been made to the prior years' financial statements in order to conform to the current year's presentation. New Accounting Pronouncements Not Yet Adopted In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires that all derivative instruments be measured at fair value and recognized in the statement of financial position 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 statement of operations. Currently the Company has one derivative instrument in the form of a cross-currency swap. The Company will adopt SFAS 133 in the second quarter of fiscal 1999. The cross-currency swap will impact the Company's statement of operations and balance sheet to the extent that there is a change in the fair value of the derivative instrument. STORE AND FACILITIES EXIT COSTS In May 1998, the Company named a sole Chief Executive Officer of the Company. Following such announcement, the Company initiated a vigorous assessment of all aspects of its business operations in order to identify the factors that were impacting the performance of the Company. As a result of the above assessment, in the third quarter of fiscal 1998, the Company decided to exit two warehouse facilities, a coffee plant and a bakery plant in Canada. In connection with the exit plan, the Company recorded a charge of approximately $11 million which is included in "Store operating, general and administrative expense" in the accompanying Statement of Operations. The $11 million charge was comprised of $7 million of severance, $3 million of facilities occupancy costs for the period subsequent to closure and $1 million to write-down the facilities to their estimated fair value. The Company has paid $3 million of the severance cost as of February 27, 1999, and expects the remainder to be paid by the end of fiscal 1999. As of February 27, 1999, the Company has incurred $0.3 million of occupancy costs. At February 27, 1999, the Company had closed and terminated operations with respect to the warehouses and the coffee plant. The volume associated with the two warehouses has been transferred to other warehouses in close geographic proximity. Further, the manufacturing processes of the coffee plant have been transferred to the Company's remaining coffee processing facility. The processing associated with the Canadian bakery has been outsourced effective January 1999. In addition, on December 8, 1998, the Company's Board of Directors approved a plan which included the exit of 127 underperforming stores throughout the United States and Canada and the disposal of two other properties. Included in the 127 stores are 31 stores representing the entire Richmond, Virginia market. Further on January 28, 1999, the Board of Directors approved the closure of five additional underperforming stores. In connection with the Company's plan to exit these 132 stores and the write- down of two properties, the Company recorded a fourth quarter charge of approximately $215 million. This $215 million charge was comprised of $8 million of severance, $1 million of facilities occupancy costs, $114 million of store occupancy costs, which principally relates to the present value of future lease obligations, net of anticipated sublease recoveries, which extend through fiscal 2028, an $83 million write-down of store fixed assets and a $9 million write-down to estimated fair value of the two properties which are held for sale. To the extent fixed assets included in those stores identified for closure could be utilized in other continuing store locations, the Company has or will transfer such assets to Page 29 those continuing stores. To the extent such fixed assets cannot be transferred, the Company will scrap such fixed assets and accordingly, the write-down was calculated utilizing an estimated scrap value. This fourth quarter charge of $215 million was reduced by approximately $2 million due to changes in estimates of pension withdrawal liabilities and fixed asset write- downs from the time the original charge was recorded. The net charge of $213 million is included in "Store operating, general and administrative expense" in the accompanying Statement of Operations. The Company has paid $1 million of the severance costs as of February 27, 1999 and expects the remainder to be paid by May 2000. In addition, the Company also paid $1 million of store occupancy costs since the date of closure of the 66 stores closed as of February 27, 1999. The total severance charge of approximately $15 million resulted from the termination of 1,273 employees. The following tabular reconciliation summarizes the activity related to the aforementioned third quarter charges of $11 million and the fourth quarter charges of $215 million. Reserve Balance at Original Utiliz- Addition Adjustment Feb. 27, Dollars in thousands Charge ation (1) (2) 1999 - -------------------- -------- ------- -------- ---------- --------- Store Occupancy $113,732 $ (1,100) $1,900 $ - $114,532 Fixed Assets 93,355 (92,639) - (716) - Severance and benefits 15,102 (3,794) - (1,242) 10,066 Facilities occupancy 4,018 (311) - 331 4,038 -------- -------- ------ ------- -------- Total $226,207 $(97,844) $1,900 $(1,627) $128,636 ======== ======== ====== ======= ======== (1) The addition represents an increase to the store occupancy reserve for the present value interest accrued. (2) The adjustment represents changes in estimates from the original date the respective charges were recorded. The adjustment to severance and benefits relates to a change in the estimate of the calculated pension withdrawal liability. As of February 27, 1999, the Company has closed 66 of the 132 stores identified, including all 31 stores in the Richmond, Virginia market. The remaining 66 stores will be closed over the next three quarters of fiscal 1999. At February 27, 1999, $45.4 million of the reserve is included in "Other accruals" and $83.2 million is included in "Other non-current liabilities" in the accompanying consolidated balance sheet. Based upon current available information, Management evaluated the reserve balance as of February 27, 1999 and has concluded that it is adequate. Included in the accompanying statement of operations are the operating results of the 132 underperforming stores which the Company is exiting. The operating results of such stores are as follows: Fiscal Fiscal Fiscal (Dollars in thousands) 1998 1997 1996 - ---------------------- -------- -------- ---------- Sales $788,014 $928,671 $1,000,364 ======== ======== ========== Operating Loss $(57,462) $(34,448) $ (14,543) ======== ======== ========== INVENTORY Approximately 18% and 20% of the Company's inventories are valued using the last-in, first-out ("LIFO") method at February 27, 1999 and February 28, 1998, respectively. Such inventories would have been $19 million and $14 million higher at February 27, 1999 and February 28, 1998, respectively, if the retail and first-in, first-out methods were used. The Company recorded LIFO charges of approximately $1 million during both fiscal years 1998 and 1996. During fiscal year 1997, the Company recorded a LIFO credit of $0.4 million. Liquidation of LIFO layers in the periods reported did not have a significant effect on the results of operations. FOOD BASICS FRANCHISE BUSINESS The Company serviced 55 Food Basics franchised stores as of February 27, 1999 and 52 stores as of February 28, 1998. These franchised stores are required to purchase inventory exclusively from the Company which acts as a wholesaler to the franchisees. During fiscal 1998 and 1997, the Company had wholesale sales to these franchised stores of $387 million and $340 million, respectively. A majority of the Food Basics franchised stores were converted from Company operated supermarkets. The Company subleases the stores and leases the equipment in the stores to the franchisees. The Company also provides merchandising, advertising, accounting and other consultative services to the franchisees for which it receives a nominal fee which mainly represents the reimbursements of costs incurred to provide such services (see "Lease Obligations" footnote). Included in other assets are Food Basics franchised business receivables, net of allowance for doubtful accounts, amounting to $36.4 million as of February 27, 1999 and $37.6 million as of February 28, 1998. The inventory notes are collateralized by the inventory in the stores, while the equipment lease receivables are collateralized by the equipment in the stores. The current portion of the inventory and equipment leases of approximately $2.1 million as of February 27, 1999 and $1.9 million as of February 28, 1998 are included in accounts receivable. The repayment of the inventory notes and equipment leases are dependent on positive operating results of the stores. To the extent that the franchisees incur operating losses, the Company establishes an allowance for doubtful accounts. The Company continually assesses the sufficiency of the allowance on a store Page 30 by store basis based upon the operating losses incurred and the related collateral underlying the amounts due from the franchisees. In the event of default by a franchisee, the Company reserves the option to reacquire the inventory and equipment at the store and operate the franchise as a corporate owned store. Included below are the amounts due to the Company for the next five years and thereafter from the franchised stores for equipment leases and inventory notes. - -------------------------------------------------------------- (Dollars in thousands) - -------------------------------------------------------------- 1999 $ 6,031 2000 6,542 2001 6,542 2002 6,542 2003 6,542 2004 and thereafter 20,331 -------- 52,530 Less interest portion (13,995) -------- Due from Food Basics franchise business $ 38,535 ======== For the fiscal years ended February 27, 1999 and February 28, 1998, approximately $8 million and $2 million, respectively, of the franchise business notes relate to equipment leases which were non-cash transactions and, accordingly, have been excluded from the consolidated statements of cash flows. INDEBTEDNESS Debt consists of: February 27, February 28, (Dollars in thousands) 1999 1998 - --------------------- ----------- ----------- 7.75% Notes, due April 15, 2007 $300,000 $300,000 7.70% Senior Notes, due January 15, 2004 200,000 200,000 7.78% Notes, due November 1, 2000 75,000 75,000 Mortgages and Other Notes, due 1999 through 2002 (average interest rates at year end of 5.81% and 6.70%, respectively) 7,417 11,972 U.S. Bank Borrowings at 5.49% and 5.86%, respectively 153,100 127,500 Less unamortized discount on 7.75% Notes (2,171) (2,356) -------- -------- 733,346 712,116 Less current portion (4,956) (16,824) -------- -------- Long-term debt $728,390 $695,292 ======== ======== On June 10, 1997, the Company executed an unsecured five year $465 million U.S. credit agreement and a five year C$50 million Canadian credit agreement (the "1997 Credit Agreement") with a syndicate of banks, enabling it to borrow funds on a revolving basis sufficient to refinance short-term borrowings. The Company pays a facility fee of 0.25% per annum on the total commitment of the U.S. and Canadian revolving credit facilities. Borrowings under the U.S. revolving credit agreement were $130 million and $90 million at February 27, 1999 and February 28, 1998, respectively. The Canadian subsidiary had no outstanding borrowings at February 27, 1999 and February 28, 1998. As of February 27, 1999, the Company had available $335 million under its U.S. credit agreement and C$50 million (U.S. $33 million at February 27, 1999) under the Canadian credit agreement. As of February 28, 1998, the Company had available $375 million under its U.S. credit agreement and C$50 million (U.S. $35 million at February 28, 1998) under the Canadian credit agreement. In addition, the U.S. has uncommitted lines of credit with various banks amounting to $211 million and $149 million as of February 27, 1999 and February 28, 1998, respectively. Borrowings under these uncommitted lines of credit amounted to $23 million and $38 million as of February 27, 1999 and February 28, 1998, respectively. As of February 27, 1999, the Company had $368 million available under the 1997 Credit Agreement and $188 million in uncommitted lines of credit As of February 27, 1999, the Company had outstanding a total of $575 million of unsecured, non-callable public debt securities in the form of $75 million 7.78% Notes due November 1, 2000, $200 million 7.70% Notes due January 15, 2004 and $300 million 7.75% Notes due April 15, 2007. On April 15, 1997, the Company issued $300 million 7.75% 10 year Notes due April 15, 2007. The Company used the net proceeds to reduce bank borrowings under the U.S. and Canadian revolving credit facilities, prepay other indebtedness and for general corporate purposes. The Company borrowed funds available under the U.S. credit facility to repay at maturity indebtedness owing in respect of the Company's 9 1/8% Notes due January 15, 1998. The Company's Canadian subsidiary, The Great Atlantic & Pacific Company of Canada, Ltd. ("A&P Canada"), has outstanding U.S. $75 million 5 year Notes denominated in U.S. dollars that were issued in October 1995 and are due on November 1, 2000. In conjunction with the issuance of the notes, A&P Canada entered into a five year cross-currency swap agreement expiring November 1, 2000. The cross-currency swap was executed for protection against the effect of a decrease in Canadian exchange rates on both the semi-annual interest payments and the final principal payment due to the Company's U.S. bondholders. The cross-currency swap enables the Company to pay in Canadian dollars a fixed Page 31 rate of interest of 9.23% on a notional amount of C$100 million for the $75 million 7.78% Notes denominated in U.S. dollars. The cost of the cross- currency swap of 1.45% is charged to interest expense. The Company records an asset or liability to the extent that an eventual transaction gain or loss is expected to be recorded upon the settlement of the notional amount of the underlying debt. Accordingly, the Company has recorded in other assets the receivable due from the counterparty amounting to approximately $8.4 million and $4.5 million as of February 27, 1999 and February 28, 1998, respectively. The fair value of the cross-currency swap was favorable to the Company by $6.9 million as of February 27, 1999 and favorable to the Company by $1 million as of February 28, 1998. The Company is exposed to credit losses in the event of nonperformance by the counterparty to its currency swap. However, the Company anticipates that the counterparty will be able to fully satisfy its obligations under the contracts. On April 15, 1997, A&P Canada entered into an interest rate swap agreement with a notional amount of C$100 million expiring November 1, 2000 where the Company receives a fixed rate of interest and pays a variable rate of interest. In August of 1998, A&P Canada assigned the interest rate swap agreement to a financial institution and received consideration of $0.6 million. The consideration received is amortized as a reduction to interest expense until November 1, 2000. The fair value of the interest rate swap was favorable to the Company by $1.4 million as of February 28, 1998. The Company's loan agreements and certain of its notes contain various financial covenants which require, among other things, minimum net worth and maximum levels of indebtedness and lease commitments. As a result of the store exit charge recorded on December 8, 1998 (see "Store and Facilities Exit Costs" in the accompanying financial statements), the Company would not have been in compliance with certain of its covenants as of February 27, 1999, relating to the 1997 Credit Agreement. The Company amended the 1997 Credit Agreement prior to February 27, 1999. Accordingly, the Company was in compliance with all such financial covenants, as amended, as of February 27, 1999 and believes that it will continue to be in compliance. The net book value of real estate pledged as collateral for all mortgage loans amounted to approximately $9 million and $14 million as of February 27, 1999 and February 28, 1998, respectively. In the second quarter of fiscal 1997, the Company recorded an extraordinary charge of $0.5 million, net of a tax benefit of $0.4 million relating to the early extinguishment of debt which amounted to $.01 per share - basic and diluted. The Company retired at a premium approximately $20 million in mortgages with a weighted average interest rate of 9.4%. The U.S. bank borrowings of $153 million and $118 million are classified as non-current as of February 27, 1999 and February 28, 1998, respectively, as the Company has the ability and intent to refinance these borrowings on a long-term basis. Pursuant to a Shelf Registration Statement dated January 23, 1998, the Company may offer up to $500 million of debt and equity securities at terms determined by market conditions at the time of sale. Maturities for the next five fiscal years and thereafter are: 1999-$5 million; 2000-$77 million; 2001-$77 million; 2002-$77 million; 2003-$200 million; 2004 and thereafter - $300 million. Interest payments on indebtedness were approximately $56 million for fiscal 1998, $58 million for fiscal 1997 and $49 million for fiscal 1996. