-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AfaZpreZo4ywgwlOw/x0D4NNbc1Lujws+Zjq+pHOAdOTG7xoIHPBW4lElDmA5AZt wluG9BiOHshYxXfPenvx0Q== 0000043300-97-000008.txt : 19970520 0000043300-97-000008.hdr.sgml : 19970520 ACCESSION NUMBER: 0000043300-97-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970222 FILED AS OF DATE: 19970516 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREAT ATLANTIC & PACIFIC TEA CO INC CENTRAL INDEX KEY: 0000043300 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 131890974 STATE OF INCORPORATION: MD FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04141 FILM NUMBER: 97610501 BUSINESS ADDRESS: STREET 1: 2 PARAGON DR CITY: MONTVALE STATE: NJ ZIP: 07645 BUSINESS PHONE: 2015739700 MAIL ADDRESS: STREET 1: 2 PARAGON DRIVE CITY: MONTVALE STATE: NJ ZIP: 07645 10-K 1 Conformed Copy SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year Commission file number 1-4141 ended February 22, 1997 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 No X Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant at May 1, 1997 was $432,122,501. The number of shares of common stock outstanding at May 1, 1997 was 38,248,966. Documents Incorporated by Reference The information required by Part I, Items 1(d) and 3, and Part II, Items 5, 6, 7 and 8 are incorporated by reference from the Registrant's 1996 Annual Report to Shareholders. The Registrant has filed with the S.E.C. since the close of its last fiscal year ended February 22, 1997, 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 973 stores averaging approximately 31,440 square feet per store as of February 22, 1997. In addition, the Company began franchising its Canadian Food Basics stores in fiscal 1995. As of February 22, 1997, the Company had 49 Food Basics Franchise stores in Canada averaging approximately 27,470 square feet per store. On the basis of reported sales for fiscal 1996, 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, Food Mart, Food Bazaar, Miracle Food Mart, Ultra Mart, Futurestore, Dominion, Food Basics and Compass Foods, the Company sells groceries, meats, fresh produce and other items commonly offered in supermarkets. In addition, many stores have bakery, delicatessen, pharmacy, floral, fresh fish and cheese departments, and on-site banking. National, regional and local brands are sold as well as private label merchandise and generic (non-branded) products. In support of its retail operations, the Company also operates two coffee roasting plants, two bakeries and a delicatessen food kitchen. The products processed in these facilities are sold under the Company's own brand names which include America's Choice, Master Choice, Health Pride, Eight O'Clock, Bokar, Royale, Savings Plus and Jane Parker. All products produced by A&P's food processing operations are sold in Company stores. A&P also sells its coffee products to unaffiliated retail outlets outside of its marketing areas. 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 corporate operations and retail stores. During fiscal 1996, the Company expended approximately $297 million for capital projects. The Company's plans for fiscal 1997 anticipate capital expenditures of approximately $310 million which include the opening of 40 new supermarkets, the remodeling or expansion of 30 stores and converting 20 Canadian stores to Food Basics Franchised stores. In addition, the Company is also developing plans for additional stores to be opened in future fiscal 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 processing facilities which produce coffee, dairy and deli products and certain baked goods. The ingredients for coffee products are purchased principally from Brazilian and Central American sources. Other ingredients are obtained from domestic suppliers. -1- Employees As of February 22, 1997, the Company had approximately 84,000 employees, of which 69% were employed on a part-time basis. Approximately 88% of the Company's employees are covered by union contracts. Competition The supermarket business is highly competitive throughout the marketing areas served by the Company and is generally characterized by low profit margins on sales with earnings primarily dependent upon rapid inventory turnover, effective cost controls and the ability to achieve high sales volume. The Company competes for sales and store locations with a number of national and regional chains as well as with many independent and cooperative stores and markets. Foreign Operations The information required is contained in the 1996 Annual Report to Shareholders on pages 23,25, 26 and 29 and is herein incorporated by reference. - 2 - ITEM 2. Properties At February 22, 1997, the Company operated 973 retail stores and serviced 49 franchised stores. Approximately 9% of the Company's stores are owned, while the remainder are leased. These stores are geographically located as follows: Company Stores: - -------------- New England States: Connecticut............. 53 Massachusetts........... 22 New Hampshire........... 1 Vermont................. 2 ----- Total................. 78 Middle Atlantic States: District of Columbia.... 1 Delaware................ 8 Maryland................ 52 New Jersey.............. 115 New York................ 183 Pennsylvania............ 45 ----- Total................. 404 Mid-Western States: Michigan................ 99 Wisconsin............... 47 ----- Total................. 146 Southern States: Alabama................. 3 Georgia................. 43 Louisiana............... 25 Mississippi............. 6 North Carolina.......... 20 South Carolina.......... 8 Virginia................ 50 West Virginia........... 1 ----- Total................. 156 Total United States... 784 Ontario, Canada........... 189 ----- Total Stores.......... 973 ===== Franchised Stores: - ------------------- Ontario, Canada 49 --- Total Franchised Stores 49 === -3- The total area of all retail stores is approximately 30.6 million square feet averaging approximately 31,440 square feet per store while the total area of all franchised stores is approximately 1.4 million square feet averaging approximately 27,470 square feet per store. The stores built by the Company over the past several years and those planned for fiscal 1997 generally range in size from 50,000 to 65,000 square feet, of which approximately 65% to 70% is utilized as selling area. The Company operates two coffee roasting plants, two bakeries and a delicatessen food kitchen in the United States and Canada. In addition, the Company maintains 16 warehouses which service its store network. The net book value of real estate pledged as collateral for all mortgage loans amounted to approximately $48 million as of February 22, 1997. ITEM 3. Legal Proceedings The information required is contained in the 1996 Annual Report to Shareholders on page 29 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 1996. PART II ITEM 5. Market for the Registrant's Common Stock and Related Security Holder Matters The information required is contained in the 1996 Annual Report to Shareholders on pages 29 and 31 and is herein incorporated by reference. ITEM 6. Selected Financial Data The information required is contained on page 31 of the 1996 Annual Report to Shareholders and is herein incorporated by reference. ITEM 7. Management's Discussion and Analysis The information required is contained in the 1996 Annual Report to Shareholders on pages 14 through 18 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 1996 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 29 of the 1996 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. -4- PART III ITEMS 10 and 11. Directors and Executive Officers of the Registrant and Executive Compensation Executive Officers of the Company Name Age Current Position James Wood.......... 67 Chairman of the Board and Co-Chief Executive Officer Christian W.E. Haub 32 President and Co-Chief Executive Officer Fred Corrado........ 57 Vice Chairman of the Board and Chief Financial Officer Gerald L. Good...... 54 Executive Vice President - Marketing and Merchandising George Graham....... 47 Executive Vice President - U.S. Operations J. Wayne Harris..... 58 Chairman and Chief Executive Officer - The Great Atlantic & Pacific Tea Company of Canada, Limited Aaron Malinsky 48 Executive Vice President - Development and Strategic Planning Peter J. O'Gorman... 58 Executive Vice President - International Store and Product Development Ivan K. Szathmary... 60 Executive Vice President - Chief Services Officer Robert G. Ulrich.... 62 Senior Vice President - General Counsel Corporate officers of the Company are elected annually and serve at the pleasure of the Board of Directors; each of the executive officers listed above is a corporate officer. Mr. Wood was elected Chairman of the Board and Chief Executive Officer on April 29, 1980. Effective April 2, 1997, Mr. Wood became Co-Chief Executive Officer with Mr. Haub. From December 1988 to December 1993 and at other prior times he also served as President. He is Chairman of the Executive Committee and is an ex officio member of the Finance and Retirement Benefits Committees of the Board. Mr. Haub was elected President and Co-Chief Executive Officer on April 2, 1997. Prior to assuming his present positions he was President and Chief Operating Officer of the Company since December 7, 1993. Prior thereto, he 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 is an ex officio member of the Executive, Finance and Retirement Benefits Committees. Mr. Corrado was elected as Vice Chairman of the Board on October 6, 1992. He has also served 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. Good was elected Executive Vice President - Marketing and Merchandising on October 3, 1994. During the past five years and prior to assuming his present position, he served as Senior Vice President and Chairman, The Great Atlantic & Pacific Company of Canada, Limited, Senior Vice President - Field Administration, and as Vice President - Chief Administrative Officer. Mr. Graham was elected Executive Vice President - U.S. Operations on January 7, 1997. Prior to assuming his present position and for the past five years, he was successively Executive Vice President, Merchandising Administration, Senior Vice President - Chief Merchandising Officer and President - Metro Area Group of the Company. -5- Mr. Harris was named Chairman and Chief Executive Officer of the Great Atlantic and Pacific Tea Company of Canada, Limited on September 19, 1996. Prior thereto, he was named Corporate Executive Vice President on December 12, 1995, and had been successively Executive Vice President, Canadian Operations, Chairman Waldbaum's, Inc., and Chief Operating Officer - U.S. Operations. In 1993 Mr. Harris was Senior Vice President - Northeast Operations, and prior thereto, Vice President - Operations Greater New York Metropolitan Area. During the past five years and prior to joining the Company in September 1992, he was Group President, Cincinnati/Dayton marketing area of the Kroger Company. Mr. Malinsky was elected Executive Vice President, Development and Strategic Planning on August 1, 1996. Prior to rejoining the Company and during the past five years, Mr. Malinsky was President and Chairman of Victory Markets, Inc. 