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
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
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-27-1999
<PERIOD-END> FEB-27-1999
<CASH> 136810
<SECURITIES> 0
<RECEIVABLES> 204700
<ALLOWANCES> 0
<INVENTORY> 841030
<CURRENT-ASSETS> 1224037
<PP&E> 1686487
<DEPRECIATION> 0
<TOTAL-ASSETS> 3141741
<CURRENT-LIABILITIES> 1134063
<BONDS> 844253
0
0
<COMMON> 38291
<OTHER-SE> 798966
<TOTAL-LIABILITY-AND-EQUITY> 3141741
<SALES> 10179358
<TOTAL-REVENUES> 10179358
<CGS> (7260110)
<TOTAL-COSTS> (7260110)
<OTHER-EXPENSES> (3083639)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (64893)
<INCOME-PRETAX> (229284)
<INCOME-TAX> 162120
<INCOME-CONTINUING> (67164)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (67164)
<EPS-PRIMARY> 1.75
<EPS-DILUTED> 1.75
</TABLE>
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
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
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.
---------------------
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.