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows: (Dollars in thousands) February 27, 1999 February 28, 1998 - --------------------- ----------------- ----------------- Carrying Fair Carrying Fair Liabilities: Amount Value Amount Value -------- -------- -------- -------- 7.75% Notes, due April 15, 2007 $297,829 $287,384 $297,644 $299,531 -------- -------- -------- -------- 7.70% Senior Notes, due January 15, 2004 $200,000 $197,271 $200,000 $205,376 -------- -------- -------- -------- 7.78% Notes, due November 1, 2000 $ 75,000 $ 75,243 $ 75,000 $ 75,832 -------- -------- -------- -------- Total Indebtedness $733,346 $720,415 $712,116 $720,211 ======== ======== ======== ======== Fair value for the public debt securities is based on quoted market prices. With respect to all other indebtedness, Management has evaluated such debt instruments and has determined, based on interest rates and terms, that the fair value of such indebtedness approximates carrying value at both February 27, 1999 and February 28, 1998. As of February 27, 1999 and February 28, 1998, the carrying values of cash and short-term investments, accounts receivable and accounts payable approximated fair values due to the short-term maturities of these instruments. On April 15, 1997, the Company's Canadian subsidiary entered into an interest rate swap agreement with a notional amount of C$100 million where the Company receives a fixed rate of interest and pays a variable rate of interest. Page 32 At February 27, 1999 and February 28, 1998, the estimated fair values of the cross-currency swap and interest rate swap agreements were as follows: (Dollars in thousands) February 27, 1999 February 28, 1998 - --------------------- ----------------- ----------------- Carrying Fair Carrying Fair Liabilities: Amount Value Amount Value - ----------- -------- -------- -------- ------- Cross-currency swap $8,438 $6,927 $4,504 $ 1,077 Interest rate swap - - - 1,350 ------ ------- ------- -------- Total cross-currency/ interest rate swap $8,438 $6,927 $4,504 $ 2,427 ======= ======= ======= ======== The fair values were determined by the counterparty which is a widely recognized investment banker. As of the end of fiscal 1998, the Company holds equity securities of both common and cumulative preferred stock in Isosceles PLC which were written- off in their entirety during fiscal 1992. There are no quoted market prices for these securities and it is not practicable, considering the materiality of these securities to the Company, to obtain an estimate of their fair value. The Company believes that the fair value for these securities is zero based upon Isosceles' current and prior years' results. LEASE OBLIGATIONS The Company operates primarily in leased facilities. Lease terms generally range up to twenty-five years for store leases and thirty years for other leased facilities, with options to renew for additional periods. The majority of the leases contain escalation clauses relating to real estate tax increases and certain store leases provide for increases in rentals when sales exceed specified levels. In addition, the Company also leases some store equipment and trucks. The consolidated balance sheets include the following: February 27, February 28, (Dollars in thousands) 1999 1998 - --------------------- ----------- ----------- Real property leased under capital leases $ 210,094 $ 213,076 Accumulated amortization (121,066) (123,018) --------- --------- $ 89,028 $ 90,058 ========= ========= During fiscal 1998 and 1996, the Company entered into new capital leases totaling $12 and $22 million, respectively. The Company did not enter into any new capital leases during fiscal 1997. These capital lease amounts are non-cash transactions and, accordingly, have been excluded from the consolidated statement of cash flows. Interest paid as part of capital lease obligations was approximately $14, $16 and $17 million in fiscal 1998, 1997 and 1996, respectively. Rent expense for operating leases consists of: (Dollars in thousands) Fiscal 1998 Fiscal 1997 Fiscal 1996 - --------------------- ----------- ----------- ----------- Minimum rentals $193,703 $181,061 $162,752 Contingent rentals 3,987 5,109 5,383 -------- -------- -------- $197,690 $186,170 $168,135 ======== ======== ======== Future minimum annual lease payments for capital leases and noncancelable operating leases in effect at February 27, 1999 are shown in the table below. All amounts are exclusive of lease obligations and sublease rentals applicable to facilities for which reserves have previously been established. In addition, the Company subleases 55 stores to the Food Basics franchise business. Included in the operating lease table below are the rental payments made by the Company offset by the rental income received from the Food Basics franchised stores. (Dollars in thousands) Capital - --------------------- Leases Real Operating Fiscal Property Leases - ------ --------- ---------- 1999 $ 25,484 $ 190,989 2000 24,404 185,555 2001 23,440 179,255 2002 21,601 169,886 2003 19,176 159,727 2004 and thereafter 139,496 1,580,434 --------- ---------- 253,601 $2,465,846 Less executory costs (1,520) ========== --------- Net minimum rentals 252,081 Less interest portion (124,735) --------- Present value of net minimum rentals $ 127,346 ========= INCOME TAXES The components of (loss) income before income taxes and extraordinary item are as follows: (Dollars in thousands) Fiscal 1998 Fiscal 1997 Fiscal 1996 - --------------------- ----------- ----------- ----------- United States $(244,573) $45,644 $ 68,478 Canadian 15,289 37,256 32,113 --------- ------- -------- Total $(229,284) $82,900 $100,591 ========= ======== ======== The (benefit) provision for income taxes before extraordinary item consists of the following: (Dollars in thousands) Fiscal 1998 Fiscal 1997 Fiscal 1996 - --------------------- ----------- ----------- ---------- Current: Federal $ - $ 4,171 $ 24,228 Canadian 552 700 700 State and local 3,000 3,018 3,698 --------- -------- -------- 3,552 7,889 28,626 --------- -------- -------- Deferred: Federal (77,489) 11,076 (926) Canadian 6,806 16,624 14,329 State and local (25,786) 349 (141) Canadian valuation allowance (69,203) (16,624) (14,329) --------- -------- -------- (165,672) 11,425 (1,067) --------- -------- --------- $(162,120) $ 19,314 $ 27,559 ========= ======== ======== Page 33 The deferred income tax provision (benefit) results primarily from the annual change in temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws, Canadian net operating tax loss carryforwards and the Canadian valuation allowance. The Company recorded income tax benefits amounting to $162 million in fiscal 1998 as compared to income tax provisions of $19 million for fiscal 1997 and $28 million for fiscal 1996. The fiscal 1998 benefit of $162 million includes reversals of the Canadian operations deferred tax valuation allowance. During the first three quarters of fiscal 1998, the Company reversed approximately $9 million of the Canadian valuation allowance to the extent that the Canadian operations had taxable income. In addition, at the beginning of the fourth quarter of fiscal 1998, the Company concluded that it was more likely than not that the net deferred tax assets related to the Canadian operations would be realized and accordingly, the Company reversed the remaining portion of the Canadian deferred tax valuation allowance amounting to approximately $60 million. The deferred tax benefit recorded for U.S. operations of approximately $103 million mainly relates to book and tax differences of the store and facilities exit costs recorded in fiscal 1998. The fiscal 1997 and 1996 income tax provisions include reversals of the Canadian valuation allowance of $17 million and $14 million, respectively. These reversals were recorded to the extent that the Canadian operations had taxable income. However, Management had still concluded that it was more likely than not that the Canadian net deferred tax assets would not be realized and through the end of fiscal 1997, the Company provided a full valuation allowance for its Canadian net deferred tax assets, principally net operating loss carryforwards. During the first three quarters of fiscal 1998, the Company continued to fully reserve its Canadian net deferred tax assets. At the beginning of the fourth quarter of fiscal 1998, based upon Management's plan to close underperforming stores in Canada (see "Store and Facilities Exit Costs" footnote), the implementation of certain tax strategies and the continued performance improvements of the Canadian operations, Management has concluded that it is more likely than not that the Canadian deferred tax assets will be realized. As such, as of December 6, 1998, the Company reversed the remaining deferred tax asset valuation allowance amounting to approximately $60 million. The Company made an election to permanently reinvest earnings of the Canadian subsidiary. Accordingly, the Company does not provide for taxes associated with Canada's undistributed earnings. The Company's Canadian net operating tax loss carryforwards of approximately $102 million will expire between February 2001 and February 2003. A reconciliation of income taxes at the 35% federal statutory income tax rate for fiscal 1998, 1997 and 1996 to income taxes as reported is as follows: (Dollars in thousands) Fiscal 1998 Fiscal 1997 Fiscal 1996 - --------------------- ----------- ----------- ----------- Income taxes computed at federal statutory income tax rate $ (80,249) $ 29,015 $ 35,207 State and local income taxes, net of federal tax benefit (14,810) 2,188 2,312 Tax rate differential relating to Canadian operations 2,007 4,155 3,789 Canadian valuation allowance (69,203) (16,624) (14,329) Goodwill and other permanent differences 135 580 580 --------- -------- -------- Income taxes, as reported $(162,120) $ 19,314 $ 27,559 ========= ======== ======== Income tax payments, net of refunds, for fiscal 1998 and 1996 were approximately $2 and $13 million, respectively. For fiscal 1997, the Company had net income tax refunds of $1 million. The components of net deferred tax assets (liabilities) are as follows: February 27, February 28, (Dollars in thousands) 1999 1998 - --------------------- ------------ ------------ Current assets: Insurance reserves $ 20,158 $ 22,420 Other reserves and accrued benefits 12,146 5,031 Accrued postretirement and postemployment benefits 2,717 3,038 Lease obligations 1,472 1,619 Pension obligations 4,486 3,827 Miscellaneous 4,055 2,870 --------- --------- 45,034 38,805 --------- --------- Current Liabilities: Inventories (14,697) (14,819) Health and welfare (9,167) (9,960) Miscellaneous (6,519) (7,083) --------- --------- (30,383) (31,862) --------- --------- Valuation allowance - (3,005) --------- --------- Deferred income taxes included in prepaid expenses and other current assets $ 14,651 $ 3,938 ========= ========= Page 34 February 27, February 28, (Dollars in thousands) 1999 1998 - --------------------- ------------ ------------ Non-current assets: Isosceles investment $ 42,617 $ 42,617 Alternative minimum tax 7,500 - Fixed assets 3,449 4,077 Other reserves 93,470 6,177 Lease obligations 15,787 17,354 Canadian loss carryforwards 45,500 60,270 Insurance reserves 5,881 4,200 Accrued postretirement and postemployment benefits 35,387 29,808 Pension obligations 7,527 6,800 Step rents 13,619 11,352 Miscellaneous 5,308 . 7,759 --------- --------- 276,045 190,414 --------- --------- Non-current liabilities: Fixed assets (215,977) (212,044) Pension obligations (21,136) (22,981) Miscellaneous (2,590) (2,404) --------- --------- (239,703) (237,429) --------- --------- Valuation allowance - (73,603) --------- --------- Net non-current deferred income tax asset (liability) $ 36,342 $(120,618) ========= ========= The net non-current deferred tax asset and liability is recorded in the consolidated balance sheet as follows: February 27, February 28, (Dollars in thousands) 1999 1998 - --------------------- ------------ ------------ Other assets $ 59,651 - Non-current liability (23,309) $(120,618) --------- --------- Net non-current deferred income tax asset(liability) $ 36,342 $(120,618) ========== ========= RETIREMENT PLANS AND BENEFITS Defined Benefit Plans The Company provides retirement benefits to certain non-union and some union employees under various defined benefit plans. The Company's defined benefit pension plans are non-contributory and benefits under these plans are generally determined based upon years of service and, for salaried employees, compensation. The Company funds these plans in amounts consistent with the statutory funding requirements. During fiscal 1998, the Company adopted SFAS No. 132, "Employers' Disclosure about Pension and Postretirement Benefits" ("SFAS 132"). SFAS 132 standardizes the disclosure requirements for pension and other postretirement benefits. This Statement addresses disclosure only. It does not address expense recognition or liability measurement. Accordingly, there was no effect on financial position or net income as a result of adopting SFAS 132. The components of net pension cost are as follows: The components of net pension cost are as follows: (Dollars in thousands) Fiscal 1998 Fiscal 1997 Fiscal 1996 - --------------------- ----------- ----------- ----------- Service cost $ 14,014 $ 11,942 $ 10,826 Interest cost 25,872 26,192 24,798 Expected return on plan assets (32,040) (31,279) (29,640) Amortization of unrecognized net asset (1,184) (1,244) (1,266) Amortization of unrecognized net prior service cost 1,237 1,158 1,105 Amortization of unrecognized net actuarial loss 506 380 134 Curtailments and settlements 863 - - -------- -------- -------- Net pension cost $ 9,268 $ 7,149 $ 5,957 ======== ======== ======== The Company's defined benefit pension plans are accounted for on a calendar year basis. The majority of plan assets is invested in listed stocks and bonds. The following tables set forth the change in benefit obligations and change in plan assets at year-end 1998 and 1997 for the Company's defined benefit plans: (Dollars in thousands) - ---------------------- Change in Benefit Obligation 1998 1997 - ---------------------------- -------- -------- Benefit obligation - beginning of year $403,970 $355,731 Service cost 14,014 11,942 Interest cost 25,872 26,192 Actuarial loss 18,991 37,839 Benefits paid (24,948) (19,260) Amendments 167 1,001 Curtailment and settlements 460 - Effect of exchange rates (15,370) (9,475) -------- -------- Benefit obligation - end of year $423,156 $403,970 ======== ======== Change in Plan Assets - --------------------- Plan assets at fair value - beginning of year $444,408 $401,503 Actual return on plan assets 46,412 64,141 Company contributions 10,019 10,710 Benefits paid (24,948) (19,260) Effect of exchange rates (17,356) (12,686) -------- -------- Plan assets at fair value- end of year $458,535 $444,408 ======== ======== Amounts recognized in the Company's balance sheet consist of the following: - ------------------------------------------- Plan assets in excess of projected benefit obligation $ 35,506 $ 40,505 Unrecognized net transition asset (4,078) (5,482) Unrecognized prior service cost 5,408 6,442 Unrecognized net actuarial gain (8,105) (10,758) -------- -------- Total recognized in the consolidated balance sheet $ 28,731 $ 30,707 ======== ======== Prepaid benefit cost $ 51,480 $ 50,779 Accrued benefit liability (33,198) (29,056) Intangible asset 2,734 2,774 Other comprehensive income 4,288 6,210 Tax benefit 3,427 - -------- -------- Total recognized in the consolidated balance sheet $ 28,731 $ 30,707 ======== ======== Plans with accumulated benefit obligation in excess of plan assets consist of the following: - ------------------------------- Accumulated benefit obligation $111,738 $102,619 Projected benefit obligation $116,800 $107,637 Plan asset at fair value $ 85,199 $ 81,870 -------- -------- Page 35 The prepaid pension asset is included in other assets while the pension liability is included in accrued salaries, wages and benefits and other non- current liabilities. At February 27, 1999 and February 28, 1998, the Company's additional minimum pension liability for its defined benefit plans was in excess of the unrecognized prior service costs and net transition obligation and accordingly, $4.3 million, net of income tax benefit and $6.2 million was reflected as a reduction to shareholders' equity, respectively. The fiscal 1997 amount was not tax effected as it related to the Canadian subsidiary which has its deferred tax assets fully reserved by a valuation allowance. During the year ended February 25, 1995, the Company's Canadian subsidiary and the United Food & Commercial Workers International Union, Locals 175 and 633, entered into an agreement which will result in the amalgamation of three of the Company's Canadian defined benefit pension plans with the Canadian Commercial Workers Industry Pension Plan ("CCWIPP"), retroactive to July 1, 1994, subject to the approval of the CCWIPP trustees and the appropriate regulatory bodies. Under the terms of this agreement, CCWIPP will assume the assets and defined benefit liabilities of the three pension plans and the Company will be required to make defined contributions to CCWIPP based upon hours worked by employees who are members of CCWIPP. The Company expects that the necessary approvals will be received by July 1999. The transfer to CCWIPP has been delayed for the past four years as the regulatory bodies have taken longer to review the transfer than originally anticipated. The Company will not change the reporting for these three plans until such approval is received. Accordingly, at February 27, 1999 and February 28, 1998, prepaid pension assets of approximately $16 million and $11 million, respectively, related to the aforementioned plans are included in the table herein. Actuarial assumptions used to determine year-end plan status are as follows: 1998 1997 ----------------- --------------- U.S. Canada U.S. Canada ----- ------ ----- ------ Weighted average discount rate 6.50% 6.25% 7.00% 6.75% Weighted average rate of compensation increase 4.00% 4.00% 4.00% 4.00% Expected long-term rate of return on plan assets 8.00% 8.40% 8.00% 8.40% The impact of the changes in the actuarial assumptions has been reflected in the funded status of the pension plans and the Company believes that such changes will not have a material effect on net pension cost for fiscal 1999. Defined Contribution Plans The Company maintains a defined contribution retirement plan to which the Company contributes an amount equal to 4% of eligible participants' salaries and a savings plan to which eligible participants may contribute a percentage of eligible salary. The Company contributes to the savings plan based on specified percentages of the participants' eligible contributions. Participants become fully vested in the Company's contributions after 5 years of service. The Company's contributions charged to operations for both plans were approximately $11 million in fiscal 1998, fiscal 1997 and fiscal 1996. Multi-employer Union Pension Plans The Company participates in various multi-employer union pension plans which are administered jointly by management and union representatives and which sponsor most full-time and certain part-time union employees who are not covered by the Company's other pension plans. The pension expense for these plans approximated $34 million in fiscal 1998 and $38 million in both fiscal 1997 and 1996. The Company could, under certain circumstances, be liable for unfunded vested benefits or other expenses of jointly administered union/management plans. At this time, the Company has not established any liabilities because such withdrawal from these plans is not probable. Postretirement Benefits The Company provides postretirement health care and life benefits to certain union and non-union employees. The Company recognizes the cost of providing postretirement benefits during employees' active service period. The components of net postretirement benefits cost are as follows: (Dollars in thousands) Fiscal 1998 Fiscal 1997 Fiscal 1996 --------------------- ----------- ----------- ----------- Service cost $1,666 $ 788 $ 794 Interest cost 3,464 2,518 2,394 Prior service cost (263) - - Amortization of (gain) loss 27 (1,056) (1,100) ------ -------- ------- Net postretirement benefits cost $4,894 $ 2,250 $ 2,088 ====== ======= ======= Page 36 The unfunded status of the plans is as follows: (Dollars in thousands) Fiscal 1998 Fiscal 1997 - ---------------------- ----------- ----------- Unfunded accumulated benefit obligation, beginning of year: $ 48,980 $34,931 Service cost 1,666 788 Interest cost 3,464 2,518 Benefits paid (2,790) (2,406) Actuarial (gain) loss 1,837 13,449 Plan amendment (16,162) - Foreign exchange (305) (300) -------- ------- Accumulated benefit obligation, at end of year 36,690 48,980 Unrecognized net gain from experience differences 221 1,976 Unrecognized prior service cost 15,899 - -------- ------- Accrued postretirement benefit costs at end of year $ 52,810 $50,956 ======== ======= Assumed discount rate 6.5% 7.0% ======== ======= The assumed rate of future increase in health care benefit cost for fiscal 1998 was 9.5% and is expected to decline to 5.0% by the year 2020 and remain at that level thereafter. The effect of a 1% change in the assumed health care cost trend rate for each future year on the net postretirement health care cost would either increase or decrease by $0.3 million, while the accumulated postretirement benefit obligation would either increase by $3.0 million or decrease by $2.5 million. Postemployment Benefits The Company accrues costs for preretirement postemployment benefits provided to former or inactive employees and recognizes an obligation for these benefits. The costs of these benefits have been included in operations for each of the three fiscal years in the period ended February 27, 1999. As of February 27, 1999 and February 28, 1998, the Company has a liability reflected in the balance sheet of $24 million and $25 million, respectively, with respect to such benefits. STOCK OPTIONS Effective February 25, 1996, the Company adopted SFAS 123 which establishes financial accounting and reporting standards for stock-based employee compensation plans. SFAS 123 encourages all entities to adopt a fair value based method of accounting for stock-based compensation plans in which compensation cost is measured at the date the award is granted based on the fair value of the award and is recognized over the employees' service period. However, SFAS 123 allows an entity to continue to use the intrinsic value- based method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), with pro forma disclosures of net income and earnings per share as if the fair value based method had been applied. APB 25 requires compensation expense to be recognized over the employees' service period based on the excess, if any, of the quoted market price of the stock at the date the award is granted or other measurement date, as applicable, over an amount an employee must pay to acquire the stock. On January 19, 1999, the Board of Directors approved the 1998 Long Term Incentive and Share Award Plan (the "1998 Plan") for its officers and key employees, subject to shareholder approval at the Company's Annual Meeting in July 1999. The Company has obtained an irrevocable proxy voting in favor of the 1998 Plan from the major shareholder who owns in excess of 54% of the Company's common stock. The 1998 Plan provides for the granting of 5,000,000 shares as either options, stock appreciation rights ("SAR") or stock awards. At February 27, 1999, the Company has four fixed stock-based compensation plans. The Company applies the principles of APB 25 for stock options and FASB Interpretation No. 28 for SAR. Most of the options and SAR vest over a four year period on the anniversary date of issuance, while some options vest immediately. The Company's 1994 Stock Option Plan (the "1994 Plan") for officers and key employees provided for the granting of 1,500,000 shares as either options or SAR. The 1,500,000 shares to be granted under the 1994 Plan were fully utilized as of February 26, 1999. The 1984 Stock Option Plan for officers and key employees, which expired on February 1, 1994, provided for the granting of 1,500,000 shares and was amended as of July 10, 1990 to increase by 1,500,000 the number of options available for grant as either options or SAR. Options and SAR issued under all of the Company's plans are granted at the fair market value of the Company's common stock at the date of grant. SAR allows the holder, in lieu of purchasing stock, to receive cash in an amount equal to the excess of the fair market value of common stock on the date of exercise over the option price. In fiscal 1998, 473,000 options were granted under the 1994 Plan and 423,000 options were Page 37 granted under the 1998 Plan. There were no SAR granted during fiscal 1998. The 1994 Stock Option Plan for Board of Directors provides for the granting of 100,000 stock options at the fair market value of the Company's common stock at the date of grant. Options granted under this plan totaled 1,600 in both fiscal 1998 and 1997 and 5,200 in fiscal 1996. The fair value of the fiscal 1998, 1997 and 1996 option grants was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: fiscal 1998, 1997 and 1996; expected volatility of 30% and expected life of 7 years for all three years. The dividend yield was between 1.23% and 1.63% in both fiscal 1998 and 1997 and 0.72% and 0.91% in fiscal 1996. The risk-free interest rates used for the grants are between 5.14% and 5.63% in fiscal 1998, 6.11% and 6.84% in fiscal 1997 and 5.57% and 6.94% in fiscal 1996. The Company recognized compensation expense of $0.6 million in fiscal 1998, $1.4 million in fiscal 1997 and $5.8 million in fiscal 1996 with respect to SAR. There was no compensation expense recognized for the other fixed plans since the exercise price of the stock options equaled the fair market value of the Company's common stock on the date of grant. Had compensation cost for the Company's stock options been determined based on the fair value at the grant dates for awards under those plans consistent with the fair value methods prescribed by SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: (Dollars in thousands, except per share amounts) - ------------------------------------------------ Fiscal Fiscal Fiscal 1998 1997 1996 ------ ------ ------ Net (loss) income: As reported $(67,164) $63,042 $73,032 Pro forma $(68,987) $61,584 $71,920 Net (loss) income per share - basic and diluted: As reported $ (1.75) $1.65 $1.91 Pro forma $ (1.80) $1.61 $1.88 The pro forma effect on net income and earnings per share may not be representative of the pro forma effect in future years because it includes compensation cost on a straight-line basis over the vesting periods of the grants and does not take into consideration the pro forma compensation costs for grants made prior to fiscal 1995. A summary of option transactions is as follows: Officers, Key Employees and Directors - ------------------------------------- Weighted Average Exercise Shares Price ------ -------- Outstanding February 24, 1996 745,600 $27.38 Granted 70,200 27.72 Cancelled or expired (63,350) 26.13 Exercised (27,383) 23.85 ------- ------ Outstanding February 22, 1997 725,067 $27.66 Granted 329,100 28.06 Cancelled or expired (98,967) 27.76 Exercised (5,250) 27.88 -------- ------- Outstanding February 28, 1998 949,950 $27.78 Granted 897,600 31.32 Cancelled or expired (10,000) 27.88 Exercised (37,750) 27.88 --------- ------- Outstanding February 27, 1999 1,799,800 $29.55 ========= ======= Exercisable at: February 28, 1998 312,367 $27.60 February 27, 1999 499,399 $27.68 -------- ------- Weighted average fair value of options granted during the year ended: February 22, 1997 $11.94 February 28, 1998 $10.96 February 27, 1999 $11.72 ======= A summary of stock options outstanding and exercisable at February 27, 1999 is as follows: Options Outstanding Options Exercisable ---------------------------------- ---------------------- Weighted Number Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise at Contractual Exercise at Exercise Prices Feb. 27, 1999 Life Price Feb. 27, 1999 Price - --------------- ------------- ----------- -------- ------------- ------- $21.50-$26.13 101,200 7.7 years $24.61 38,700 $24.17 $26.50-$27.50 128,600 7.6 years $27.28 57,533 $27.22 $27.63-$27.75 121,200 7.4 years $27.73 42,450 $27.71 $27.88 461,000 6.3 years $27.88 336,000 $27.88 $30.25-$32.56 987,800 9.7 years $31.36 24,716 $31.52 --------- ------- 1,799,800 499,399 ========= ======= Page 38 A summary of SAR transactions is as follows: Officers and Key Employees - -------------------------- Price Range Shares Per Share ---------- --------------- Outstanding February 24, 1996 2,152,750 $21.50 - $65.13 Granted 86,500 27.25 - 31.63 Cancelled or expired (20,000) 27.38 - 56.13 Exercised (247,237) 21.50 - 34.75 --------- --------------- Outstanding February 22, 1997 1,972,013 $21.88 - $65.13 Granted 10,000 26.63 Cancelled or expired (136,750) 23.38 - 52.38 Exercised (187,275) 23.00 - 27.25 --------- --------------- Outstanding February 28, 1998 1,657,988 $21.88 - $65.13 Granted - - Cancelled or expired (388,625) 27.45 - 46.38 Exercised (89,644) 21.88 - 27.25 --------- --------------- Outstanding February 27, 1999 1,179,719 $21.88 - $65.13 ========= =============== Exercisable at: February 28, 1998 1,596,863 $21.88 - $65.13 February 27, 1999 1,138,969 $21.88 - $65.13 LITIGATION On August 28, 1998, Capital Graphics Advertising Agency, Inc. ("Capital Graphics") was awarded a verdict against the Company amounting to $4 million. This lawsuit is the result of the Company terminating a relationship with an Atlanta printer which the Company felt that it had a right to terminate. However, a jury awarded Capital Graphics damages, plus interest and litigation expenses totaling $4 million. During the second quarter of fiscal 1998, the Company recorded a $4 million charge included in store operating, general and administrative expense. The Company believes that it has several strong bases for the appellate court to set aside the jury's verdict and order a new trial. Accordingly, the Company will proceed with an appeal and defend against this claim vigorously. On May 14, 1998, a complaint was filed in the Federal District Court