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. Dr. Szathmary was elected Executive Vice President and Chief Services Officer on July 11, 1996. Prior thereto, he was Senior Vice President and Chief Services Officer since July 1986. Mr. Ulrich was elected Senior Vice President and General Counsel of the Company in April 1981. The Company has filed with the Commission since the close of its fiscal year ended February 22, 1997 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 1996 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 1996 definitive proxy statement on pages 1 and 6 and is herein incorporated by reference. -6- 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 1996 Annual Report to Shareholders. The following required items, appearing on pages 19 through 30 of the 1996 Annual Report to Shareholders, are herein incorporated by reference: Statements of Consolidated Operations Statements of Consolidated Shareholders' Equity Consolidated Balance Sheets Statements of Consolidated Cash Flows Notes to Consolidated Financial Statements Independent Auditors' Report 2) Financial Statement Schedules are omitted because they are not required or do not apply, or the information is included elsewhere in the financial statements or notes thereto. -7- 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, and February 25, 1995; 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 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 Payment Plan -8- Exhibit Incorporation by reference Numbers Description (If applicable) 11) Not Applicable 12) Not Applicable 13) 1996 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 No reports on Form 8-K were filed for the fiscal year ended February 22, 1997. -9- 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 13, 1997 By: /s/ Fred Corrado 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, James Wood Co-Chief Executive Officer and Director /s/ Christian W.E. Haub President, Co-Chief Executive Officer Christian W.E. Haub and 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 -10- The above-named persons signed this report on behalf of the registrant on May 13, 1997. /s/ Kenneth A. Uhl Vice President, Controller May 16, 1997 Kenneth A. Uhl Date -11- EX-13 2 The Great Atlantic & Pacific Tea Company, Inc. (Dollars in thousands, except per share amounts) - ----------------------------------------------- Fiscal 1996 Fiscal 1995 Fiscal 1994 ----------- ----------- ----------- Sales $10,089,014 $10,101,356 $10,331,950 Income (loss) from operations 169,303 151,734 (57,530) Income (loss) before cumulative effect of accounting change 73,032 57,224 (166,586) Net income (loss) 73,032 57,224 (171,536) Income (loss) per share before cumulative effect of accounting change 1.91 1.50 (4.36) Net income (loss) per share 1.91 1.50 (4.49) Cash dividends per share .20 .20 .65 Expenditures for property 296,878 236,139 214,886 Depreciation and amortization 230,748 225,449 235,444 Working capital 215,374 190,967 97,277 Shareholders' equity 890,072 822,785 774,914 Debt to total capitalization .49 .49 .53 Book value per share 23.27 21.53 20.27 New store openings 30 30 22 Number of stores at year end 973 1,014 1,108 Number of franchised stores served at year end 49 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OPERATING RESULTS Fiscal 1996 Compared with 1995 Sales for fiscal 1996 were $10,089 million, a net decrease of $12 million or 0.1% when compared to fiscal 1995 sales of $10,101 million. U.S. sales decreased $83 million or 1.0% compared to fiscal 1995. U.S. same store sales, which include replacement stores, were down 0.7% from the prior year. In Canada, sales increased $71 million or 4.1% from fiscal 1995 to $1,807 million. Canada same store sales, which include replacement stores, were up 0.5% from the prior year. Total Company same store sales, including replacement stores, for fiscal 1996 decreased 0.5% from the prior year. Average weekly sales per supermarket were approximately $195,200 in fiscal 1996 versus $183,300 in fiscal 1995 for a 6.5% increase. During fiscal 1996, the Company opened 27 new supermarkets and 3 new liquor stores, remodeled or expanded 72 stores, and closed 71 stores, of which 23 were converted to Food Basics franchised stores in Canada. The sales decrease of $12 million from last year was mainly the result of store closings. The Company closed 171 stores, excluding replacement stores, since the beginning of fiscal 1995 which reduced comparative sales by approximately $443 million or 4.4% in fiscal 1996. The store closures include 41 stores that were subsequently converted to Food Basics franchised stores. The lost sales of the store closures were offset by the opening of 35 new stores, excluding 25 stores that replaced 27 older, outmoded stores, since the beginning of fiscal 1995 which increased sales by approximately $276 million or 2.7% in fiscal 1996. In addition, the opening and conversion of 42 Food Basics franchised stores in fiscal 1996 increased wholesale sales to the Franchisees by $199 million to sales of $205 million in fiscal 1996, from sales of only $6 million in fiscal 1995. Gross margin as a percent of sales decreased 0.1% to 29.0% for the current year from 29.1% for the prior year resulting primarily from lower margins on wholesale sales to the Food Basics franchised stores, partially offset by an increase in the retail supermarket margin in both the U.S. and Canada. The gross margin dollar decrease of $14 million is primarily the result of a decrease in gross margin rates of $10 million, a decrease in sales volume which had an impact of decreasing margin by $6 million, partially offset by a higher Canadian exchange rate resulting in an increase of $2 million. The U.S. gross margin increased $16 million principally as a result of increased gross margin rates of $40 million, partially offset by a decrease in sales volume which had an impact of decreasing margin by $24 million. In Canada, gross margin decreased $30 million, primarily resulting from the effect of a decrease in gross margin rates of $50 million, partially offset by sales volume increases which impacted margins by $18 million, and a higher Canadian exchange rate resulting in an increase of $2 million. Store operating, general and administrative expense of $2,752 million in fiscal 1996 declined by approximately $31 million from fiscal 1995. As a percent of sales, store operating, general and administrative expense for fiscal 1996 decreased to 27.3% from 27.6% for the prior year. U.S. expenses increased $19 million, principally as a result of increased store labor and rental costs on the new superstores opened in fiscal 1996. Canadian expenses decreased $50 million, principally as a result of reduced store labor and occupancy costs as a result of converting 41 stores to Food Basics franchised stores. Interest expense increased $0.1 million from the previous year, primarily due to increased average borrowings in the U.S. partially offset by lower average interest rates. Interest income increased $2.0 million from the previous year, primarily due to interest income on equipment leases and inventory notes relating to the Food Basics franchise business. Income before taxes for fiscal 1996 was $101 million as compared to $81 million in fiscal 1995 for an increase of $20 million or 24%. Income before taxes increased due to improvements in the results of the Canadian operations of $24 million from $8 million in fiscal 1995 to $32 million in fiscal 1996. The Canadian increase was partially offset by a decrease in U.S. income before taxes from $73 million in fiscal 1995 to $69 million in fiscal 1996. The effective tax rate for fiscal 1996 was 27.4% as compared to a tax rate of 29.4% in fiscal 1995. Included in the fiscal 1995 tax provision is a $6.5 million or $0.17 per share credit relating to a refund of previously paid taxes in Canada. Excluding the $6.5 million credit, the fiscal 1995 income tax provision would have been $30.4 million resulting in an effective tax rate of 37.4%. The decrease in the effective tax rate, after giving effect to this credit is mainly attributable to the change in the Canadian income tax valuation allowance. The Company is reversing the income tax valuation allowance to the extent that its Canadian operations generate taxable income. During fiscal 1994, the Company recorded a valuation allowance of $119.6 million against Canadian deferred tax assets, which, based upon current available evidence, are not likely to be realized. These deferred tax assets resulted from tax loss carryforwards and deductible temporary differences arising from the Canadian write-off of goodwill and long-lived assets. During fiscal 1996, since the Canadian operations generated pretax earnings, the Company reversed approximately $14.3 million of the valuation allowance. Although Canada generated pretax earnings in fiscal 1996 of $32 million and $8 million in fiscal 1995, the Company was unable to conclude that the Canadian deferred tax assets were more likely than not to be realized. This conclusion was based in part on the competitive Canadian marketplace and the significant losses experienced prior to fiscal 1995. Accordingly, at February 22, 1997 the Company is continuing to fully reserve its Canadian net deferred tax assets. The valuation allowance will be adjusted when and if, in the opinion of Management, significant positive evidence exists which indicates that it is more likely than not that the Company will be able to realize the Canadian deferred tax assets. Net income for fiscal 1996 was $73 million or $1.91 per share as compared to $57 million or $1.50 per share for fiscal 1995. Excluding the $6.5 million or $0.17 per share Canadian tax refund, fiscal 1995 net income would have been $51 million or $1.33 per share. Accordingly, excluding the effect of such refund, net income increased $22 million or $0.58 per share. The increase in net income is the result of lower store operating, general and administrative expenses of $31 million, coupled with a lower effective income tax rate, partially offset by lower gross margins of $14 million. Fiscal 1995 Compared with 1994 Sales for fiscal 1995 were $10,101 million, a net decrease of $231 million or 2.2% when compared to fiscal 1994 sales of $10,332 million. U.S. sales decreased $176 million or 2.1% compared to fiscal 1994. U.S. same store sales, which include replacement stores, were down 0.2% from the prior year. In Canada, sales of $1,736 million decreased $55 million or 3.1% from fiscal 1994. Canada same store sales, which include replacement stores, were down 1.6% from the prior year. During fiscal 1995, the Company opened 27 new supermarkets and 3 new liquor stores, remodeled or expanded 76 stores, and closed 124 stores, of which 6 were converted to Food Basics franchised stores in Canada, and 8 in the Rhode Island market which were sold to Edwards Super Food Stores in the first quarter of fiscal 1995. The Company recorded sales to the Food Basics franchised stores of $6 million in fiscal 1995. The Company closed 190 stores, excluding replacement stores, since the beginning of fiscal 1994. The store closures, excluding replacement stores, since the beginning of fiscal 1994 reduced comparative sales by approximately $422 million or 4.1% in fiscal 1995. The opening of 33 new stores, excluding 19 stores that replaced 21 older, outmoded stores, since the beginning of fiscal 1994 added approximately $219 million or 2.1% to sales in fiscal 1995. Total Company same store sales, including replacement stores, for fiscal 1995 decreased 0.5% from the prior year. Average weekly sales per supermarket were approximately $183,300 in fiscal 1995 versus $176,000 in fiscal 1994 for a 4.1% increase. Gross margin as a percent of sales increased 0.6% to 29.1% for the current year from 28.5% for the prior year resulting primarily from increased gross margin rates in both the U.S. and Canada partially offset by increased promotional price reductions in the U.S. The gross margin dollar decrease of $8 million is primarily the result of a decrease in sales volume which had an impact of decreasing margin by approximately $69 million, partially offset by an increase in gross margin rates of $58 million and an increase in the Canadian exchange rate of $3 million. The U.S. gross margin decreased $17 million principally as a result of decreased sales volume which resulted in margins decreasing $50 million partially offset by an increase in gross margin rates of $33 million. In Canada, gross margin increased $9 million, primarily resulting from the effect of an increase in gross margin rates of $25 million and a higher Canadian exchange rate resulting in an increase of $3 million, partially offset by sales volume declines which impacted margins by $19 million. Store operating, general and administrative expense of $2,784 million in fiscal 1995 declined by approximately $90 million from fiscal 1994. The fiscal 1994 store operating, general and administrative expense includes charges of $27 million for employee buy-out costs incurred as a result of new labor agreements entered into in Canada and $17 million to cover the cost of closing 13 stores, other than Miracle Food Mart ("Miracle") stores in Canada. As a percent of sales, store operating, general and administrative expense for fiscal 1995 decreased to 27.6% from 27.8% for the prior year. U.S. expenses decreased $4 million, principally as a result of lower store labor costs on reduced sales volume. Canadian expenses decreased $86 million, as a result of the charges noted above of $27 million and $17 million recorded in fiscal 1994, coupled with reduced store labor costs and reduced occupancy costs. Included under the Company's 1995 year-end