for the Western District of Wisconsin by fifteen individual plaintiffs on behalf of Kohl's Food Stores, Inc., a subsidiary of the Company. Shirley A. Lang et al. V. Kohl's Food Stores, Inc. and The Great Atlantic & Pacific Tea Company, Inc. Plaintiffs allege that they were discriminated against in the denial of opportunities for placement, training, promotions and compensation equal to those afforded male Kohl's employees who were placed in Kohl's produce departments. The produce clerk and produce manager positions allegedly pay more than the bakery and deli clerk and manager positions, but allegedly no greater skill is required to perform the produce positions. In addition to the alleged discriminatory acts in violation of the Civil Rights Act of 1964, ("Title VII"), the plaintiffs allege violation of the Federal Equal Pay Act. The plaintiffs seek lost wages, punitive damages and other benefits, costs and attorney's fees and other relief. The federal judge has permitted "opt in" notices to be sent to the alleged plaintiffs in the Equal Pay Act portion of the suit, and on March 17, 1999, certified a class with respect to the alleged wage differentials in the Title VII portion of the suit. The Company is vigorously defending the allegations made against it in the suit, and based upon current available information the Company believes that the ultimate liability, if any, will not have a material effect upon the Company's consolidated financial statements or liquidity. The Company is involved in various other claims, administrative agency proceedings and lawsuits arising out of the normal conduct of its business. Although the ultimate outcome of these legal proceedings cannot be predicted with certainty, the Management of the Company believes that the resulting liability, if any, will not have a material effect upon the Company's consolidated financial statements or liquidity. OPERATING SEGMENTS During the fourth quarter of fiscal 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). This statement establishes standards for reporting information about operating segments in annual financial statements and selected information in interim financial statements. It also establishes standards for related disclosures about products and services and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker is the Chief Executive Officer. Page 39 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 store franchising operation which includes serving as the exclusive wholesaler to such franchised stores. The accounting policies for the segments are the same as those described in the summary of significant accounting policies. The Company measures segment performance based upon operating profit. Information on segments are as follows: (Dollars in thousands) - --------------------- Fiscal 1998 - ----------- U.S. Canada Total Retail Retail Wholesale Company ---------- ---------- --------- ----------- Sales $8,276,493 $1,515,602 $387,263 $10,179,358 Depreciation and amortization 209,656 24,007 - 233,663 Operating (loss) income (186,558) 11,317 10,850 (164,391) Interest expense (58,389) (13,108) - (71,497) Interest income 876 2,686 3,042 6,604 Income (loss) before taxes (244,071) 895 13,892 (229,284) Total assets 2,582,040 504,926 54,775 3,141,741 Capital expenditures 376,688 61,657 - 438,345 Fiscal 1997 - ----------- U.S. Canada Total Retail Retail Wholesale Company ---------- ---------- --------- ----------- Sales $8,344,253 $1,577,742 $340,248 $10,262,243 Depreciation and amortization 209,521 24,715 - 234,236 Operating income 109,501 40,088 5,670 155,259 Interest expense (65,968) (14,184) - (80,152) Interest income 2,110 2,639 3,044 7,793 Income before taxes and extraordinary item 45,643 28,543 8,714 82,900 Total assets 2,521,008 417,064 57,181 2,995,253 Capital expenditures 243,442 24,181 - 267,623 Fiscal 1996 - ----------- U.S. Canada Total Retail Retail Wholesale Company ---------- ---------- --------- ----------- Sales $8,281,925 $1,601,958 $205,131 $10,089,014 Depreciation and amortization 205,528 25,220 - 230,748 Operating (loss) income 122,159 49,457 (2,313) 169,303 Interest expense (54,257) (18,951) - (73,208) Interest income 576 1,786 2,134 4,496 Income before taxes 68,478 32,292 (179) 100,591 Total assets 2,549,500 393,495 59,677 3,002,672 Capital expenditures 250,796 46,082 - 296,878 Geographic Areas Fiscal 1998 Total - ----------- United States Canada Company ------------- ---------- ----------- Sales $8,276,493 $1,902,865 $10,179,358 Long-lived assets 1,528,249 204,687 1,732,936 Fiscal 1997 Total - ----------- United States Canada Company ------------- ---------- ----------- Sales $8,344,253 $1,917,990 $10,262,243 Long-lived assets 1,469,641 175,174 1,644,815 Fiscal 1996 Total - ----------- United States Canada Company ------------- ---------- ----------- Sales $8,281,925 $1,807,089 $10,089,014 Long-lived assets 1,456,270 183,143 1,639,413 SUBSEQUENT EVENT On April 26, 1999, the Company announced that it had reached definitive agreements to sell 14 stores in the Atlanta market, two of which were previously included in the Company's store exit program (see "Store and Facilities Exit Costs" footnote). 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, the Company expects to record a fiscal 1999 first quarter pre-tax charge, net of proceeds from asset sales, in the range of $15 million to $20 million. This charge will include fixed and intangible asset write-offs, severance and lease commitments, and will be recorded as "store operating, general and administrative expense". Page 40 SUMMARY OF QUARTERLY RESULTS (unaudited) The table below summarizes the Company's results of operations by quarter for fiscal 1998 and 1997. The first quarter of each fiscal year contains sixteen weeks, while the other quarters each contain twelve weeks, except the fourth quarter of fiscal 1997 which contains thirteen weeks resulting from a 53 week year. (Dollars in thousands, First Second Third Fourth Total except per share data) Quarter Quarter Quarter Quarter Year - ---------------------- ------- ------- ------- ------- ------ 1998 Sales $3,078,386 $2,330,249 $2,344,400 $2,426,323 $10,179,358 Gross margin 886,313 673,278 679,714 679,943 2,919,248 Depreciation and amortization 72,194 54,167 55,081 52,221 233,663 Income (loss) from operations 44,231 28,653 (1,749) (235,526) (164,391) Interest expense (21,032) (15,781) (16,212) (18,472) (71,497) Net income (loss) 19,169 10,951 (8,734) (88,550) (67,164) Per share data: Net income (loss) - basic and diluted .50 .29 (.23) (2.31) (1.75) Cash dividends .10 .10 .10 .10 .40 Market price: High 34.25 33.63 27.63 34.00 Low 29.63 23.56 22.13 25.43 Number of stores at end of period 919 913 907 839 Number of franchised stores served at end of period 53 53 55 55 - --------------------------------------------------------------------------- (Dollars in thousands, First Second Third Fourth Total except per share data) Quarter Quarter Quarter Quarter Year - ---------------------- ------- ------- ------- ------- ------ 1997 Sales $3,104,591 $2,335,695 $2,318,821 $2,503,136 $10,262,243 Gross margin 884,216 673,467 663,727 713,468 2,934,878 Depreciation and amortization 71,439 53,963 53,763 55,071 234,236 Income from operations 53,006 38,640 30,753 32,860 155,259 Interest expense 24,418 18,928 18,670 18,136 80,152 Income before extraordinary item 22,787 16,207 11,234 13,358 63,586 Extraordinary loss on early extinguishment of debt - (544) - - (544) Net income 22,787 15,663 11,234 13,358 63,042 Per share data: Income (loss) per share before extraordinary item - basic and diluted .60 .42 .29 .35 1.66 Extraordinary loss on early extinguishment of debt - basic and diluted - (.01) - - (.01) Net income - basic and diluted .60 .41 .29 .35 1.65 Cash dividends .10 .10 .10 .10 .40 Market price: High 31.375 27.875 36.000 32.750 Low 23.125 24.125 25.313 26.750 Number of stores at end of period 964 943 941 936 Number of franchised stores served at end of period 48 48 52 52 - ----------------------------------------------------------------------------- Page 41 MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS The Management of The Great Atlantic & Pacific Tea Company, Inc. has prepared the consolidated financial statements and related financial data contained in this Annual Report. The financial statements were prepared in accordance with generally accepted accounting principles appropriate to our business and, by necessity and circumstance, include some amounts which were determined using Management's best judgments and estimates with appropriate consideration to materiality. Management is responsible for the integrity and objectivity of the financial statements and other financial data included in this report. To meet this responsibility, Management maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that accounting records are reliable. Management supports a program of internal audits and internal accounting control reviews to provide reasonable assurance that the system is operating effectively. The Board of Directors pursues its responsibility for reported financial information through its Audit Review Committee. The Audit Review Committee meets periodically and, when appropriate, separately with Management, internal auditors and the independent auditors, Deloitte & Touche LLP, to review each of their respective activities. /s/Christian W.E. Haub President and Chief Executive Officer /s/Fred Corrado Vice Chairman of the Board and Chief Financial Officer INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of The Great Atlantic & Pacific Tea Company, Inc.: We have audited the accompanying consolidated balance sheets of The Great Atlantic & Pacific Tea Company, Inc. and its subsidiary companies as of February 27, 1999 and February 28, 1998 and the related consolidated statements of operations, shareholders' equity and comprehensive (loss) income, and cash flows for each of the three fiscal years in the period ended February 27, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Great Atlantic & Pacific Tea Company, Inc. and its subsidiary companies at February 27, 1999 and February 28, 1998 and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 27, 1999 in conformity with generally accepted accounting principles. /s/Deloitte & Touche LLP Parsippany, New Jersey April 29, 1999 Page 42 FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA The Great Atlantic & Pacific Tea Company, Inc. (Dollars in thousands, except per share data) - ------------------------ Fiscal 1998 Fiscal 1997 Fiscal 1996 Fiscal 1995 Fiscal 1994 (52 weeks) (53 weeks) (52 weeks) (52 weeks) (52 weeks) ----------- ----------- ----------- ----------------------- Operating Results Sales $10,179,358 $10,262,243 $10,089,014 $10,101,356 $10,331,950 Income (loss) from operations (164,391) 155,259 169,303 151,734 (57,530) Depreciation and amortization 233,663 234,236 230,748 225,449 235,444 Interest expense 71,497 80,152 73,208 73,143 72,972 Income (loss) before cumulative effect of accounting change and extraordinary item (67,164) 63,586 73,032 57,224 (166,586) Extraordinary loss on early extinguishment of debt - (544) - - - Cumulative effect on prior years of change in accounting principle: Postemployment benefits - - - - (4,950) Net income (loss) (67,164) 63,042 73,032 57,224 (171,536) - ----------------------------------------------------------------------------- Per Share Data Income (loss) before cumulative effect of accounting change and extraordinary item - basic and diluted (1.75) 1.66 1.91 1.50 (4.36) Extraordinary loss on early extinguishment of debt - basic and diluted - (0.01) - - - Cumulative effect on prior years of change in accounting principle: Postemployment benefits - basic and diluted - - - - (.13) Net income (loss) - basic and diluted (1.75) 1.65 1.91 1.50 (4.49) Cash dividends .40 .40 .20 .20 .65 Book value per share 21.87 24.22 23.27 21.53 20.27 - ----------------------------------------------------------------------------- Financial Position Current assets 1,224,037 1,217,227 1,231,379 1,174,935 1,193,731 Current liabilities 1,134,063 955,130 1,016,005 983,968 1,096,454 Working capital 89,974 262,097 215,374 190,967 97,277 Current ratio 1.08 1.27 1.21 1.19 1.09 Expenditures for property 438,345 267,623 296,878 236,139 214,886 Total assets 3,141,741 2,995,253 3,002,672 2,860,847 2,894,788 Current portion of long-term debt 4,956 16,824 18,290 13,040 112,821 Current portion of capital lease obligations 11,483 12,293 12,708 13,125 14,492 Long-term debt 728,390 695,292 701,609 650,169 612,473 Long-term portion of capital lease obligations 115,863 120,980 137,886 129,887 146,400 Total debt 860,692 845,389 870,493 806,221 886,186 Debt to total capitalization .51 .48 .49 .49 .53 - ---------------------------------------------------------------------------- Equity Shareholders' equity 837,257 926,632 890,072 822,785 774,914 Weighted average shares outstanding 38,273,859 38,249,832 38,221,329 38,220,333 38,220,333 Number of registered shareholders 7,419 8,029 8,808 10,010 10,867 - ---------------------------------------------------------------------------- Other Number of employees 83,400 79,980 84,000 89,000 92,000 New store openings 46 40 30 30 22 Number of stores at year end 839 936 973 1,014 1,108 Total store area (square feet) 28,736,319 30,574,286 30,587,324 31,101,589 33,310,121 Number of franchised stores served at year end 55 52 49 7 - Total franchised store area (square feet) 1,537,388 1,389,435 1,345,786 177,936 - - ----------------------------------------------------------------------------- Page 43 EXECUTIVE OFFICERS AND KEY OPERATING MANAGEMENT Senior Executive Officers Christian W.E. Haub * President and Chief Executive Officer Fred Corrado * Vice Chairman, Chief Financial Officer George Graham * Executive Vice President, Chief Merchandising Officer Michael J. Larkin * Senior Executive Vice President, Chief Operating Officer Laurane Magliari * Senior Vice President, People Resources & Services Aaron Malinsky * Vice Chairman, Development and Strategic Planning Peter J. O'Gorman * Executive Vice President, International Store and Product Development Cheryl Palmer * Senior Vice President, Strategic Marketing Merchandising/Staff Officers Susan Adam Vice President, Leadership & Organizational Development Marene Allison Vice President, Loss Prevention & Safety Stephen T. Brown * Vice President, Labor Relations Sam A. Burman Vice President, Planning & Design Frederick S. Burstein Vice President, A&P Properties Andrew Carrano Vice President, Marketing & Corporate Affairs Timothy J. Courtney * Vice President, Taxation Frank D'Ariano Vice President, Design & Construction David S. Edwards Vice President, People Relations R. Terrence Galvin * Vice President, Finance and Treasurer Donna George Vice President, Corporate Brands Vincent Giambalvo, Ph.D Vice President, People Development Kenneth W. Green * Vice President, Produce Merchandising and Procurement Dennis Hickey Vice President, GSO Marshall K. Hill, Ph.D Vice President, Quality Assurance Joseph J. Hoffman * Vice President, Meat Merchandising and Procurement Robert A. Keenan * Vice President, Chief Internal Auditor John Kirk * Vice President, Grocery Merchandising and Procurement Francis X. Leonard * Vice President, Real Estate Administration Mary Ellen Offer * Vice President, Assistant Corporate Secretary and Senior Counsel Brian Pall * Senior Vice President, Development Peter Rojek Vice President, Environmental Health Richard J. Scola * Vice President, Real Estate Law, Assistant General Counsel and Assistant Corporate Secretary Kenneth A. Uhl * Vice President and Controller Robert G. Ulrich * Senior Vice President, General Counsel and Secretary Francis L. Urbaniak Vice President, Retail Support Services William Wolverton * Vice President, Warehousing and Transportation Lawrence Zimmerman Vice President, Management Information Systems RETAIL OPERATIONS Northeast Operations William A. Louttit Chairman and Chief Executive Officer Andrew Fuchs President, Metro Group David Hoalt President, Super Fresh Group Robert Panasuk President, New England Group Louis Ruggiero President, Food Emporium David A. Smithies President, Waldbaum, Inc. SOUTHERN OPERATIONS Donald Dobson * Group Vice President MIDWESTERN OPERATIONS Craig C. Sturken Chairman and Chief Executive Officer James Holt President, Kohl's Food Stores, Inc. A&P CANADA John P. Dunne, Chairman & Co-Chief Executive Officer Brian Piwek Vice Chairman & Co-Chief Executive Officer William McEwan President & Chief Merchandising Officer Compass Foods Eight O'Clock Coffee Donald J. Sommerville Vice President & General Manager Super Market Service Corp. Eugene Lear * President * denotes elected officers Page 44 BOARD OF DIRECTORS James Wood (c) Chairman of the Board John D. Barline, Esq. (e) Williams, Kastner & Gibbs LLP, Tacoma, Washington Rosemarie Baumeister (b) Executive Vice President, Tengelmann Warenhandelsgesellschaft, Germany Fred Corrado (c)(d)(e) Vice Chairman of the Board and Chief Financial Officer Christopher F. Edley (a)(b)(c)(e) President Emeritus and former President and Chief Executive Officer of the United Negro College Fund, Inc. Christian W.E. Haub (c)(d)(e) President and Chief Executive Officer Helga Haub (c)(d) Barbara Barnes Hauptfuhrer (a)(c)(d)(e) Director of various corporations William A. Liffers (a)(b)(c) Former Vice Chairman of American Cyanamid Company Fritz Teelen (d) Chief Operating Officer of Tengelmann Warenhandelsgesellschaft, Germany R.L. "Sam" Wetzel (a)(b)(d)(e) President and Chief Executive Officer of Wetzel International, Inc. (a) Member of Audit Review Committee, William A. Liffers, Chairman (b) Member of Compensation Policy Committee, Christopher F. Edley, Chairman (c) Member of Executive Committee, James Wood, Chairman (d) Member of Finance Committee, R.L. "Sam" Wetzel, Chairman (e) Member of Retirement Benefits Committee, Barbara Barnes Hauptfuhrer, Chairman SHAREHOLDER INFORMATION Executive Offices Box 418 2 Paragon Drive Montvale, NJ 07645 Telephone 201-573-9700 Transfer Agent and Registrar American Stock Transfer and Trust Company 40 Wall Street New York, NY 10005 Telephone 212-936-5100 Independent Auditors Deloitte & Touche LLP Two Hilton Court Parsippany, NJ 07054 Shareholder Inquiries and Publications Shareholders, security analysts, members of the media and others interested in further information about the Company are invited to contact the Treasury Department at the Executive Offices in Montvale, New Jersey. Internet users can access information on A&P at: www.aptea.com Correspondence concerning shareholder address changes should be directed to: American Stock Transfer and Trust Company 40 Wall Street New York, NY 10005 Telephone 212-936-5100 Form 10-K Copies of Form 10-K filed with the Securities and Exchange Commission will be provided to shareholders upon written request to the Secretary at the Executive Offices in Montvale, New Jersey. Annual Meeting The Annual Meeting of Shareholders will be held at 10:00 a.m. (EDT) on Tuesday, July 13, 1999 at the Sheraton Crossroads Hotel, One International Boulevard, Mahwah, New Jersey. Shareholders are cordially invited to attend. Common Stock Common stock of the Company is listed and traded on the New York Stock Exchange under the ticker symbol "GAP" and has unlisted trading privileges on the Boston, Midwest, Philadelphia, Cincinnati, and Pacific Stock Exchanges. The stock is reported in newspapers and periodical tables as "GtAtPc." Financial Calendar Annual Meeting of Shareholders July, 13, 1999. Estimated Date of Announcement of the Quarter's Results 1st July 7, 1999 2nd September 28, 1999 3rd December 21, 1999 4th March 16, 2000 Estimated Date of Dividend Payment 1st April 30, 1999 2nd August 9, 1999 3rd November 1, 1999 4th February 1, 2000 Page 45 EX-21 3 EXHIBIT 21 SUBSIDIARIES of the REGISTRANT SUBSIDIARY NAME STATE INCORPORATED A&P Wine and Spirits, Inc. Massachusetts ANP Properties I Corp. Delaware ANP Sales Corp. Maryland APW Produce Company, Inc. New York APW Supermarket Corporation Delaware APW Supermarkets, Inc. New York Big Star, Inc. Georgia The Great Atlantic and Pacific Tea Company, Limited (NRO) Canada The Great Atlantic & Pacific Company of Canada, Limited d/b/a A&P and New Dominion Canada A&P Drug Mart Limited Ontario A&P Properties Limited Ontario Food Basics, Limited Ontario 3399486 Canada Inc. Canada Borman's, Inc. d/b/a Farmer Jack Delaware Compass Foods, Inc. Delaware Family Center, Inc. d/b/a Family Mart Delaware Futurestore Food Markets, Inc. Delaware The Great Atlantic & Pacific Tea Company of Vermont, Inc. Vermont Hamilton Property I, Inc. Delaware Hopelawn Property I, Inc. Delaware Kohl's Food Stores, Inc. Wisconsin Kwik Save Inc. Pennsylvania Limited Foods, Inc. Delaware LO-LO Discount Stores, Inc. Texas Montvale Holdings, Inc. New Jersey North Jersey Properties, Inc. I Delaware North Jersey Properties, Inc. II Delaware North Jersey Properties, Inc. III Delaware North Jersey Properties, Inc. IV Delaware North Jersey Properties, Inc. V Delaware North Jersey Properties, Inc. VI Delaware Richmond, Incorporated d/b/a Pantry Pride & Sun, Inc. Delaware Regina Properties, Inc. New Jersey St. Pancras Company Limited Bermuda St. Pancras Too, Limited Bermuda Shopwell, Inc. d/b/a Food Emporium Delaware Southern Acquisition Corporation Delaware Southern Development, Inc. of Delaware Delaware Super Fresh Food Markets, Inc. Delaware Super Fresh Food Markets of Maryland, Inc. Maryland Super Fresh/Sav-A-Center, Inc. Delaware Super Fresh Food Markets of Virginia, Inc. Delaware Super Market Service Corp. Pennsylvania Super Plus Food Warehouse, Inc. Delaware Supermarket Distribution Service Corp. New Jersey Supermarket Distribution Service - Florence, Inc. New Jersey Supermarket Distribution Services, Inc. Delaware Supermarket Systems, Inc. Delaware Tea Development Co., Inc. Delaware The South Dakota Great Atlantic & Pacific Tea Company, Inc. South Dakota Transco Service-Milwaukee, Inc. New Jersey Waldbaum, Inc. d/b/a Waldbaum, Inc. and Food Mart New York W.S.L. Corporation New Jersey 2008 Broadway, Inc. New York EX-27 4
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE GREAT ATLANTIC AND PACIFIC TEA COMPANY, INC. ANNUAL REPORT FOR THE FISCAL YEAR ENDED FEBRUARY 27, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR FEB-27-1999 FEB-27-1999 136810 0 204700 0 841030 1224037 1686487 0 3141741 1134063 844253 0 0 38291 798966 3141741 10179358 10179358 (7260110) (7260110) (3083639) 0 (64893) (229284) 162120 (67164) 0 0 0 (67164) 1.75 1.75
EX-10.A 5 January 20, 1999 Ms. Laurane S. Magliari 2 Paragon Drive Montvale, NJ 07645 Dear Ms. Magliari: This letter sets forth the key points of your employment with A&P. 1. Title: Senior Vice President, People Resources and Services. 2. Salary. $300,000 annually. 3. Bonus. You will be entitled to participate in the Company's Corporate Management Bonus Program with a bonus base of $122,000. The bonus will be guaranteed for the first year of your employment. 4. Stock Options. You will receive a grant of 37,000 Stock Options under the A&P Stock Option Plan at the price in effect on the date you begin employment with A&P. Subsequent awards under the Company's new five year program, which envisions annual share awards, are at the decision of the Board of Directors based upon individual and Company performance as well as other criteria. As we discussed your targeted award would be in the 20,000 - 25,000 share range for fully acceptable performance. The Board has the final decision on meeting fully acceptable standards. 5. Health Benefits. You will participate in the Company's Executive Medical Program immediately upon commencement of employment. We confirm that you will begin your employment on or about February 16, 1999. Please be so kind as to indicate your agreement with the foregoing by signing in the space provided below. Very truly yours, THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. By:-------------------------- Fred Corrado Vice Chairman - -------------------------- Laurane S. Magliari April 6, 1999 Ms. Cheryl Palmer 2 Paragon Drive Montvale, NJ 07645 Dear Ms. Palmer: We are pleased to confirm to you our offer for employment. The details are as follows: You will be employed by The Great Atlantic & Pacific Tea Company, Inc. on an agreed upon date, as Sr. Vice President Strategic Marketing, reporting to Christian Haub, President & CEO, which is conditioned on satisfactory substance abuse testing. Your base salary will be $200,000 per annum, payable in four weekly increments (13 times per year) at a rate of $15,384.61. Checks are issued on Thursday of the last week of each fiscal period. As Sr. Vice President Strategic Marketing, you will participate in the Fiscal Year 1999 Management Bonus Plan at a target bonus rate of 35% of grade mid- point (1999 mid-point is $244,000). Additionally, you will be granted an issuance of 10,000 Stock Options under the A&P Stock Option Plan at the price in effect on the date you begin employment with A&P. Vacation entitlement will be three (3) weeks each calendar year. You will participate in the Company's Executive Medical Program immediately upon commencement of employment. You will be eligible to participate in the A&P Retirement and Savings Plan upon completion of one year of employment. We will be delighted with your decision to join A&P. We believe your association with our organization will be extremely beneficial to both of us. Sincerely, Enclosed is a duplicate copy of this letter which I would appreciate your signing and returning indicating agreement with the above. - ----------------------- ------------------------ CHERYL PALMER DATE EX-23 6 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.: We consent to the incorporation by reference in Registration Statement No. 2- 92428 on Form S-8, Post Effective Amendment No. 7 to Registration Statement No. 2-59290 on Form S-8, Post Effective Amendment No. 3 to Registration Statement No. 2-73205 on Form S-8 and Registration Statement No. 333-36225 on Form S-3 of our report dated April 29, 1999, contained in the Company's 1998 Annual Report to Shareholders and incorporated by reference in the Annual Report on Form 10-K of The Great Atlantic & Pacific Tea Company, Inc. for the year ended February 27, 1999. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Parsippany, New Jersey May 18, 1999 EX-10.I 7 AMENDMENT dated as of February 17, 1999, to the Competitive Advance and Revolving Credit Facilities Agreement dated as of June l0, 1997 (the "Credit Agreement"), among THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., a Maryland corporation (the "Company"), THE GREAT ATLANTIC & PACIFIC COMPANY OF CANADA, LIMITED, a Canadian corporation ("A&P Canada" and, together with the Company, the "Borrowers"), the banks party thereto (the "Banks"), THE CHASE MANHATTAN BANK, a New York banking corporation, as agent for the U.S. Banks (in such capacity, the "U.S. Agent"), and THE CHASE MANHATTAN BANK OF CANADA, a Canadian chartered bank, as agent for the Canadian Banks (in such capacity, the "Canadian Agent"). A. Pursuant to the Credit Agreement, the Banks have extended credit to the Borrowers, and have agreed to extend credit to the Borrowers, in each case pursuant to the terms and subject to the conditions set forth therein. B. The Borrowers have requested that the Banks agree to amend certain provisions of the Credit Agreement as set forth herein. C. The undersigned Banks are willing to so amend the Credit Agreement, in each case pursuant to the terms and subject to the conditions set forth herein. D. Capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Credit Agreement. In consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto hereby agree, on the terms and subject to the conditions set forth herein, as follows: SECTION 1. Amendments. (a) Section 1.01 of the Credit Agreement is hereby amended as follows: (i) By adding the following definitions in the appropriate alphabetical order: "Extraordinary Charges" means the pre-tax cash portion of the charges taken (or to be taken) by the Company to accrue for future lease costs in connection with the planned closings of approximately 133 of the Company's stores and any sale or closing of certain of the Company's stores in its Atlanta Region. "Applicable EBITDA Add-Back" shall mean, for any period of four consecutive fiscal quarters, the amount of the Extraordinary Charges, if any, for such period; provided, that the "Applicable EBITDA Add-Back" shall not exceed (i) $170 million, for the period of four consecutive fiscal quarters ending February 27, 1999, and (ii) $186 million for any period of four consecutive fiscal quarters thereafter; provided, that the sum of all Extraordinary Charges that are treated as part of the "Applicable EBITDA Add-Back" for each fiscal quarter ending after February 27, 1999 shall not exceed (on a cumulative basis) $16 million in the aggregate. "Net Worth Add-Back" shall mean, at any time, the amount by which Tangible Net Worth shall have been decreased as a result of the Extraordinary Charges; provided, that the "Net Worth Add-Back" shall not exceed (i) $97 million, at any time on or prior to the end of the fiscal quarter ended February 27, 1999 and (ii) $106 million, at any time thereafter. "Required Coverage Ratio" shall mean (i) 1.6 to 1.0, for the period of four consecutive fiscal quarters ended February 27, 1999, (ii) 1.4 to 1.0, for each of the two periods of four consecutive fiscal quarters that end at the ends of the first two fiscal quarters that begin in fiscal 1999, (iii) 1.45 to 1.0, for the period of four consecutive fiscal quarters that ends at the end of the third fiscal quarter that begins in fiscal 1999, and (iv) 1.7 to 1.0, for all other periods. (ii) By deleting in its entirety the table in the definition of "Applicable Facility Fee Percentage" and replacing it with the following: S&P/Moody's Rating Facility Fee - ------------------ ------------- Category 1 - ---------- A-/A3 or higher 0.100% Category 2 - ---------- BBB+/Baa1 0.125% Category 3 - ---------- BBB/Baa2 0.150% Category 4 - ---------- BBB-/Baa3 0.250% Category 5 - ---------- BB+/Ba1 0.300% Category 6 - ---------- BB/Ba2 or lower 0.375% (iii) By deleting in its entirety the table in the definition of "Applicable Margin" and replacing it with the following: S&P/Moody's Rating Spread - ------------------ ------ Category 1 - ---------- A-/A3 or higher 0.275% Category 2 - ---------- BBB+/Baa1 0.375% Category 3 - ---------- BBB/Baa2 0.475% Category 4 - ---------- BBB-/Baa3 0.500% Category 5 - ---------- BB+/Bal 0.700% Category 6 - ---------- BB/Ba2 or lower 1.00% (iv) By adding to the definition of "Tangible Net Worth," after the proviso thereto and before the final period, the following clause; ";provided, further, that Tangible Net Worth shall be increased by the Net Worth Add-Back, if any". (v) By adding to the definition of "EBITDA" in the second line thereto following "Income from Operations," the following: "(i)", and by adding to the definition of "EBITDA" before the final period thereto, the following: "and (ii) the Applicable EBITDA Add-Back". (b) Section 6.03 of the Credit Agreement is hereby amended by striking "1.7 to 1.0" and substituting in its place "the Required Coverage Ratio". SECTION 2. Representations and Warranties. Each of the Borrowers represents and warrants to the Agents and the Banks that: (a) This Amendment has been duly executed and delivered by it and constitutes its legal, valid and binding obligation enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting creditors' rights generally and except as enforceability may be limited by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (b) After giving effect to this Amendment, the representations and warranties set forth in Article III of the Credit Agreement are true and correct in all material respects with the same effect