balance sheet captions "Other accruals" and "Other non-current liabilities" are amounts totaling approximately $23 million associated with store closing liabilities. During fiscal 1995 approximately $20 million was charged against the store closing reserve. During fiscal 1994, the Company recorded a charge of $127 million representing the write-off of $50 million of goodwill and the write-down of $77 million of fixed assets relating to Miracle stores which were expected to continue to generate operating losses. As of February 24, 1996, based on current information, the Company has no reasonable basis to believe that there has been any further impairment of its existing goodwill. There is currently no goodwill recorded relating to the Canadian operations. Interest expense increased $0.2 million from the previous year, primarily due to increased Canadian borrowings and an increase in average interest rates. U.S. interest expense decreased from the previous year, as a result of decreased borrowings and a decrease in average interest rates on short- term borrowings. Income before taxes and cumulative effect of accounting change for fiscal 1995 was $81 million as compared to a loss of $129 million in fiscal 1994. The fiscal 1994 loss included Canadian charges for the write-off of goodwill and long-lived assets of $127 million, the employee termination/reassignment program of $27 million and the provision for store closings of $17 million. Income before taxes and cumulative effect of accounting change for U.S. operations for fiscal 1995 was $73 million as compared to $81 million for fiscal 1994, or an 8.9% decrease. For Canadian operations, income before taxes and cumulative effect of accounting change for fiscal 1995 was $8 million as compared to a loss of $210 million for fiscal 1994, resulting in an increase of $218 million. During fiscal 1994, the Company recorded a valuation allowance of $119.6 million against Canadian deferred tax assets, which, based upon current available evidence, are not likely to be realized. These deferred tax assets result from tax loss carryforwards and deductible temporary differences arising from the Canadian write-off of goodwill and long-lived assets. The Company historically provided U.S. deferred taxes on the undistributed earnings of the Canadian operations. During fiscal 1994, the Company made an election to permanently reinvest prior years' earnings and, accordingly, reversed deferred tax liabilities of $27 million associated with the undistributed earnings of the Canadian operations. Further, this decision also resulted in a direct charge to equity of approximately $20 million to eliminate the deferred tax asset related to the Cumulative Translation Adjustment. During fiscal 1995, since the Canadian operations generated pretax earnings, the Company reversed approximately $3.4 million of the valuation allowance. Although Canada generated pretax earnings in fiscal 1995, the Company was unable to conclude that realization of such deferred tax assets was more likely than not due to pretax losses experienced by Canada in prior years. Accordingly, at February 24, 1996 the Company is continuing to fully reserve its Canadian net deferred tax assets. The valuation allowance will be adjusted when and if, in the opinion of Management, significant positive evidence exists which indicates that it is more likely than not that the Company will be able to realize the Canadian deferred tax assets. In addition, during fiscal 1995 the Company recorded a $6.5 million credit relating to a refund of previously paid taxes in Canada. Effective February 27, 1994, the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS 112"). As a result, in fiscal 1994 the Company recorded an after-tax charge of $5 million or $0.13 per share as the cumulative effect of this change on prior years. Net income for fiscal 1995 was $57 million or $1.50 per share as compared to a net loss for fiscal 1994 of $172 million or $4.49 per share. Fiscal 1995 net income included the $6.5 million Canadian tax refund. The fiscal 1994 net loss included after-tax Canadian charges for the write-off of goodwill and long-lived assets of $127 million, the employee termination/reassignment program of $27 million, the provision for store closings of $17 million, a reduction of deferred tax benefits previously recorded of $28 million and the cumulative effect of adopting SFAS 112 of $5 million, offset by the reversal of deferred tax liabilities of $27 million in the U.S. associated with the undistributed earnings of the Canadian operations. Excluding the U.S. reversal of the deferred tax liabilities associated with undistributed earnings of $27 million recorded in fiscal 1994, net income from U.S. operations decreased from $50 million or $1.31 per share in fiscal 1994 to $44 million or $1.15 per share in fiscal 1995. Excluding the above fiscal 1994 Canadian charges and the fiscal 1995 Canadian tax refund, fiscal 1994 would have resulted in a net loss from Canadian operations of $45 million or $1.17 per share and fiscal 1995 would have resulted in net income of $7 million or $0.18 per share for a $52 million increase. LIQUIDITY AND CAPITAL RESOURCES The Company ended the 1996 fiscal year with working capital of $215 million compared to $191 million and $97 million at February 24, 1996 and February 25, 1995, respectively. The Company had cash and short-term investments aggregating $99 million at the end of fiscal 1996 compared to $100 million and $129 million at the end of fiscal 1995 and 1994, respectively. In December 1995, the Company executed an unsecured five year $400 million U.S. credit agreement and a five year C$100 million (U.S. $73 million at February 22, 1997) Canadian credit agreement with a syndicate of banks, enabling it to borrow funds on a revolving basis sufficient to refinance any outstanding short-term borrowings. The Company pays a facility fee ranging from 3/16% to 1/2% per annum on the U.S. and Canadian revolving credit facilities. Borrowings under the U.S. revolving credit agreement were $95 million and $60 million at February 22, 1997 and February 24, 1996, respectively. A&P Canada has outstanding borrowings of $59 million and $54 million at February 22, 1997 and February 24, 1996, respectively. As of February 22, 1997 the Company has available $305 million under its U.S. revolver and C$19 million (U.S. $14 million at February 22, 1997) under the Canadian credit agreement. As of February 24, 1996, the Company had available $340 million under its U.S. revolver and C$22 million (U.S. $16 million at February 24, 1996) under the Canadian credit agreement. In addition, the U.S. has uncommitted lines of credit with various banks amounting to $145 million and $50 million as of February 22, 1997 and February 24, 1996, respectively. Borrowings under these uncommitted lines of credit amounted to $52 million and $35 million as of February 22, 1997 and February 24, 1996, respectively. As of February 22, 1997, the Company has outstanding a total of $400 million of unsecured, non-callable public debt securities in the form of $200 million 9 1/8% Notes due January 15, 1998, and $200 million 7.70% Notes due January 15, 2004. As of February 22, 1997, the Company has $305 million available under the U.S. five year $400 million revolving credit facility, accordingly, the $200 million 9 1/8% Notes due January 15, 1998 are recorded as non-current since the Company has the ability and intent to refinance these Notes on a long-term basis. See "Indebtedness" footnote for further discussion. 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. After reducing borrowings under the U.S. and Canadian revolving credit facilities with the net proceeds of the $300 million Notes, the Company currently intends to draw upon the 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. During April 1997, the Company began discussions with its lenders under its U.S. and Canadian revolving credit facilities (the "Facility") to amend such Facility to principally (I) extend the maturity; (ii) lower the cost of borrowing by reducing the spread payable over certain reference rates: and (iii) reduce the facility fees payable thereunder. Although there is no assurance that the facility will be amended, the Company does expect to obtain such an amendment. On October 17, 1995, the Company's Canadian subsidiary, The Great Atlantic & Pacific Company of Canada, Ltd.("A&P Canada"), issued U.S. $75 million of unsecured, non-callable 7.78% Notes due November 1, 2000 guaranteed by the Company. The net proceeds from the issuance of these Notes were used to repay indebtedness under the Canadian subsidiary's revolving credit facility. In conjunction with the issuance of the U.S. $75 million Notes, A&P Canada entered into a five year cross-currency swap agreement expiring November 1, 2000. The cross-currency swap agreement requires A&P Canada to make net payments to the counterparty based on a fixed interest differential on a semi- annual basis. The interest differential to be paid under the swap agreement is accrued over the life of the agreement as an adjustment to the yield of the 7.78% Notes and is recorded as interest expense. 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. The Company's loan agreements and certain of its notes contain various financial covenants which require, among other things, minimum net worth and maximum levels of indebtedness and lease commitments. The Company was in compliance with all such financial covenants as of February 22, 1997, and believes that it will continue to be in compliance. During fiscal 1996, 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 $147 million at February 22, 1997 as compared to $95 million at February 24, 1996. U.S. bank borrowings during fiscal 1996 were at an average interest rate of 5.8% compared to 6.4% in fiscal 1995. Canadian bank and commercial paper borrowings were $59 million and $54 million at February 22, 1997 and February 24, 1996, respectively. Canadian bank and commercial paper borrowings during fiscal 1996 were at an average interest rate of 5.3% compared to 8.4% in fiscal 1995. For fiscal 1996, capital expenditures totaled $297 million, which included 27 new supermarkets, 3 new liquor stores, 72 remodels and enlargements and 23 stores which were converted to Food Basics franchised stores in Canada. For fiscal 1997, the Company has planned capital expenditures of approximately $310 million and plans to open 40 new supermarkets, remodel and expand 30 stores and open approximately 20 Food Basics franchised stores in Canada. 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. From fiscal 1997 through fiscal 2000, the Company intends to improve the use of technology through scanning and other technological advances to improve customer service, store operations and merchandising and to intensify advertising and promotions. The Company currently expects to close approximately 53 stores in fiscal year 1997, in addition to 12 stores which will be converted to the Food Basics format in Canada. The Company plans to open approximately 50 new supermarkets in fiscal 1998 and approximately 50 new supermarkets per year thereafter for several years, with an attendant increase in square footage of approximately 3% per year, and to remodel an average of 50 stores per year. The Company's concentration will be on larger stores in the 50,000 to 65,000 square foot range. Costs of each project will vary significantly based upon size, marketing format, geographic area and development involvement required from the Company. The planned costs of these projects approximate $4 million for a new store and $1 million for a remodel or enlargement. Traditionally, the Company leases real estate and expends capital on leasehold improvements and store fixtures and fittings. Consistent with the Company's history, most new store activity will be directed into those areas where the Company achieves its best profitability. Remodeling and enlargement programs are normally undertaken based upon competitive opportunities and usually involve updating a store to a more modern and competitive format. On March 18, 1997, the Board of Directors increased the Company's quarterly dividend from $0.05 to $0.10 per share which will increase the annual dividend payment from $7.6 million in fiscal 1996 to $15.3 million in fiscal 1997. At fiscal year end, the Company's existing senior debt rating was Baa3 with Moody's Investors Service and BB+ with Standard & Poor's Ratings Group. On April 14, 1997, Standard & Poor's Ratings Group upgraded the Company's rating to BBB-. This rating change is not expected to have a material effect on the Company's profitability or availability of credit. A further 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 1997 capital expenditure program, mandatory scheduled debt repayments and dividend payments throughout fiscal 1997. IMPACT OF NEW ACCOUNTING PRONOUNCEMENT Effective February 25, 1996, the Company adopted Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). In conjunction with the adoption, the Company will continue to apply the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" with pro forma disclosure of net income and earnings per share as if the fair value based method prescribed by SFAS 123 had been applied. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128") . SFAS 128 simplifies the financial accounting and reporting standards for computing and presenting earnings per share ("EPS") previously found in Accounting Principles Board Opinion No. 15, "Earnings Per Share" and makes them comparable to international EPS standards. SFAS 128 applies to entities with publicly held common stock or common stock equivalents. SFAS 128 replaces the presentation of primary EPS with a presentation of basic EPS. SFAS 128 requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods and requires restatement of all prior period EPS data presented. Earlier application is not permitted. The Company will adopt SFAS 128 in fiscal 1997 and believes the computation of basic EPS will not result in a material difference from primary EPS as currently computed. STATEMENTS OF CONSOLIDATED OPERATIONS The Great Atlantic & Pacific Tea Company, Inc. (Dollars in thousands, except per share amounts) - ----------------------------------------------- Fiscal 1996 Fiscal 1995 Fiscal 1994 ----------- ------------ ----------- Sales $10,089,014 $10,101,356 $10,331,950 Cost of merchandise sold (7,167,315) (7,166,119) (7,388,495) ----------- ----------- ----------- Gross margin 2,921,699 2,935,237 2,943,455 Store operating, general and administrative expense (2,752,396) (2,783,503) (2,873,985) Write-off of goodwill and long-lived assets - - (127,000) ----------- ----------- ---------- Income (loss) from operations 169,303 151,734 (57,530) Interest expense (73,208) (73,143) (72,972) Interest income 4,496 2,501 1,054 ----------- ----------- ---------- Income (loss) before income taxes and cumulative effect of accounting change 100,591 81,092 (129,448) Provision for income taxes (27,559) (23,868) (37,138) ----------- ----------- ---------- Income (loss) before cumulative effect of accounting change 73,032 57,224 (166,586) Cumulative effect on prior years of change in accounting principle: Postemployment benefits - - (4,950) ----------- ---------- ---------- Net income (loss) $ 73,032 $ 57,224 $ (171,536) =========== ========== ========== Earnings (loss) per share: Income (loss) before cumulative effect of accounting change $ 1.91 $ 1.50 $ (4.36) Cumulative effect on prior years of change in accounting principle: Postemployment benefits - - (.13) ----------- ---------- ---------- Net income (loss) per share $ 1.91 $ 1.50 $ (4.49) =========== ========== ========== STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY The Great Atlantic & Pacific Tea Company, Inc. (Dollars in thousands, except share amounts) - ------------------------------------------------ Fiscal 1996 Fiscal 1995 Fiscal 1994 ----------- ----------- ----------- Common stock: Shares: Issued and outstanding at beginning of year 38,220,333 38,220,333 38,220,333 Stock options exercised 27,383 - - ----------- ---------- ----------- Issued and outstanding at end of year 38,247,716 38,220,333 38,220,333 =========== =========== =========== Balance at beginning of year $ 38,220 $ 38,220 $ 38,220 Stock options exercised 27 - - ----------- ----------- ----------- Balance at end of year $ 38,247 $ 38,220 $ 38,220 =========== =========== =========== Capital surplus: Balance at beginning of year $ 453,121 $ 453,121 $ 453,121 Stock options exercised 630 - - ----------- ----------- ----------- Balance at end of year $ 453,751 $ 453,121 $ 453,121 =========== =========== =========== Cumulative translation adjustment: Balance at beginning of year $ (50,936)$ (49,227) $ (26,103) Exchange adjustment 1,242 (1,709) (3,317) Elimination of deferred income tax asset (see "Income Taxes" footnote) - - (19,807) ----------- ----------- ----------- Balance at end of year $ (49,694)$ (50,936) $ (49,227) =========== =========== =========== Retained earnings: Balance at beginning of year $ 382,380 $ 332,800 $ 529,179 Net income (loss) 73,032 57,224 (171,536) Cash dividends (7,644) (7,644) (24,843) ----------- ----------- ----------- Balance at end of year $ 447,768 $ 382,380 $ 332,800 =========== =========== =========== See Notes to Consolidated Financial Statements. CONSOLIDATED BALANCE SHEETS The Great Atlantic & Pacific Tea Company, Inc. February 22, February 24, (Dollars in thousands) 1997 1996 - --------------------- ------------ ----------- Assets Current assets: Cash and short-term investments $ 98,830 $ 99,772 Accounts receivable 213,888 205,133 Inventories 881,288 826,510 Prepaid expenses and other assets 37,373 43,520 ---------- ---------- Total current assets 1,231,379 1,174,935 ---------- ---------- Property: Land 128,779 129,567 Buildings 343,076 321,830 Equipment and leasehold improvements 2,118,808 2,084,609 ---------- ---------- Total-at cost 2,590,663 2,536,006 Less accumulated depreciation and amortization (1,104,159) (1,074,841) ---------- ---------- 1,486,504 1,461,165 Property leased under capital leases 103,474 93,379 ---------- ---------- Property-net 1,589,978 1,554,544 Other assets 181,315 131,368 ---------- ---------- $3,002,672 $2,860,847 ========== ========== Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term debt $ 18,290 $ 13,040 Current portion of obligations under capital leases 12,708 13,125 Accounts payable 468,808 452,257 Book overdrafts 182,305 157,022 Accrued salaries, wages and benefits 146,737 127,133 Accrued taxes 52,269 59,407 Other accruals 134,888 161,984 ---------- ---------- Total current liabilities 1,016,005 983,968 ---------- ---------- Long-term debt 701,609 650,169 ---------- ---------- Obligations under capital leases 137,886 129,887 ---------- ---------- Deferred income taxes 113,188 120,904 ---------- ---------- Other non-current liabilities 143,912 153,134 ---------- ---------- Commitments & 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 38,247,716 and 38,220,333 shares, respectively 38,247 38,220 Capital surplus 453,751 453,121 Cumulative translation adjustment (49,694) (50,936) Retained earnings 447,768 382,380 ---------- ---------- Total shareholders' equity 890,072 822,785 ---------- ---------- $3,002,672 $2,860,847 ========== ========== See Notes to Consolidated Financial Statements. STATEMENTS OF CONSOLIDATED CASH FLOWS The Great Atlantic & Pacific Tea Company, Inc. (Dollars in thousands) Fiscal 1996 Fiscal 1995 Fiscal 1994 - --------------------- ----------- ----------- ----------- Cash Flows From Operating Activities: Net income (loss) $ 73,032 $ 57,224 $(171,536) Adjustments to reconcile net income (loss) to cash provided by operating activities: Write-off of goodwill and long-lived assets - - 127,000 Cumulative effect on prior years of change in accounting principle: Postemployment benefits - - 4,950 Depreciation and amortization 230,748 225,449 235,444 Deferred income tax provision (benefit) on income (loss) before cumulative effect of accounting change (1,067) 9,496 20,836 (Gain) loss on disposal of owned property 1,338 (3,177) (816) (Increase) decrease in receivables (5,615) 556 (15,197) (Increase) decrease in inventories (53,672) (13,103) 34,048 (Increase) decrease in prepaid expenses and other current assets 6,401 (573) (1,341) Increase in other assets (26,753) (12,066) (3,925) Increase (decrease) in accounts payable 15,950 3,944 (9,996) Increase (decrease) in accrued expenses (2,657) (4,251) 1,295 Increase (decrease) in store closing reserves (8,600) (18,240) 2,012 Increase (decrease) in other accruals and other liabilities (13,307) 16,518 (43,603) Other operating activities, net 271 193 2,169 --------- --------- --------- Net cash provided by operating activities 216,069 261,970 181,340 --------- --------- --------- Cash Flows From Investing Activities: Expenditures for property (296,878) (236,139) (214,886) Proceeds from disposal of property 19,408 34,576 12,113 --------- --------- --------- Net cash used in investing activities (277,470) (201,563) (202,773) --------- --------- --------- Cash Flows From Financing Activities: Changes in short-term debt 25,903 25,598 (30,912) Proceeds under revolving lines of credit and long-term borrowings 126,445 594,613 229,447 Payments on revolving lines of credit and long-term borrowings (96,804) (683,442) (93,085) Principal payments on capital leases (13,166) (17,953) (15,923) Increase (decrease) in book overdrafts 24,901 (1,075) (37,720) Proceeds from stock options exercised 657 - - Cash dividends (7,644) (7,644) (24,843) --------- --------- ---------- Net cash provided by (used in) financing activities 60,292 (89,903) 26,964 --------- --------- --------- Effect of exchange rate changes on cash and short-term investments 167 338 (837) --------- --------- --------- Net Increase (Decrease) in Cash and Short-term Investments (942) (29,158) 4,694 Cash and Short-term Investments at Beginning of Year 99,772 128,930 124,236 --------- --------- --------- Cash and Short-term Investments at End of Year $ 98,830 $ 99,772 $ 128,930 ========= ========= ========= See Notes to Consolidated Financial Statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. The Company operates retail supermarkets in the United States and Canada. The U.S. operations are mainly in the Eastern part of the U.S. and certain parts of the Midwest. See the following footnotes for additional information on the Canadian Operations: Operations in Geographic Areas, Write-off of Goodwill and Long- Lived Assets, 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 1996 ended February 22, 1997, fiscal 1995 ended February 24, 1996 and fiscal 1994 ended February 25, 1995. Fiscal 1996, fiscal 1995 and fiscal 1994 were each comprised of 52 weeks. Common Stock The principal shareholder of the Company, Tengelmann Warenhandelsgesellschaft, owned 54.13% of the Company's common stock as of February 22, 1997. Cash and Short-term Investments Short-term investments that are highly liquid with an original maturity of three months or less are included in cash and short-term investments and are deemed to be cash equivalents. Inventories Store inventories are valued principally at the lower of cost or market with cost determined under the retail method. Warehouse and other inventories are valued primarily at the lower of cost or market with cost determined on a first-in, first-out basis. Inventories of certain acquired companies are valued using the last-in, first-out method, which was their practice prior to acquisition. Advertising Costs Advertising costs are expensed as incurred. The Company recorded advertising expense of $138 million for both fiscal 1996 and 1995, and $151 million for fiscal 1994. 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. Properties designated for sale are classified as current assets. Pre-opening Costs The costs of opening new stores are expensed in the year incurred. Earnings (Loss) Per Share Earnings (loss) per share is based on the weighted average number of common and dilutive common equivalent shares outstanding during the fiscal year which was 38,287,589 in fiscal 1996, 38,221,707 in fiscal 1995, and 38,220,333 in fiscal 1994. Stock options outstanding were considered common stock equivalents to the extent that they were dilutive. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"). The Company will adopt SFAS 128 in fiscal 1997 and believes the computation of basic earnings per share ("EPS") will not result in a material difference from primary EPS as currently computed. 