as if made on the date hereof, except to the extent such representations and warranties expressly relate to an earlier date. (c) After giving effect to this Amendment, no Event of Default, or event that with notice or lapse of time or both would constitute an Event of Default, has occurred and is continuing. SECTION 3. Conditions to Effectiveness. This Amendment shall become effective (as of the date first written above) on the date (the "Amendment Effective Date") when (a) the Agents (or their counsel) shall have received counterparts of this Amendment that, when taken together, bear the signatures of the Borrowers and the Required Banks and (b) the Agents shall have received payment of the fees payable under Section 4 below (to the extent due on the Amendment Effective Date) and any out-of-pocket expenses of the Agents payable by the Borrowers that have been invoiced before the Amendment Effective Date. This Amendment shall terminate on March 3, 1999, unless all conditions set forth in this section shall have been satisfied at or before 5 p.m., New York City time, on that date; provided, that the Company, with the consent of the U.S. Agent, may extend such date to a later date (but no later than March 15, 1999). SECTION 4. Amendment Fee. The Borrowers agree to pay to each Bank that executes and delivers a copy of this Amendment to the Agents (or their counsel) on or prior to February 26, 1999, an amendment fee in an amount equal to 0.125% of such Bank's Commitment (whether used or unused), in each case as of the Amendment Effective Date; provided that the Borrowers shall have no liability for any such amendment fee if this Amendment does not become effective; provided further, that the Company, with the consent of the U.S. Agent, may extend such date to a later date (but no later than March 13, 1999). Such amendment fee shall be payable (i) on the Amendment Effective Date, to each Bank entitled to receive such fee as of the Amendment Effective Date and (ii) in the case of any Bank that becomes entitled to such fee after the Amendment Effective Date, within two Business Days after such Bank becomes entitled to such fee. SECTION 5. Expenses. The Borrowers shall reimburse the Agents for their reasonable out-of-pocket expenses incurred in connection with this Amendment, including the reasonable fees and expenses of Cravath, Swaine & Moore, counsel for the Agents. SECTION 6. Effect of Amendment. Except as expressly set forth herein, this Amendment shall not by implication or otherwise limit, impair, constitute a waiver of, or otherwise affect the rights and remedies of the Agents or the Banks under the Credit Agreement, and shall not alter, modify, amend or in any way affect the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement, all of which are ratified and affirmed in all respects and shall continue in full force and effect. Nothing herein shall be deemed to entitle the Borrowers to a consent to, or a waiver, amendment, modification or other change of, any terms, conditions, obligations, covenants or agreements contained in the Credit Agreement in similar or different circumstances. This Amendment shall apply and be effective only with respect to the provisions of the Credit Agreement specifically referred to herein. SECTION 7. Credit Agreement. Except as specifically amended or waived hereby, the Credit Agreement shall continue in full force and effect in accordance with the provisions thereof as in existence on the date hereof. After the date hereof, any reference to the Credit Agreement shall mean the Credit Agreement as amended and waived hereby. This Amendment shall constitute a Loan Document for all purposes under the Credit Agreement. SECTION 8. Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 9. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract. Delivery of an executed signature page of this Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. SECTION 10. Headings. The Section headings used herein are for convenience of reference only, are not part of this Amendment and are not to affect the construction of, or to be taken into consideration in interpreting, this Amendment. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first written above. THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., by /s/ R. Terrence Galvin ---------------------- Name: R. Terrence Galvin Title: Vice President, Finance and Treasurer THE GREAT ATLANTIC & PACIFIC COMPANY OF CANADA, LIMITED, by /s/ R. Terrence Galvin ---------------------- Name: R. Terrence Galvin Title: Vice President, Finance and Treasurer THE CHASE MANHATTAN BANK, individually and as U.S. Agent, by /s/ The Chase Manhattan Bank ---------------------------- COMMERZBANK AKTIENGESELLSCHAFT, individually and as Documentation Agent, by /s/ Commerzbank Aktiengesellschaft ---------------------------------- THE CHASE MANHATTAN BANK OF CANADA, individually and as Canadian Agent, by /s/ The Chase Manhattan Bank of Canada -------------------------------------- NATIONSBANK, N.A., by /s/ Nationsbank, N.A. --------------------- ROYAL BANK OF CANADA (NEW YORK) by /s/ Royal Bank of Canada (New York) ---------------------------------- CITIBANK, N.A., by /s/Citibank, N.A. ----------------- THE BANK OF NOVA SCOTIA (NEW YORK), by /s/ The Bank of Nova Scotia (New York) -------------------------------------- FIRST UNION NATIONAL BANK, as successor by acquisition to Corestates Bank, N.A., by /s/ First Union National Bank ----------------------------- THE BANK OF NEW YORK, by /s/ The Bank of New York ------------------------ DEUTSCHE BANK AG NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH, by /s/ Deutsche Bank AG New York Branch and/or Cayman Islands Branch ------------------------------------ THE SUMITOMO BANK, LIMITED, NEW YORK BRANCH, by /s/ The Sumitomo Bank, Limited, New York Branch -------------------------------- NORDDEUTSCHE LANDESBANK GIROZENTRALE NEW YORK AND/OR CAYMAN ISLANDS BRANCH, by /s/ Norddeutsche Landesbank Girozentrale New York and/or Cayman Islands Branch -------------------------------- THE NORTHERN TRUST COMPANY, by /s/ The Northern Trust Company ------------------------------ FLEET NATIONAL BANK, by /s/ Fleet National Bank ----------------------- ARAB BANK PLC, by /s/ Arab Bank PLC ----------------- THE BANK OF NOVA SCOTIA (TORONTO), by /s/ The Bank of Novia Scotia (Toronto) -------------------------------------- CITIBANK (CANADA), by /s/ Citibank (Canada) --------------------- DEUTSCHE BANK CANADA, by /s/ Deutsche Bank Canada ------------------------ LANDESBANK HESSEN THUERINGEN- GIROZENTRALE, by /s/ Landesbank Hessen Thueringen- Girozentrale --------------------------------- HIBERNIA NATIONAL BANK, by /s/ Hibernia National Bank -------------------------- SUMMIT BANK, by /s/ Summit Bank -------------------- BAYERISCHE LANDESBANK GIROZENTRALE, by /s/ Bayerische Landesbank Girozentrale ------------------------- by BERLINER BANK AG, by /s/ Berliner Bank AG -------------------- CARIPLO Cassa de Risparmio delle Provincie Lombarde S.p.A., by /s/ Cariplo Cassa de Risparmio delle Provincie Lombarde S.p.A. ------------------------------------ EUROPEAN AMERICAN BANK, by /s/ European American Bank -------------------------- FIRSTAR BANK, by /s/ Firstar Bank ---------------- MICHIGAN NATIONAL BANK, by /s/ Michigan National Bank -------------------------- STATE STREET BANK AND TRUST COMPANY, by /s/ State Street Bank and Trust Company --------------------------------------- WACHOVIA BANK, N.A., by /s/ Wachovia Bank, N.A. --------------------- EX-10.K 8 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. 1998 LONG TERM INCENTIVE AND SHARE AWARD PLAN 1. Purposes. The purposes of the 1998 Long Term Incentive and Share Award Plan are to advance the interests of The Great Atlantic & Pacific Tea Company, Inc. and its shareholders by providing a means to attract, retain, and motivate employees of the Company upon whose judgment, initiative and efforts the continued success, growth and development of the Company is dependent. 2. Definitions. For purposes of the Plan, the following terms shall be defined as set forth below: (a) "Affiliate" means any entity other than the Company and its Subsidiaries that is designated by the Board or the Committee as a participating employer under the Plan, provided that the Company directly or indirectly owns at least 20% of the combined voting power of all classes of stock of such entity or at least 20% of the ownership interests in such entity. (b) "Award" means any Option, SAR, Restricted Share, Restricted Share Unit, Performance Share, Performance Unit, Dividend Equivalent, or Other Share-Based Award granted to an Eligible Person under the Plan. (c) "Award Agreement" means any written agreement, contract, or other instrument or document evidencing an Award. (d) "Beneficiary" means the person, persons, trust or trusts which have been designated by the Eligible Person in his or her most recent written beneficiary designation filed with the Company to receive the benefits specified under this Plan upon the death of the Eligible Person, or, if there is no designated Beneficiary or surviving designated Beneficiary, then the person, persons, trust or trusts entitled by will or the laws of descent and distribution to receive such benefits. (e) "Board" means the Board of Directors of the Company. (f) "Code" means the Internal Revenue Code of 1986, as amended from time to time. References to any provision of the Code shall be deemed to include successor provisions thereto and regulations thereunder. (g) "Committee" means the Compensation Policy Committee of the Board, or such other Board committee as may be designated by the Board to administer the Plan; provided, however, that the Committee shall consist of two or more directors of the Company, each of whom is a "non-employee director" within the meaning of Rule 16b-3 under the Exchange Act, to the extent applicable. (h) "Company" means The Great Atlantic & Pacific Tea Company, Inc., a corporation organized under the laws of Maryland, or any successor corporation. (i) "Dividend Equivalent" means a right, granted under Section 5(g), to receive cash, Shares, or other property equal in value to dividends paid with respect to a specified number of Shares. Dividend Equivalents may be awarded on a free-standing basis or in connection with another Award, and may be paid currently or on a deferred basis. (j) "Eligible Person" means an employee of the Company, a Subsidiary or an Affiliate, including any director who is an employee. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. References to any provision of the Exchange Act shall be deemed to include successor provisions thereto and regulations thereunder. (l) "Fair Market Value" means, with respect to Shares or other property, the fair market value of such Shares or other property determined by such methods or procedures as shall be established from time to time by the Committee. If the Shares are listed on any established stock exchange or a national market system, unless otherwise determined by the Committee in good faith, the Fair Market Value of a Share shall mean the closing price of the Share on the date on which it is to be valued hereunder (or, if the Shares were not traded on that day, the next preceding day that the Shares were traded) on the principal exchange on which the Shares are traded, as such prices are officially quoted on such exchange. (m) "ISO" means any option intended to be and designated as an incentive stock option within the meaning of Section 422 of the Code. (n) "NQSO" means any Option that is not an ISO. (o) "Option" means a right, granted under Section 5(b), to purchase Shares. (p) "Other Share-Based Award" means a right, granted under Section 5(h), that relates to or is valued by reference to Shares. (q) "Participant" means an Eligible Person who has been granted an Award under the Plan. (r) "Performance Share" means a performance share granted under Section 5(f). (s) "Performance Unit" means a performance unit granted under Section 5(f). (t) "Plan" means this 1998 Long Term Incentive and Share Award Plan. (u) "Restricted Shares" means an Award of Shares under Section 5(d) that may be subject to certain restrictions and to a risk of forfeiture. (v) "Restricted Share Unit" means a right, granted under Section 5(e), to receive Shares or cash at the end of a specified deferral period. (w) "Rule 16b-3" means Rule 16b-3, as from time to time in effect and applicable to the Plan and Participants, promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act. (x) "SAR" or "Share Appreciation Right" means the right, granted under Section 5(c), to be paid an amount measured by the difference between the exercise price of the right and the Fair Market Value of Shares on the date of exercise of the right, with payment to be made in cash, Shares, or property as specified in the Award or determined by the Committee. (y) "Shares" means common stock, $1 par value per share, of the Company. (z) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns shares possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. 3. Administration. (a) Authority of the Committee. The Plan shall be administered by the Committee, and the Committee shall have full and final authority to take the following actions, in each case subject to and consistent with the provisions of the Plan: (i) to select Eligible Persons to whom Awards may be granted; (ii) to designate Affiliates; (iii) to determine the type or types of Awards to be granted to each Eligible Person; (iv) to determine the type and number of Awards to be granted, the number of Shares to which an Award may relate, the terms and conditions of any Award granted under the Plan (including, but not limited to, any exercise price, grant price, or purchase price, and any bases for adjusting such exercise, grant or purchase price, any restriction or condition, any schedule for lapse of restrictions or conditions relating to transferability or forfeiture, exercisability, or settlement of an Award, and waiver or accelerations thereof, and waivers of performance conditions relating to an Award, based in each case on such considerations as the Committee shall determine), and all other matters to be determined in connection with an Award; (v) to determine whether, to what extent, and under what circumstances an Award may be settled, or the exercise price of an Award may be paid, in cash, Shares, other Awards, or other property, or an Award may be canceled, forfeited, exchanged, or surrendered; (vi) to determine whether, to what extent, and under what circumstances cash, Shares, other Awards, or other property payable with respect to an Award will be deferred either automatically, at the election of the Committee, or at the election of the Eligible Person; (vii) to determine whether, to what extent, and under what circumstances any cash, Shares, other Awards, or other property payable on a deferred basis will be adjusted for interest or earnings equivalents and, if so, the basis for determining such equivalents; (viii) to prescribe the form of each Award Agreement, which need not be identical for each Eligible Person; (ix) to adopt, amend, suspend, waive, and rescind such rules and regulations and appoint such agents as the Committee may deem necessary or advisable to administer the Plan; (x) to correct any defect or supply any omission or reconcile any inconsistency in the Plan and to construe and interpret the Plan and any Award, rules and regulations, Award Agreement, or other instrument hereunder; (xi) to accelerate the exercisability or vesting of all or any portion of any Award or to extend the period during which an Award is exercisable; and (xii) to make all other decisions and determinations as may be required under the terms of the Plan or as the Committee may deem necessary or advisable for the administration of the Plan. (b) Manner of Exercise of Committee Authority. The Committee shall have sole discretion in exercising its authority under the Plan. Any action of the Committee with respect to the Plan shall be final, conclusive, and binding on all persons, including the Company, Subsidiaries, Affiliates, Eligible Persons, any person claiming any rights under the Plan from or through any Eligible Person, and shareholders. The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. The Committee may delegate to officers or managers of the Company or any Subsidiary or Affiliate the authority, subject to such terms as the Committee shall determine, to perform administrative functions and, with respect to Awards granted to persons not subject to Section 16 of the Exchange Act, to perform such other functions as the Committee may determine, to the extent permitted under Rule 16b-3 (if applicable) and applicable law. (c) Limitation of Liability. Each member of the Committee shall be entitled to, in good faith, rely or act upon any report or other information furnished to him or her by any officer or other employee of the Company or any Subsidiary or Affiliate, the Company's independent certified public accountants, or other professional retained by the Company to assist in the administration of the Plan. No member of the Committee, nor any officer or employee of the Company acting on behalf of the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Committee and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action, determination, or interpretation. (d) Limitation on Committee's Discretion. Anything in this Plan to the contrary notwithstanding, in the case of any Award which is intended to qualify as "performance-based compensation" within the meaning of Section 162(m)(4)(C) of the Code, unless the Award Agreement specifically provides otherwise, the Committee shall have no discretion to increase the amount of compensation payable under the Award to the extent such an increase would cause the Award to lose its qualification as such performance-based compensation. (e) Quorum, Acts of Committee. A majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by all of the members, shall be acts of the Committee. 4. Shares Subject to the Plan. (a) Subject to adjustment as provided in Section 4(c) hereof, the total number of Shares reserved for issuance in connection with Awards under the Plan shall be 5,000,000. No Award may be granted if the number of Shares to which such Award relates, when added to the number of Shares previously issued under the Plan, exceeds the number of Shares reserved under the preceding sentence. If any Awards are forfeited, canceled, terminated, exchanged or surrendered or such Award is settled in cash or otherwise terminates without a distribution of Shares to the Participant, any Shares counted against the number of Shares reserved and available under the Plan with respect to such Award shall, to the extent of any such forfeiture, settlement, termination, cancellation, exchange or surrender, again be available for Awards under the Plan. Upon the exercise of any Award granted in tandem with any other Awards, such related Awards shall be canceled to the extent of the number of Shares as to which the Award is exercised. (b) Subject to adjustment as provided in Section 4(c) hereof, the maximum number of Shares with respect to which options or SARs may be granted during a calendar year to any Eligible Person under this Plan shall be 500,000 Shares. (c) In the event that the Committee shall determine that any dividend in Shares, recapitalization, Share split, reverse split, reorganization, merger, consolidation, spin- off, combination, repurchase, or share exchange, or other similar corporate transaction or event, affects the Shares such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of Eligible Persons under the Plan, then the Committee shall make such equitable changes or adjustments as it deems appropriate and, in such manner as it may deem equitable, adjust any or all of (i) the number and kind of shares which may thereafter be issued under the Plan, (ii) the number and kind of shares, other securities or other consideration issued or issuable in respect of outstanding Awards, and (iii) the exercise price, grant price, or purchase price relating to any Award; provided, however, in each case that, with respect to ISOs, such adjustment shall be made in accordance with Section 424(a) of the Code, unless the Committee determines otherwise. In addition, the Committee is authorized to make adjustments in the terms and conditions of, and the criteria and performance objectives included in, Awards in recognition of unusual or non-recurring events (including, without limitation, events described in the preceding sentence) affecting the Company or any Subsidiary or Affiliate or the financial statements of the Company or any Subsidiary or Affiliate, or in response to changes in applicable laws, regulations, or accounting principles; provided, however, that, in the case of an Award which is intended to qualify as "performance-based compensation" within the meaning of Section 162(m)(4)(C) of the Code, such authority shall be subject to Section 3(d) hereof. (d) Any Shares distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or treasury Shares including Shares acquired by purchase in the open market or in private transactions. 5. Specific Terms of Awards. (a) General. Awards may be granted on the terms and conditions set forth in this Section 5. In addition, the Committee may impose on any Award or the exercise thereof, at the date of grant or thereafter (subject to Section 8(d)), such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine, including terms regarding forfeiture of Awards or continued exercisability of Awards in the event of termination of employment by the Eligible Person. (b) Options. The Committee is authorized to grant Options, which may be NQSOs or ISOs, to Eligible Persons on the following terms and conditions: (i) Exercise Price. The exercise price per Share purchasable under an Option shall be determined by the Committee, and the Committee may, without limitation, set an exercise price that is based upon achievement of performance criteria if deemed appropriate by the Committee. (ii) Option Term. The term of each Option shall be determined by the Committee. (iii) Time and Method of Exercise. The Committee shall determine at the date of grant or thereafter the time or times at which an Option may be exercised in whole or in part (including, without limitation, upon achievement of performance criteria if deemed appropriate by the Committee), the methods by which such exercise price may be paid or deemed to be paid (including, without limitation, broker-assisted exercise arrangements), the form of such payment (including, without limitation, cash, Shares, notes or other property), and the methods by which Shares will be delivered or deemed to be delivered to Eligible Persons. (iv) ISOs. The terms of any ISO granted under the Plan shall comply in all respects with the provisions of Section 422 of the Code, including but not limited to the requirement that the ISO shall be granted within ten years from the earlier of the date of adoption or shareholder approval of the Plan. ISOs may only be granted to employees of the Company or a Subsidiary. (c) SARs. The Committee is authorized to grant SARs (Share Appreciation Rights) to Eligible Persons on the following terms and conditions: (i) Right to Payment. An SAR shall confer on the Eligible Person to whom it is granted a right to receive with respect to each Share subject thereto, upon exercise thereof, the excess of (1) the Fair Market Value of one Share on the date of exercise (or, if the Committee shall so determine in the case of any such right, the Fair Market Value of one Share at any time during a specified period before or after the date of exercise) over (2) the base amount of the SAR as determined by the Committee as of the date of grant of the SAR (which, in the case of an SAR granted in tandem with an Option, shall be equal to the exercise price of the underlying Option). (ii) Other Terms. The Committee shall determine, at the time of grant or thereafter, the time or times at which an SAR may be exercised in whole or in part, the method of exercise, method of settlement, form of consideration payable in settlement, method by which Shares will be delivered or deemed to be delivered to Eligible Persons, whether or not an SAR shall be in tandem with any other Award, and any other terms and conditions of any SAR. Unless the Committee determines otherwise, an SAR (1) granted in tandem with an NQSO may be granted at the time of grant of the related NQSO or at any time thereafter and (2) granted in tandem with an ISO may only be granted at the time of grant of the related ISO. (d) Restricted Shares. The Committee is authorized to grant Restricted Shares to Eligible Persons on the following terms and conditions: (i) Issuance and Restrictions. Restricted Shares shall be subject to such restrictions on transferability and other restrictions, if any, as the Committee may impose at the date of grant or thereafter, which restrictions may lapse separately or in combination at such times, under such circumstances (including, without limitation, upon achievement of performance criteria if deemed appropriate by the Committee), in such installments, or otherwise, as the Committee may determine. Except to the extent restricted under the Award Agreement relating to the Restricted Shares, an Eligible Person granted Restricted Shares shall have all of the rights of a shareholder including, without limitation, the right to vote Restricted Shares and the right to receive dividends thereon. The Committee must certify in writing prior to the lapse of restrictions conditioned on achievement of performance criteria that such performance criteria were in fact satisfied. (ii) Forfeiture. Except as otherwise determined by the Committee, at the date of grant or thereafter, upon termination of employment during the applicable restriction period, Restricted Shares and any accrued but unpaid dividends or Dividend Equivalents (and any accrued but unpaid interest or earnings equivalents thereon) that are at that time subject to restrictions shall be forfeited; provided, however, that the Committee may provide, by rule or regulation or in any Award Agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Shares will be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Restricted Shares. (iii) Certificates for Shares. Restricted Shares granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing Restricted Shares are registered in the name of the Eligible Person, such certificates shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Shares, and the Company shall retain physical possession of the certificate. (iv) Dividends. Dividends paid on Restricted Shares shall be either paid at the dividend payment date, or deferred (with or without the crediting of interest or earnings equivalents thereon as determined by the Committee) for payment to such date as determined by the Committee, in cash or in unrestricted Shares having a Fair Market Value equal to the amount of such dividends; provided, however, that any such dividends (and any interest or earnings equivalents credited thereon) shall be subject to forfeiture upon such conditions, if any, as the Committee may specify. Shares distributed in connection with a Share split or dividend in Shares, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Shares with respect to which such Shares or other property has been distributed. (e) Restricted Share Units. The Committee is authorized to grant Restricted Share Units to Eligible Persons, subject to the following terms and conditions: (i) Award and Restrictions. Delivery of Shares or cash, as the case may be, will occur upon expiration of the deferral period specified for Restricted Share Units by the Committee (or, if permitted by the Committee, as elected by the Eligible Person). In addition, Restricted Share Units shall be subject to such restrictions as the Committee may impose, if any (including, without limitation, the achievement of performance criteria if deemed appropriate by the Committee), at the date of grant or thereafter, which restrictions may lapse at the expiration of the deferral period or at earlier or later specified times, separately or in combination, in installments or otherwise, as the Committee may determine. The Committee must certify in writing prior to the lapse of restrictions conditioned on the achievement of performance criteria that such performance criteria were in fact satisfied. (ii) Forfeiture. Except as otherwise determined by the Committee at date of grant or thereafter, upon termination of employment (as determined under criteria established by the Committee) during the applicable deferral period or portion thereof to which forfeiture conditions apply (as provided in the Award Agreement evidencing the Restricted Share Units), or upon failure to satisfy any other conditions precedent to the delivery of Shares or cash to which such Restricted Share Units relate, all Restricted Share Units that are at that time subject to deferral or restriction shall be forfeited; provided, however, that the Committee may provide, by rule or regulation or in any Award Agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Share Units will be waived in whole or in part in the event of termination resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Restricted Share Units. (f) Performance Shares and Performance Units. The Committee is authorized to grant Performance Shares or Performance Units or both to Eligible Persons on the following terms and conditions: (i) Performance Period. The Committee shall determine a performance period (the "Performance Period") of one or more years and shall determine the performance objectives for grants of Performance Shares and Performance Units. Performance objectives may vary from Eligible Person to Eligible Person and shall be based upon such performance criteria as the Committee may deem appropriate. Performance Periods may overlap and Eligible Persons may participate simultaneously with respect to Performance Shares and Performance Units for which different Performance Periods are prescribed. (ii) Award Value. At the beginning of a Performance Period, the Committee shall determine for each Eligible Person or group of Eligible Persons with respect to that Performance Period the range of number of Shares, if any, in the case of Performance Shares, and the range of dollar values, if any, in the case of Performance Units, which may be fixed or may vary in accordance with such performance or other criteria specified by the Committee, which shall be paid to an Eligible Person as an Award if the relevant measure of Company performance for the Performance Period is met. (iii) Significant Events. If during the course of a Performance Period there shall occur significant events as determined by the Committee which the Committee expects to have a substantial effect on a performance objective during such period, the Committee may revise such objective; provided, however, that, in the case of an Award which is intended to qualify as "performance-based compensation" within the meaning of Section 162(m)(4)(C) of the Code, such authority shall be subject to Section 3(d) hereof. (iv) Forfeiture. Except as otherwise determined by the Committee, at the date of grant or thereafter, upon termination of employment during the applicable Performance Period, Performance Shares and Performance Units for which the Performance Period was prescribed shall be forfeited; provided, however, that the Committee may provide, by rule or regulation or in any Award Agreement, or may determine in an individual case, that restrictions or forfeiture conditions relating to Performance Shares and Performance Units will be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Performance