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 both fiscal 1996 and fiscal 1995, and $2.6 million for fiscal 1994. The accumulated amortization relating to goodwill amounted to $10.2 million and $8.7 million at February 22, 1997 and February 24, 1996, 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 22, 1997, 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 (see "Write- off of Goodwill and Long-Lived Assets" footnote). Long-Lived Assets The Company adopted the provisions of Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of ("SFAS 121") during the fourth quarter of fiscal 1995. SFAS 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. The Company reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Such review is based upon groups of assets and the undiscounted estimated future cash flows from such assets to determine if the carrying value of such assets are recoverable from their respective cash flows. The adoption of SFAS No. 121 did not have an effect on the financial position or results of operations of the Company. Income Taxes The Company provides deferred income taxes on temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Current Liabilities Certain accounts payable checks issued but not presented to banks frequently result in negative 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 and $80 million at February 22, 1997 and February 24, 1996, respectively, are included in the balance sheet caption "Accrued salaries, wages and benefits." Stock-Based Compensation Effective February 25, 1996, the Company adopted Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). In conjunction with the adoption, the Company will continue to apply the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" with proforma disclosure of net income and earnings per share as if the fair value based method prescribed by SFAS 123 had been applied. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accompanying balance sheets include liabilities with respect to self- insured workers' compensation and general liability claims. The Company determines the required liability of such claims based upon various assumptions which include, but are not limited to, the Company's historical loss experience, industry loss standards, projected loss development factors, projected payroll, employee headcount and other internal data. It is reasonably possible that the final resolution of some of these claims may require significant expenditures by the Company in excess of its existing reserves, over an extended period of time and in a range of amounts that cannot be reasonably estimated. Reclassifications Certain reclassifications have been made to the prior years' financial statements in order to conform to the current year's presentation. INVENTORY Approximately 27.0% of the Company's inventories are valued using the last- in, first-out ("LIFO") method. Such inventories would have been $15 million and $14 million higher at February 22, 1997 and February 24, 1996, respectively, if the retail and first-in, first-out methods were used. During fiscal 1996 and fiscal 1995, the Company recorded a LIFO charge of approximately $1 million and $2 million, respectively. During fiscal 1994, the Company recorded a LIFO credit of approximately $2 million. Liquidation of LIFO layers in the periods reported did not have a significant effect on the results of operations. FOOD BASICS FRANCHISE BUSINESS As of February 22, 1997, the Company serviced 49 Food Basics franchised stores. During fiscal 1996, the Company had wholesale sales of $205 million to these franchised stores. A majority of the Food Basics franchised stores were converted from Company operated supermarkets. The Company subleases the stores to the franchisees and provides them with equipment and inventory (see "Lease Obligations" footnote). Included in other assets are Food Basics franchise business receivables, net of allowance for doubtful accounts, amounting to $40.2 million as of February 22, 1997 and $1.6 million as of February 24, 1996. The receivables are related to the initial inventory notes and equipment leases. 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 allowance for doubtful accounts is recorded to the extent of the franchisee's net operating losses. The current portion of the inventory and equipment leases of approximately $2.4 million as of February 22,1997 and $0.1 million as of February 24,1996 are included in accounts receivable. 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) - -------------------------------------------------------------- 1997 $ 5,761 1998 6,598 1999 6,598 2000 6,598 2001 6,598 2002 and thereafter 25,536 ------- $57,689 Less interest portion (15,040) ------- Due from Food Basics franchise business $42,649 ======= Approximately $34 million of the above notes relate to equipment leases which were non-cash transactions, and accordingly, have been excluded from the consolidated statement of cash flows. WRITE-OFF OF GOODWILL AND LONG-LIVED ASSETS During the third quarter of fiscal 1994, the Company recorded a non-cash charge of $127 million reflecting $50 million for the write-off of goodwill related to the acquisition of Miracle Food Mart ("Miracle") stores in Canada and $77 million for the write-down of certain Miracle fixed assets. Miracle experienced a work stoppage for a 14-week period at the end of fiscal 1993. Under Canadian labor laws the stores were closed during this time period. The labor dispute was settled and the stores re-opened for business on February 25, 1994. The Company anticipated that the new labor agreement would have a positive impact on operating results assuming historical sales levels could be attained. Through the first half of fiscal 1994, the Company expended significant promotional efforts in order to regain its pre- strike sales levels. The sales performance through the first half of fiscal 1994 was disappointing and the Company continued to monitor Miracle's performance through the third quarter. Sales performance in the third quarter of fiscal 1994 continued to be negative when compared to pre-strike sales levels. The Company, no longer believing that Miracle's negative operating performance was temporary, revised its future expected cash flow projections. These revised projections indicated that the goodwill balance would not be recoverable over its remaining life. Further, these projections indicated that the operating results of Miracle would not be sufficient to absorb the depreciation and amortization of certain of its operating fixed assets. Accordingly, Miracle's goodwill balance was written- off and fixed assets relating to Miracle stores which were expected to continue to generate operating losses were written-down as of the end of the third quarter of fiscal 1994. INDEBTEDNESS Debt consists of: February 22, February 24, (Dollars in thousands) 1997 1996 - --------------------- ----------- ----------- 9 1/8% Notes, due January 15, 1998 $200,000 $200,000 7.70% Senior Notes, due January 15, 2004 200,000 200,000 7.78% Notes, due November 1, 2000 75,000 75,000 Mortgages and Other Notes, due 1997 through 2014 (average interest rates at year end of 9.35% and 9.77%, respectively) 38,878 39,279 U.S. Bank Borrowings at 5.76% and 5.73%, respectively 147,000 95,000 Canadian Commercial Paper at 3.44% and 6.20%, respectively 2,192 7,977 Canadian Bank Borrowings at 3.65% and 6.03%, respectively 56,956 46,223 Less unamortized discount on 9 1/8% Notes (127) (270) -------- -------- 719,899 663,209 Less current portion (18,290) (13,040) -------- -------- Long-term debt $701,609 $650,169 ======== ======== In December 1995, the Company executed an unsecured five year $400 million U.S. credit agreement and a five year C$100 million (U.S. $73 million as of February 22,1997) Canadian credit agreement with a syndicate of banks enabling it to borrow funds on a revolving basis sufficient to refinance any outstanding short-term borrowings. The Company pays a facility fee ranging from 3/16% to 1/2% per annum on the U.S. and Canadian revolving credit facilities. Borrowings under the U.S. revolving credit agreement were $95 million and $60 million at February 22, 1997 and February 24, 1996, respectively. A&P Canada has outstanding borrowings of $59 million and $54 million at February 22, 1997 and February 24, 1996, respectively. As of February 22, 1997, the Company has available $305 million under its U.S. revolver and C$19 million (U.S. $14 million at February 22, 1997) under the Canadian credit agreement. As of February 24, 1996, the Company had available $340 million under its U.S. revolver and C$22 million (U.S. $16 million at February 24, 1996) under the Canadian credit agreement. In addition, the U.S. has uncommitted lines of credit with various banks amounting to $145 million and $50 million as of February 22, 1997 and February 24, 1996, respectively. Borrowings under these uncommitted lines of credit amounted to $52 million and $35 million as of February 22, 1997 and February 24, 1996, respectively. As of February 22, 1997, the Company has outstanding a total of $400 million of unsecured, non-callable public debt securities in the form of $200 million 9 1/8% Notes due January 15, 1998, and $200 million 7.70% Notes due January 15, 2004. As of February 22, 1997, the Company has $305 million available under the U.S. five year $400 million revolving credit facility, accordingly, the $200 million 9 1/8% Notes due January 15, 1998 are recorded as non-current since the Company has the ability and intent to refinance these Notes on a long-term basis. 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. After reducing borrowings under the U.S. and Canadian revolving credit facilities with the net proceeds of the $300 million Notes, the Company currently intends to draw upon the 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. During April 1997 the Company began discussions with its lenders under its U.S. and Canadian revolving credit facilities (the "Facility") to amend such Facility to principally (i) extend the maturity; (ii) lower the cost of borrowing by reducing the spread payable over certain reference rates; and (iii) reduce the facility fees payable thereunder. Although there is no assurance that the Facility will be so amended, the Company does expect to obtain such an amendment. On October 17, 1995, the Company's Canadian subsidiary, The Great Atlantic & Pacific Company of Canada, Ltd. ("A&P Canada"), issued U.S. $75 million of unsecured, non-callable 7.78% Notes due November 1, 2000 guaranteed by the Company. The net proceeds from the issuance of these Notes were used to repay indebtedness under the Canadian subsidiary's revolving credit facility. In conjunction with the issuance of the U.S. $75 million Notes, A&P Canada entered into a five year cross-currency swap agreement expiring November 1, 2000. The cross-currency swap agreement requires A&P Canada to make net payments to the counterparty based on a fixed interest differential on a semi- annual basis. The interest differential to be paid under the swap agreement is accrued over the life of the agreement as an adjustment to the yield of the 7.78% Notes and is recorded as interest expense. 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. The Company's loan agreements and certain of its notes contain various financial covenants which require, among other things, minimum net worth and maximum levels of indebtedness and lease commitments. The Company was in compliance with all such financial covenants as of February 22, 1997 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 $48 million and $49 million as of February 22, 1997 and February 24, 1996, respectively. Combined U.S. bank and Canadian bank and commercial paper borrowings of $196 million as of February 22, 1997 are classified as non-current as the Company has the ability and intent to refinance these borrowings on a long-term basis. Maturities for the next five fiscal years and thereafter are: 1997-$218 million($200 million of which is expected to be refinanced); 1998-$40 million; 1999-$54 million; 2000-$194 million; 2001-$3 million; 2002 and thereafter - $211 million. Interest payments on indebtedness were approximately $49 million for fiscal 1996, $54 million for fiscal 1995 and $52 million for fiscal 1994. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows: (Dollars in thousands) February 22, 1997 February 24, 1996 - --------------------- ----------------- ----------------- Carrying Fair Carrying Fair Liabilities: Amount Value Amount Value -------- -------- -------- -------- 9 1/8% Notes, due January 15, 1998 $199,873 $204,296 $199,730 $209,440 -------- -------- -------- -------- 7.70% Senior Notes, due January 15, 2004 $200,000 $203,390 $200,000 $198,360 -------- -------- -------- -------- 7.78% Notes, due November 1, 2000 $ 75,000 $ 76,912 $ 75,000 $ 75,713 -------- -------- -------- -------- Total Indebtedness $719,899 $729,624 $663,209 $671,992 ======== ======== ======== ======== Fair value for the public debt securities is based on quoted market prices. With respect to all other indebtedness, Company management has evaluated such debt instruments and has determined, based on interest rates and terms, that the fair value of such indebtedness approximates carrying value at February 22, 1997 and February 24, 1996. As of February 22, 1997 and February 24, 1996, the carrying values of cash and short-term investments, accounts receivable and accounts payable approximated fair values due to the short-term maturities of these instruments. At February 22, 1997, the fair value of the cross-currency swap agreement was unfavorable by approximately $5 million. The fair value was determined by the counterparty which is a widely recognized investment banker. As of the end of fiscal 1996, 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 year's 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 22, February 24, (Dollars in thousands) 1997 1996 - --------------------- ------------ ------------ Real property leased under capital leases $223,507 $206,543 Accumulated amortization (120,033) (113,164) -------- -------- $103,474 $ 93,379 ======== ======== The Company entered into $22 million of new capital leases during fiscal 1996. These capital lease amounts are non-cash transactions and, accordingly, have been excluded from the consolidated statement of cash flows. The Company did not enter into any new capital leases during fiscal 1995 or 1994. Interest paid as part of capital lease obligations was approximately $17, $18, and $20 million in fiscal 1996, 1995 and 1994, respectively. Rent expense for operating leases consists of: (Dollars in thousands) Fiscal 1996 Fiscal 1995 Fiscal 1994 - --------------------- ----------- ----------- ----------- Minimum rentals $162,752 $154,439 $154,488 Contingent rentals 5,383 5,890 6,619 -------- -------- -------- $168,135 $160,329 $161,107 ======== ======== ======== Future minimum annual lease payments for capital leases and noncancelable operating leases in effect at February 22, 1997 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 49 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 - ------ -------- --------- 1997 $29,602 $170,833 1998 28,318 157,382 1999 26,231 146,533 2000 25,120 134,677 2001 23,964 133,939 2002 and thereafter 153,393 1,241,453 -------- ---------- 286,628 $1,984,817 ========== Less executory costs (2,149) -------- Net minimum rentals 284,479 Less interest portion (133,885) -------- Present value of net minimum rentals $150,594 ======== INCOME TAXES The components of income (loss) before income taxes and cumulative effect of accounting change are as follows: (Dollars in thousands) Fiscal 1996 Fiscal 1995 Fiscal 1994 - ---------------------- ----------- ----------- ----------- United States $ 68,478 $73,364 $ 80,509 Canadian 32,113 7,728 (209,957) -------- ------- --------- Total $100,591 $81,092 $(129,448) ======== ======= ========= The provision for income taxes before cumulative effect of accounting change consists of the following: (Dollars in thousands) Fiscal 1996 Fiscal 1995 Fiscal 1994 - --------------------- ----------- ----------- ----------- Current: Federal $24,228 $15,129 $ 8,577 Canadian 700 (5,622) 2,687 State and local 3,698 4,865 5,038 ------- -------- -------- 28,626 14,372 16,302 ------- -------- -------- Deferred: Federal (926) 9,387 (9,922) Canadian 14,329 3,448 (88,948) State and local (141) 109 114 Canadian valuation allowance (14,329) (3,448) 119,592 ------- -------- -------- (1,067) 9,496 20,836 ------- -------- -------- $27,559 $23,868 $ 37,138 ======= ======== ======== 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 Canadian deferred income tax benefit for fiscal 1994 relates primarily to net operating tax loss carryforwards, the write-off of goodwill and certain long-lived assets and other temporary differences associated with the Company's operations in Canada. Management assessed the likelihood of realizing the Canadian net deferred income tax assets and, based on all available evidence, concluded that it was not likely that such assets would be realized. Accordingly, during the third quarter of fiscal 1994, the Company recorded a valuation allowance to reserve for previously recognized deferred tax benefits and continued through the remainder of fiscal 1994 to provide a valuation allowance against its deferred income tax benefits. During fiscal 1996 and fiscal 1995, the Company has reduced the income tax valuation allowance to the extent the Canadian operations have been able to generate taxable income, however, the Company was unable to conclude that it was more likely than not that the remaining deferred tax assets would be realized. This conclusion was based in part on the competitive Canadian marketplace and the significant losses experienced prior to fiscal 1995. Accordingly, at February 22, 1997 the Company is continuing to fully reserve its Canadian net deferred tax assets. The valuation allowance will be adjusted when and if, in the opinion of Management, significant positive evidence exists which indicates that it is more likely than not that the Company will be able to realize the Canadian deferred tax assets. The Company historically provided U.S. deferred taxes on the undistributed earnings of the Canadian operations. During fiscal 1994, the Company made an election to permanently reinvest prior years' earnings and, accordingly, reversed deferred tax liabilities of $27 million associated with the undistributed earnings of the Canadian operations. Further, in conjunction with this decision, the Company recorded a direct charge to equity of approximately $20 million to eliminate the deferred tax asset related to the Cumulative Translation Adjustment. The Company's Canadian net operating tax loss carryforwards of approximately $180.4 million will expire between February 1999 and February 2003. A reconciliation of income taxes at the 35% federal statutory income tax rate for fiscal 1996, 1995 and 1994 to income taxes as reported is as follows: (Dollars in thousands) Fiscal 1996 Fiscal 1995Fiscal 1994 - --------------------- ----------- ---------------------- Income taxes computed at federal statutory income tax rate $35,207 $28,382 $(45,307) Targeted jobs tax credits - - (1,300) State and local income taxes, net of federal tax benefit 2,312 3,233 3,348 Tax rate differential relating to Canadian operations 3,789 (4,879) (12,775) Canadian valuation allowance (14,329) (3,448) 119,592 Goodwill 580 580 580 Reduction of tax liabilities associated with undistributed earnings - - (27,000) ------- -------- ------- Income taxes, as reported $27,559 $23,868 $ 37,138 ======= ======== ======= The fiscal 1995 tax rate differential relating to Canadian operations is the above table includes a $6.5 million benefit related to a refund of previously paid Canadian taxes. Income tax payments, net of refunds, for fiscal 1996, 1995 and 1994 were approximately $13, $19 and $12 million, respectively. The components of net deferred tax assets (liabilities) are as follows: February 22, February 24, (Dollars in thousands) 1997 1996 - --------------------- ------------ ------------ Current assets: Insurance reserves $24,186 $ 27,372 Other reserves 3,524 8,172 Lease obligations 1,817 1,994 Pension obligations 2,390 1,970 Miscellaneous 9,079 4,968 -------- -------- 40,996 44,476 -------- -------- Current liabilities: Inventories (14,819) (15,172) Health and Welfare (9,534) (10,007) Miscellaneous (5,997) (2,678) -------- -------- (30,350) (27,857) -------- -------- Valuation allowance (3,337) (2,660) -------- -------- Deferred income taxes included in prepaid expenses and other assets $ 7,309 $ 13,959 ======== ======== Non-current assets: Isosceles investment $42,617 $ 42,617 Fixed assets 4,061 10,129 Other reserves 5,420 7,191 Lease obligations 19,166 20,519 Canadian loss carryforwards 80,494 85,494 Insurance reserves 6,720 8,820 Accrued postretirement and postemployment benefits 28,110 28,569 Pension Obligations 6,300 6,300 Miscellaneous 18,302 17,727 --------- --------- 211,190 227,366 --------- --------- Non-current liabilities: Fixed assets (177,636) (193,432) Pension obligations (21,050) (17,752) Miscellaneous (29,453) (25,800) --------- --------- (228,139) (236,984) --------- --------- Valuation allowance (96,239) (111,286) --------- --------- Deferred income taxes $(113,188) $(120,904) ========= ========= RETIREMENT PLANS AND BENEFITS Defined Benefit Plans The Company provides retirement benefits to certain non-union and some union employees under various defined benefit plans. The Company's defined benefit pension plans are non-contributory and benefits under these plans are generally determined based upon years of service and, for salaried employees, compensation. The Company funds these plans in amounts consistent with the statutory funding requirements. The components of net pension cost are as follows: (Dollars in thousands) Fiscal 1996 Fiscal 1995 Fiscal 1994 - --------------------- ----------- ----------- ----------- Service cost $10,826 $ 9,340 $ 11,182 Interest cost 24,798 23,976 22,858 Actual return on plan assets (34,921) (42,724) (17,448) Net amortization and deferral 5,254 16,362 (9,246) -------- -------- -------- Net pension cost $ 5,957 $ 6,954 $ 7,346 ======== ======== ======== The Company's defined benefit pension plans are accounted for on a calendar year basis. The majority of plan assets is invested in listed stocks and bonds. The funded status of the plans is as follows: 1996 1995 ---------------------- ---------------------- Assets Accumulated Assets Accumulated Exceed Benefits Exceed Benefits Accumulated Exceed Accumulated Exceed (Dollars in thousands) Benefits Assets Benefits Assets - --------------------- ----------- ---------- ----------- ---------- Accumulated benefit obligation: Vested $300,111 $38,726 $267,391 $ 36,396 Nonvested 3,766 1,907 3,393 1,776 -------- -------- -------- -------- $303,877 $40,633 $270,784 $ 38,172 ======== ======== ======== ======== Projected benefit obligation $312,762 $42,969 $279,667 $ 40,324 Plan assets at fair value 378,903 22,600 333,100 16,752 -------- -------- -------- -------- Excess (deficiency) of assets over projected benefit obligation 66,141 (20,369) 53,433 (23,572) Unrecognized net transition (asset) obligation (7,446) 483 (8,097) (78) Unrecognized net (gain) loss from experience differences (15,059) (1,109) (9,271) 2,649 Unrecognized prior service cost 3,082 3,964 3,357 4,115 Additional minimum liability - (2,824) - (4,614) -------- -------- -------- -------- Prepaid pension asset (pension liability) $46,718 $(19,855) $ 39,422 $(21,500) ======== ======== ======== ======== 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. 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 December 1997. The transfer to CCWIPP has been delayed for the past two 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 22, 1997 and February 24, 1996, prepaid pension assets of approximately $15 million and $13 million, respectively, related to the aforementioned plans are included in the above table. Actuarial assumptions used to determine year-end plan status are as follows: 1996 1995 ---------------- --------------- U.S. Canada U.S. Canada ----- ------ ----- ------ Discount rate 7.50% 7.75% 7.00% 8.50% Weighted average rate of compensation increase 4.50% 4.00% 4.00% 4.00% Expected long-term rate of return on plan assets 8.50% 8.80% 8.00% 8.80% The impact of the changes in the actuarial assumptions has been reflected in the funded status of the pension plans and the Company believes that such changes will not have a material effect on net pension cost for fiscal 1997. Defined Contribution Plans The Company maintains a defined contribution retirement plan to which the Company contributes an amount equal to 4% of eligible participants' salaries and a savings plan to which eligible participants may contribute a percentage of eligible salary. The Company contributes to the savings plan based on specified percentages of the participants' eligible contributions. Participants become fully vested in the Company's contributions after 5 years of service. The Company's contributions charged to operations for both plans were approximately $11 million in each of the three fiscal years in the period ended February 22, 1997. The Company participates in various multi-employer union pension plans which are administered jointly by management and union representatives and which sponsor most full-time and certain part-time union employees who are not covered by the Company's other pension plans. The pension expense for these plans approximated $38 million in both fiscal 1996 and 1995, and $39 million in fiscal 1994. 