Shares and Performance Units. (v) Payment. Each Performance Share or Performance Unit may be paid in whole Shares, or cash, or a combination of Shares and cash either as a lump sum payment or in installments, all as the Committee shall determine, at the time of grant of the Performance Share or Performance Unit or otherwise, commencing as soon as practicable after the end of the relevant Performance Period. The Committee must certify in writing prior to the payment of any Performance Share or Performance Unit that the performance objectives and any other material terms were in fact satisfied. (g) Dividend Equivalents. The Committee is authorized to grant Dividend Equivalents to Eligible Persons. The Committee may provide, at the date of grant or thereafter, that Dividend Equivalents shall be paid or distributed when accrued or shall be deemed to have been reinvested in additional Shares, or other investment vehicles as the Committee may specify, provided that Dividend Equivalents (other than freestanding Dividend Equivalents) shall be subject to all conditions and restrictions of the underlying Awards to which they relate. (h) Other Share-Based Awards. The Committee is authorized, subject to limitations under applicable law, to grant to Eligible Persons such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Shares, as deemed by the Committee to be consistent with the purposes of the Plan, including, without limitation, unrestricted shares awarded purely as a "bonus" and not subject to any restrictions or conditions, other rights convertible or exchangeable into Shares, purchase rights for Shares, Awards with value and payment contingent upon performance of the Company or any other factors designated by the Committee, and Awards valued by reference to the performance of specified Subsidiaries or Affiliates. The Committee shall determine the terms and conditions of such Awards at date of grant or thereafter. Shares delivered pursuant to an Award in the nature of a purchase right granted under this Section 5(h) shall be purchased for such consideration, paid for at such times, by such methods, and in such forms, including, without limitation, cash, Shares, notes or other property, as the Committee shall determine. Cash awards, as an element of or supplement to any other Award under the Plan, shall also be authorized pursuant to this Section 5(h). 6. Certain Provisions Applicable to Awards. (a) Stand-Alone, Additional, Tandem and Substitute Awards. Awards granted under the Plan may, in the discretion of the Committee, be granted to Eligible Persons either alone or in addition to, in tandem with, or in exchange or substitution for, any other Award granted under the Plan or any award granted under any other plan or agreement of the Company, any Subsidiary or Affiliate, or any business entity to be acquired by the Company or a Subsidiary or Affiliate, or any other right of an Eligible Person to receive payment from the Company or any Subsidiary or Affiliate. Awards may be granted in addition to or in tandem with such other Awards or awards, and may be granted either as of the same time as or a different time from the grant of such other Awards or awards. The per Share exercise price of any Option, grant price of any SAR, or purchase price of any other Award conferring a right to purchase Shares which is granted, in connection with the substitution of awards granted under any other plan or agreement of the Company or any Subsidiary or Affiliate or any business entity to be acquired by the Company or any Subsidiary or Affiliate, shall be determined by the Committee, in its discretion. (b) Terms of Awards. The term of each Award granted to an Eligible Person shall be for such period as may be determined by the Committee; provided, however, that in no event shall the term of any ISO or an SAR granted in tandem therewith exceed a period of ten years from the date of its grant (or such shorter period as may be applicable under Section 422 of the Code). (c) Form of Payment Under Awards. Subject to the terms of the Plan and any applicable Award Agreement, payments to be made by the Company or a Subsidiary or Affiliate upon the grant, maturation, or exercise of an Award may be made in such forms as the Committee shall determine at the date of grant or thereafter, including, without limitation, cash, Shares, or other property, and may be made in a single payment or transfer, in installments, or on a deferred basis. The Committee may make rules relating to installment or deferred payments with respect to Awards, including the rate of interest or earnings equivalents to be credited with respect to such payments. (d) Nontransferability. Unless otherwise set forth by the Committee in an Award Agreement, Awards (except for vested shares) shall not be transferable by an Eligible Person except by will or the laws of descent and distribution (except pursuant to a Beneficiary designation) and shall be exercisable during the lifetime of an Eligible Person only by such Eligible Person or his or her guardian or legal representative. An Eligible Person's rights under the Plan may not be pledged, mortgaged, hypothecated, or otherwise encumbered, and shall not be subject to claims of the Eligible Person's creditors. 7. Change of Control Provisions. (a) Acceleration of Exercisability and Lapse of Restrictions. In the event of a Change of Control, the following acceleration provisions shall apply unless otherwise provided by the Committee at the time of the Award grant: All outstanding Awards pursuant to which the Participant may have rights the exercise of which is restricted or limited, shall become fully exercisable at the time of the Change of Control. Unless the right to lapse of restrictions or limitations is waived or deferred by a Participant prior to such lapse, all restrictions or limitations (including risks of forfeiture and deferrals) on outstanding Awards subject to restrictions or limitations under the Plan shall lapse, and all performance criteria and other conditions to payment of Awards under which payments of cash, Shares or other property are subject to conditions shall be deemed to be achieved or fulfilled and shall be waived by the Company at the time of the Change of Control. (b) Definitions of Certain Terms. For purposes of this Section 7, the following definitions, in addition to those set forth in Section 2, shall apply: (i) "Change of Control" means and shall be deemed to have occurred if: (a) any person (within the meaning of the Exchange Act), other than the Company, a Related Party or Tengelmann Warenhandelsgesellschaft, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting Securities representing 40 percent or more of the total voting power of all the then- outstanding Voting Securities; or (b) the individuals who, as of the effective date of the Plan, constitute the Board, together with those who first become directors subsequent to such date and whose recommendation, election or nomination for election to the Board was approved by a vote of at least a majority of the directors then still in office who either were directors as of the effective date of the Plan or whose recommendation, election or nomination for election was previously so approved (the "Continuing Directors"), cease for any reason to constitute a majority of the members of the Board; or (c) the stockholders of the Company approve a merger, consolidation, recapitalization or reorganization of the Company or a Subsidiary, reverse split of any class of Voting Securities, or an acquisition of securities or assets by the Company or a Subsidiary, or consummation of any such transaction if stockholder approval is not obtained, other than (I) any such transaction in which the holders of outstanding Voting Securities immediately prior to the transaction receive (or, in the case of a transaction involving a Subsidiary and not the Company, retain), with respect to such Voting Securities, voting securities of the surviving or transferee entity representing more than 60 percent of the total voting power outstanding immediately after such transaction, with the voting power of each such continuing holder relative to other such continuing holders not substantially altered in the transaction, or (II) any such transaction which would result in a Related Party beneficially owning more than 50 percent of the voting securities of the surviving entity outstanding immediately after such transaction; or (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets other than any such transaction which would result in a Related Party owning or acquiring more than 50 percent of the assets owned by the Company immediately prior to the transaction. (ii) "Related Party" means (a) a majority-owned subsidiary of the Company; (b) an employee or group of employees of the Company or any majority-owned subsidiary of the Company; (c) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any majority-owned subsidiary of the Company; or (d) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of Voting Securities. (iii) "Voting Securities" means any securities of the Company which carry the right to vote generally in the election of directors. 8. General Provisions. (a) Compliance with Legal and Trading Requirements. The Plan, the granting and exercising of Awards thereunder, and the other obligations of the Company under the Plan and any Award Agreement, shall be subject to all applicable federal and state laws, rules and regulations, and to such approvals by any regulatory or governmental agency as may be required. The Company, in its discretion, may postpone the issuance or delivery of Shares under any Award until completion of such stock exchange or market system listing or registration or qualification of such Shares or other required action under any state or federal law, rule or regulation as the Company may consider appropriate, and may require any Participant to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Shares in compliance with applicable laws, rules and regulations. No provisions of the Plan shall be interpreted or construed to obligate the Company to register any Shares under federal or state law. (b) No Right to Continued Employment or Service. Neither the Plan nor any action taken thereunder shall be construed as giving any employee or director the right to be retained in the employ or service of the Company or any of its Subsidiaries or Affiliates, nor shall it interfere in any way with the right of the Company or any of its Subsidiaries or Affiliates to terminate any employee's or director's employment or service at any time. (c) Taxes. The Company or any Subsidiary or Affiliate is authorized to withhold from any Award granted, any payment relating to an Award under the Plan, including from a distribution of Shares, or any payroll or other payment to an Eligible Person, amounts of withholding and other taxes due in connection with any transaction involving an Award, and to take such other action as the Committee may deem advisable to enable the Company and Eligible Persons to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Shares or other property and to make cash payments in respect thereof in satisfaction of an Eligible Person's tax obligations. (d) Changes to the Plan and Awards. The Board may amend, alter, suspend, discontinue, or terminate the Plan or the Committee's authority to grant Awards under the Plan without the consent of shareholders of the Company or Participants, except that any such amendment, alteration, suspension, discontinuation, or termination shall be subject to the approval of the Company's shareholders to the extent such shareholder approval is required under Section 422 of the Code; provided, however, that, without the consent of an affected Participant, no amendment, alteration, suspension, discontinuation, or termination of the Plan may materially and adversely affect the rights of such Participant under any Award theretofore granted to him or her. The Committee may waive any conditions or rights under, amend any terms of, or amend, alter, suspend, discontinue or terminate, any Award theretofore granted, prospectively or retrospectively; provided, however, that, without the consent of a Participant, no amendment, alteration, suspension, discontinuation or termination of any Award may materially and adversely affect the rights of such Participant under any Award theretofore granted to him or her. (e) No Rights to Awards; No Shareholder Rights. No Eligible Person or employee shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Eligible Persons and employees. No Award shall confer on any Eligible Person any of the rights of a shareholder of the Company unless and until Shares are duly issued or transferred to the Eligible Person in accordance with the terms of the Award. (f) Unfunded Status of Awards. The Plan is intended to constitute an "unfunded" plan for incentive compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award shall give any such Participant any rights that are greater than those of a general creditor of the Company; provided, however, that the Committee may authorize the creation of trusts or make other arrangements to meet the Company's obligations under the Plan to deliver cash, Shares, other Awards, or other property pursuant to any Award, which trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Committee otherwise determines with the consent of each affected Participant. (g) Nonexclusivity of the Plan. Neither the adoption of the Plan by the Board nor its submission to the shareholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of options and other awards otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases. (h) Not Compensation for Benefit Plans. No Award payable under this Plan shall be deemed salary or compensation for the purpose of computing benefits under any benefit plan or other arrangement of the Company for the benefit of its employees or directors unless the Company shall determine otherwise. (i) No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award. The Committee shall determine whether cash, other Awards, or other property shall be issued or paid in lieu of such fractional Shares or whether such fractional Shares or any rights thereto shall be forfeited or otherwise eliminated. (j) Governing Law. The validity, construction, and effect of the Plan, any rules and regulations relating to the Plan, and any Award Agreement shall be determined in accordance with the laws of New Jersey without giving effect to principles of conflict of laws. (k) Effective Date; Plan Termination. The Plan shall become effective as of July 14, 1998 (the "Effective Date"), subject to approval by the vote of the holders of a majority of the shares of stock of the Company present or represented at the annual meeting of stockholders to be held in July 1999. Awards may be made prior to such approval by stockholders, but each such Award shall be subject to the approval of this Plan by the stockholders, and if this Plan shall not be so approved, all Awards granted under this Plan shall be of no effect. The Plan shall terminate as to future awards on the date which is ten (10) years after the Effective Date. (l) Relationship to 1998 Restricted Stock Plan. This Plan constitutes an amendment and restatement of The Great Atlantic & Pacific Tea Company, Inc. 1998 Restricted Stock Plan (the "Restricted Stock Plan") effective as of July 14, 1998, the date of inception of the Restricted Stock Plan. Any awards of shares of Restricted Stock made under the Restricted Stock Plan shall be deemed to be Awards of Restricted Shares under this Plan and shall be subject to all the terms and conditions of this Plan. (m) Titles and Headings. The titles and headings of the sections in the Plan are for convenience of reference only. In the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. -----END PRIVACY-ENHANCED MESSAGE-----