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 and its wholly-owned subsidiaries provide 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 1996 Fiscal 1995 Fiscal 1994 - -------------------- ----------- ----------- ----------- Service cost $ 794 $ 600 $ 600 Interest cost 2,394 2,900 3,600 Net amortization and deferral (1,100) (800) - ------ ------ ------ Net postretirement benefits cost $2,088 $2,700 $4,200 ====== ====== ====== The unfunded status of the plans is as follows: (Dollars in thousands) Fiscal 1996 Fiscal 1995 - --------------------- ----------- ----------- Unfunded accumulated benefit obligation: Retirees $17,680 $19,100 Fully eligible active plan participants 4,026 3,500 Other active plan participants 13,225 13,200 ------- ------- 34,931 35,800 ------- ------- Unrecognized net gain from experience differences 16,407 15,600 ------- ------- Accrued postretirement costs $51,338 $51,400 ======= ======= Assumed discount rate 7.5% 7.0% ======= ====== The assumed rate of future increase in health care benefit cost was 9.75% in fiscal 1996 and is expected to decline to 5.0% by the year 2020 and remain at that level thereafter. The effect of a one-percentage-point increase in the assumed health care cost trend rate for each future year on the net postretirement health care cost and the accumulated postretirement benefit obligation would be $0.5 million and $3.2 million, respectively. Postemployment Benefits Effective February 27, 1994, the Company adopted Statement of Financial Accounting Standards No. 112 "Employers' Accounting for Postemployment Benefits" ("SFAS 112"). SFAS 112 requires the accrual of costs for preretirement postemployment benefits provided to former or inactive employees and the recognition of an obligation for these benefits. The Company's previous accounting policy had been to accrue for workers' compensation and a principal portion of long-term disability benefits and to expense other postemployment benefits, such as short-term disability, as incurred. As a result of adopting SFAS 112, the Company recorded a charge of $5.0 million, net of applicable income taxes of $3.9 million, as the cumulative effect of recording the obligation as of the beginning of fiscal 1994. The effect of adopting SFAS 112 had an immaterial effect on the financial results before the cumulative effect of accounting change for fiscal 1994. Further, the costs incurred for fiscal 1996 and fiscal 1995 were not significant. STOCK OPTIONS Effective February 25, 1996, the Company adopted SFAS 123 which establishes financial accounting and reporting standards for stock-based employee compensation plans. SFAS 123 encourages all entities to adopt a fair value based method of accounting for stock-based compensation plans in which compensation cost is measured at the date the award is granted based on the fair value of the award and is recognized over the employees' service period. However, SFAS 123 allows an entity to continue to use the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), with pro forma disclosures of net income and earnings per share as if the fair value based method had been applied. APB 25 requires compensation expense to be recognized over the employees' service period based on the excess, if any, of the quoted market price of the stock at the date the award is granted or other measurement date, as applicable, over an amount an employee must pay to acquire the stock. At February 22, 1997, the Company has three fixed stock-based compensation plans. The Company applies the principles of APB 25 for stock options and FASB Interpretation No. 28 for stock appreciation rights ("SAR's"). Most of the options vest over a four year period on the anniversary date of issuance, while some options vest immediately. The 1994 Stock Option Plan for officers and key employees provides for the granting of 1,500,000 shares as either options or SAR's. Options and SAR's issued under this plan are granted at the fair market value of the Company's common stock at the date of grant. The 1984 Stock Option Plan for officers and key employees, which expired on February 1, 1994, provided for the granting of 1,500,000 shares and was amended as of July 10, 1990 to increase by 1,500,000 the number of options available for grant as either options or SAR's. Each option was available for grant at the fair market value of the Company's common stock on the date the option was granted. SAR's allow the holder, in lieu of purchasing stock, to receive cash in an amount equal to the excess of the fair market value of common stock on the date of exercise over the option price. A total of 65,000 options and 86,500 SAR's was granted in fiscal 1996 under this plan. The 1994 Stock Option Plan for Board of Directors provides for the granting of 100,000 stock options at the fair market value of the Company's common stock at the date of grant. Options granted under this plan in fiscal 1996, fiscal 1995 and fiscal 1994 totaled 5,200, 1,800 and 19,800, respectively. The fair value of the fiscal 1996 and 1995 option grants was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: Fiscal 1996 and Fiscal 1995; expected volatility of 30%, expected life of 7 years and dividend yield between 0.72% and 0.91%. The risk-free interest rates used for the grants are between 5.57% and 6.94%. The Company recognized compensation expense of $5.8 million in fiscal 1996, $0.3 million for fiscal 1995 and no expense for fiscal 1994 with respect to SAR's. There was no compensation expense recognized for the other fixed plans since the exercise price of the stock options equaled the fair market value the Company's common stock on the date of grant. Had compensation cost for the Company's stock options been determined based on the fair value at the grant dates for awards under those plans consistent with the fair value methods prescribed by SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: (Dollars in thousands, except per share amounts) - ------------------------------------------------ Fiscal Fiscal 1996 1995 ------ ------ Net Income: As reported $73,032 $57,224 Pro forma $71,920 $56,624 Earnings Per Share: As reported $1.91 $1.50 Pro forma $1.88 $1.48 A summary of option transactions is as follows: Officers, Key Employees and Board of Directors - --------------------------- Weighted Average Exercise Shares Price ------ -------- Outstanding February 26, 1994 15,000 $27.63 Granted 69,800 24.22 ------- ------ Outstanding February 25, 1995 84,800 $24.82 Granted 670,800 27.71 Cancelled or expired (10,000) 27.88 ------- ------ Outstanding February 24, 1996 745,600 $27.38 Granted 70,200 27.72 Cancelled or expired (63,350) 26.13 Exercised (27,383) 23.85 ------- ------ Outstanding February 22, 1997 725,067 $27.66 ======= ====== Exercisable at: February 24, 1996 34,100 $25.81 February 22, 1997 182,400 $27.58 ======= ====== Weighted average fair value of options granted during the year: February 24, 1996 $11.45 February 22, 1997 $11.94 ======= A summary of stock options outstanding and exercisable at February 22, 1997 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. 22, 1997 Life Price Feb. 22, 1997 Price - --------------- ------------- ----------- -------- ------------- -------- $21.50 - $25.88 26,466 8.5 years $23.37 7,183 $23.22 $26.50 - $30.75 89,601 8.9 years $27.47 12,467 $26.55 $27.63 15,000 4.8 years $27.63 15,000 $27.63 $27.88 594,000 8.3 years $27.88 147,750 $27.88 ------- -------- 725,067 182,400 ======= ======== A summary of SAR transactions is as follows: Officers and Key Employees - -------------------------- Price Range Shares Per Share --------- --------------- Outstanding February 26, 1994 2,414,125 $21.50 - $65.13 Cancelled or expired (26,500) 39.75 - 59.00 Exercised (2,500) 23.38 --------- --------------- Outstanding February 25, 1995 2,385,125 $21.50 - $65.13 Granted 10,000 21.88 Cancelled or expired (166,750) 23.38 - 46.38 Exercised (75,625) 21.50 - 24.75 --------- --------------- Outstanding February 24, 1996 2,152,750 $21.50 - $65.13 Granted 86,500 27.25 - 31.63 Cancelled or expired (20,000) 27.38 - 56.13 Exercised (247,237) 21.50 - 34.75 --------- --------------- Outstanding February 22, 1997 1,972,013 $23.00 - $65.13 ========= =============== Exercisable at: February 24, 1996 1,666,500 $21.50 - $65.13 February 22, 1997 1,647,388 $23.00 - $65.13 ========= =============== LITIGATION The Company is involved in various claims, administrative agency proceedings and lawsuits arising out of the normal conduct of its business. Although the ultimate outcome of these legal proceedings cannot be predicted with certainty, the management of the Company believes that the resulting liability, if any, will not have a material effect upon the Company's consolidated financial statements or liquidity. OPERATIONS IN GEOGRAPHIC AREAS The Company has been engaged in the retail food business since 1859 and currently does business principally under the names A&P, Waldbaum's, Food Emporium, Super Fresh, Farmer Jack, Kohl's, Sav-A-Center, Dominion, and Food Basics. Sales in the table below reflect sales to unaffiliated customers in the United States and Canada as well as wholesale sales to franchised stores. (Dollars in thousands) Fiscal 1996 Fiscal 1995 Fiscal 1994 - --------------------- ----------- ----------- ----------- Sales: United States $ 8,281,925 $ 8,365,327 $ 8,540,871 Foreign 1,807,089 1,736,029 1,791,079 ----------- ----------- ----------- Total $10,089,014 $10,101,356 $10,331,950 =========== =========== =========== Income (Loss) From Operations: United States $ 122,159 $ 125,118 $ 137,804 Foreign 47,144 26,616 (195,334) ----------- ----------- ----------- Total $ 169,303 $ 151,734 $ (57,530) =========== =========== =========== Assets: United States $2,549,500 $2,438,353 $ 2,482,108 Foreign 453,172 422,494 412,680 ---------- ----------- ----------- Total $3,002,672 $2,860,847 $ 2,894,788 ========== =========== =========== SUMMARY OF QUARTERLY RESULTS (unaudited) The table below summarizes the Company's results of operations by quarter for fiscal 1996 and 1995. The first quarter of each fiscal year contains sixteen weeks while the other quarters each contain twelve weeks. (Dollars in thousands, First Second Third Fourth Total except per share data) Quarter Quarter Quarter Quarter Year - ---------------------- ------- ------- ------- ------- ----- 1996 Sales $3,092,554 $2,329,987 $2,318,762 $2,347,711 $10,089,014 Gross margin 896,780 662,355 668,664 693,900 2,921,699 Depreciation and amortization 69,558 53,240 53,939 54,011 230,748 Income from operations 52,743 34,553 34,398 47,609 169,303 Interest expense 21,550 16,387 17,028 18,243 73,208 Net income 21,879 13,994 14,091 23,068 73,032 Per share data: Net income .57 .37 .37 .60 1.91 Cash dividends .05 .05 .05 .05 .20 Market price: High 36.750 34.625 34.000 34.375 Low 22.125 25.875 25.125 29.875 Number of stores at end of period 993 977 974 973 Number of franchised stores served at end of period 24 36 47 49 - ---------------------------------------------------------------------------- 1995 Sales $3,135,514 $2,341,171 $2,293,597 $2,331,074 $10,101,356 Gross margin 909,812 669,103 666,121 690,201 2,935,237 Depreciation and amortization 70,400 52,340 51,957 50,752 225,449 Income from operations 46,884 29,861 29,235 45,754 151,734 Interest expense 22,873 16,197 17,159 16,914 73,143 Net income 14,550 9,384 7,735 25,555 57,224 Per share data: Net income .38 .25 .20 .67 1.50 Cash dividends .05 .05 .05 .05 .20 Market price: High 26.250 28.625 28.875 24.875 Low 19.000 23.875 20.000 19.500 Number of stores at end of period 1,082 1,063 1,043 1,014 Number of franchised stores served at end of period - - - 7 - ---------------------------------------------------------------------------- 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/James Wood Chairman of the Board and Co-Chief Executive Officer /s/Christian W.E. Haub President and Co-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 22, 1997 and February 24, 1996 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three fiscal years in the period ended February 22, 1997. 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 22, 1997 and February 24, 1996 and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 22, 1997 in conformity with generally accepted accounting principles. As discussed in Notes to Consolidated Financial Statements, in fiscal 1994 the Company changed its method of accounting for postemployment benefits to conform with Statement of Financial Accounting Standards No. 112. /s/Deloitte & Touche LLP Parsippany, New Jersey April 24, 1997 FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA The Great Atlantic & Pacific Tea Company, Inc. (Dollars in thousands, except per share data) - ------------------------ Fiscal 1996 Fiscal 1995 Fiscal 1994 Fiscal 1993Fiscal 1992 (52 weeks) (52 weeks) (52 weeks) (52 weeks) (52 weeks) ----------- ----------- ----------- ---------------------- Operating Results Sales $10,089,014 $10,101,356 $10,331,950 $10,384,077 $10,499,465 Income (loss) from operations 169,303 151,734 (57,530) 68,280 44,306 Depreciation and amortization 230,748 225,449 235,444 235,910 228,976 Interest expense 73,208 73,143 72,972 63,318 66,436 Income (loss) before cumulative effect of accounting changes 73,032 57,224 (166,586) 3,959 (98,501) Cumulative effect on prior years of changes in accounting principles: Postemployment benefits - - (4,950) - - Income taxes - - - - (64,500) Postretirement benefits - - - - (26,500) Net income (loss) 73,032 57,224 (171,536) 3,959 (189,501) Per Share Data Income (loss) before cumulative effect of accounting changes 1.91 1.50 (4.36) .10 (2.58) Cumulative effect on prior years of changes in accounting principles: Postemployment benefits - - (.13) - - Income taxes - - - - (1.69) Postretirement benefits - - - - (.69) Net income (loss) 1.91 1.50 (4.49) .10 (4.96) Cash dividends .20 .20 .65 .80 .80 Book value per share 23.27 21.53 20.27 26.02 27.06 Financial Position Current assets 1,231,379 1,174,935 1,193,731 1,230,339 1,221,492 Current liabilities1,016,005 983,968 1,096,454 1,151,132 1,164,723 Working capital 215,374 190,967 97,277 79,207 56,769 Current ratio 1.21 1.19 1.09 1.07 1.05 Expenditures for property 296,878 236,139 214,886 267,329 204,870 Total assets 3,002,672 2,860,847 2,894,788 3,098,695 3,090,930 Current portion of long-term debt 18,290 13,040 112,821 77,755 104,660 Current portion of capital lease obligations 12,708 13,125 14,492 16,097 18,021 Long-term debt 701,609 650,169 612,473 544,399 414,301 Long -term portion of capital lease obligations 137,886 129,887 146,400 162,866 182,066 Total debt 870,493 806,221 886,186 801,117 719,048 Debt to total capitalization .49 .49 .53 .45 .41 Equity Shareholders' equity 890,072 822,785 774,914 994,417 1,034,330 Weighted average shares outstanding 38,221,329 38,220,333 38,220,333 38,220,351 38,219,395 Number of registered shareholders 8,808 10,010 10,867 11,831 12,309 Other Number of employees 84,000 89,000 92,000 94,000 90,000 New store openings 30 30 22 16 11 Number of stores at year end 973 1,014 1,108 1,173 1,193 Total store area (square feet) 30,587,324 31,101,589 33,310,121 34,696,265 34,761,170 Number of franchised stores at year end 49 7 - - - Total franchised store area (square feet) 1,345,786 177,936 - - - CORPORATE OFFICERS James Wood Chairman of the Board and Co-Chief Executive Officer Christian W.E. Haub President and Co-Chief Executive Officer Fred Corrado Vice Chairman of the Board and Chief Financial Officer Gerald L. Good Executive Vice President, Marketing and Merchandising George Graham Executive Vice President, U.S. Operations Aaron Malinsky Executive Vice President, Development and Strategic Planning Peter J. O'Gorman Executive Vice President, International Store and Product Development Ivan K. Szathmary Executive Vice President, Chief Services Officer Clifford J. Horler Senior Vice President, Design and Construction H. Nelson Lewis Senior Vice President, Human Resources Brian Pall Senior Vice President, Development Michael J. Rourke Senior Vice President, Communications and Corporate Affairs Michael Stolarz Senior Vice President, Sales Robert G. Ulrich Senior Vice President, General Counsel Peter R. Brooker Vice President, Planning and Corporate Secretary Stephen T. Brown Vice President, Labor Relations Timothy J. Courtney Vice President, Taxation Donald B. Dobson Vice President, Southern Operations R. Paul Gallant President, Compass Foods R. Terrence Galvin Vice President, Treasurer Kenneth W. Green Vice President, Produce Merchandising and Procurement Joseph J. Hoffman Vice President, Meat Merchandising and Procurement Robert A. Keenan Vice President, Chief Internal Auditor Francis X. Leonard Vice President, Real Estate Administration Mary Ellen Offer Vice President, Assistant Corporate Secretary and Senior Counsel Richard J. Scola Vice President, Real Estate Law and Assistant General Counsel Kenneth A. Uhl Vice President, Controller William T. Wolverton Vice President, Warehousing and Transportation Canadian Company - ---------------- J. Wayne Harris Chairman and Chief Executive Officer - Canadian Company Greater Metro New York - ----------------------- William Louttit Chairman and Chief Executive Officer - Greater Metro New York Area Operations Midwest - ------- Craig C. Sturken Chairman and Chief Executive Officer - Midwest Operations DIRECTORS James Wood (c)(d)(e) Chairman of the Board and Co-Chief Executive Officer 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 Co-Chief Executive Officer Helga Haub (c)(d) Barbara Barnes Hauptfuhrer (a)(c)(d)(e) Director of various corporations William A. Liffers (a)(c) Former Vice Chairman of American Cyanamid Company Fritz Teelen (d) Chief Operating Officer of Tengelmann Warenhandelsgesellschaft, Germany R.L. "Sam" Wetzel (a)(b)(d)(e) President and Chief Executive Officer of Wetzel International, Inc. (a) Member of Audit Review Committee, William A. Liffers, Chairman (b) Member of Compensation Policy Committee, Christopher F. Edley, Chairman (c) Member of Executive Committee, James Wood, Chairman (d) Member of Finance Committee, R.L. "Sam" Wetzel, Chairman (e) Member of Retirement Benefits Committee, Barbara Barnes Hauptfuhrer, Chairman SHAREHOLDER INFORMATION Executive Offices Box 418 2 Paragon Drive Montvale, NJ 07645 Telephone 201-573-9700 Transfer Agent and Registrar American Stock Transfer and Trust Company 40 Wall Street New York, NY 10005 Telephone 212-936-5100 Independent Auditors Deloitte & Touche LLP Two Hilton Court Parsippany, NJ 07054 Shareholder Inquiries and Publications Shareholders, security analysts, members of the media and others interested in further information about the Company are invited to contact the Corporate Affairs Department at the Executive Offices in Montvale, New Jersey. Internet users can access information on A&P at: www.aptea.com Correspondence concerning shareholders 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. on Tuesday, July 15, 1997 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." EX-21 3 c:subs Exhibit 21 SUBSIDIARIES OF THE REGISTRANT SUBSIDIARY NAME STATE INCORPORATED A&P Wine and Spirits, Inc. Massachusetts ANP Properties I Corp. Delaware ANP Sales Corp. Maryland APG VI, Inc. South Dakota APW Produce Company, Inc. New York APW Supermarket Corporation Delaware APW Supermarkets, Inc. New York Big Star, Inc. Georgia The Great Atlantic and Pacific Tea Company, Limited (NRO)Canada The Great Atlantic & Pacific Company of Canada, Limited d/b/a A&P and New Dominion Canada A&P Drug Mart Limited Ontario A&P Properties Limited Ontario Food Basics, Limited Ontario Borman's, Inc. d/b/a Farmer Jack Delaware Compass Foods, Inc. Delaware Family Center, Inc. d/b/a Family Mart Delaware Futurestore Food Markets, Inc. Delaware The Great Atlantic & Pacific Tea Company of Vermont, Inc. Vermont Kohl's Food Stores, Inc. Wisconsin Kwik Save Inc. Pennsylvania Limited Foods, Inc. Delaware LO-LO Discount Stores, Inc. Texas Montvale Holdings, Inc. New Jersey Richmond, Incorporated d/b/a Pantry Pride & Sun, Inc. Delaware Regina Properties, Inc. New Jersey St. Pancras Company Limited Bermuda St. Pancras Too, Limited Bermuda Shopwell, Inc. d/b/a Food Emporium Delaware Southern Acquisition Corporation Delaware Southern Development, Inc. of Delaware Delaware Super Fresh Food Markets, Inc. Delaware Super Fresh Food Markets of Maryland, Inc. Maryland Super Fresh/Sav-A-Center, Inc. Delaware Super Fresh Food Markets of Virginia, Inc. Delaware Super Market Service Corp. Pennsylvania Super Plus Food Warehouse, Inc. Delaware Supermarket Distribution Service Corp. New Jersey Supermarket Distribution Service - Florence, Inc. New Jersey Supermarket Distribution Services, Inc. Delaware Supermarket Systems, Inc. Delaware Tea Development Co., Inc. Delaware The South Dakota Great Atlantic & Pacific Tea Company, Inc. South Dakota Transco Service-Milwaukee, Inc. New Jersey Viviola Land Corp., Inc. New Jersey Waldbaum, Inc. d/b/a Waldbaum, Inc. and Food Mart New York W.S.L. Corporation New Jersey 2008 Broadway, Inc. New York EX-23 4 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.: We consent to the incorporation by reference in Registration Statement 2-92428 on Form S-8, Post Effective Amendment No. 7 to Registration Statement No. 2-59290 on Form S-8 and Post Effective Amendment No. 3 to Registration Statement No. 2-73205 on Form S-8 of our report dated April 24, 1997, contained in the Company's 1996 Annual Report to shareholders and incorporated by reference in this Annual Report on Form 10-K of The Great Atlantic & Pacific Tea Company, Inc. for the year ended February 22, 1997. Deloitte & Touche LLP Parsippany, New Jersey May 13, 1997 EX-27 5
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE GREAT ATLANTIC AND PACIFIC TEA COMPANY, INC. FORM 10-K FOR THE YEAR ENDED FEBRUARY 22, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR FEB-22-1997 FEB-22-1997 98830 0 213888 0 881288 1231379 2814170 (1224192) 3002672 1016005 839495 0 0 38247 851825 3002672 10089014 10089014 (7167315) (7167315) (2752396) 0 (68712) 100591 (27,559) 73032 0 0 0 73032 1.91 1.91
EX-10.A 6 July 2, 1996 Mr. Aaron Malinsky 360 E. 88th Street Apt. 33C New York, New York 10128 Dear Aaron: This letter sets forth the key points of your employment with A&P. 1. Title - Reporting Relationship. Executive Vice President, Development and Strategic Planning, reporting to Christian Haub, President and Chief Operating Officer. 2. Salary. $425,000 annually. 3. Bonus. You will be entitled to participate in the Company's Corporate Management Bonus Program with a bonus base of $125,000. The bonus earned will be prorated for A&P's 1996 fiscal year beginning with your employment date. 4. Stock Options. You will receive a grant of 65,000 shares under the A&P Stock Option Plan at the price in effect on the date you commence your employment with A&P - to be submitted to the Board of Directors for approval immediately following the July 9, 1996 Annual Meeting. 5. Benefits. You will participate in the Company's Executive Medical Program and will become a member of the Company's Supplemental Executive Retirement Plan ("SERP") effective immediately upon employment. The Company will provide life insurance coverage in the amount of $1,000,000. You will be entitled to reimbursement of your annual membership fees in a country club of your choice located in the New York Metropolitan area. 6. Severance. In the event of involuntary termination by the Company (except in the case of termination for cause) you will be entitled to one year's salary as severance pay. We would expect you to begin your employment as of Thursday, August 1, 1996. Please be so kind as to indicate your agreement with the foregoing by signing in the space provided below. Very truly yours, THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. By: /s/ Christian W.E. Haub Christian W. E. Haub, President and Chief Operating Officer /s/ Aaron Malinsky Aaron Malinsky EX-10.H 7 8 disk134/deferred THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. DIRECTORS' DEFERRED PAYMENT PLAN Adopted May 1, 1996 Section 1. Effective Date. The effective date of The Great Atlantic & Pacific Tea Company, Inc. Directors' Deferred Payment Plan (the "Plan"), is May 1, 1996. Section 2. Eligibility. Any Director of The Great Atlantic & Pacific Tea Company, Inc. (the "Company") elected to the Board of Directors after May 1, 1996 and who is not an employee of the Company is eligible to participate in the Plan. Officers and ex-officers of the Company shall not be eligible to participate in the Plan unless specifically authorized to participate by the Board of Directors. The following transitional provisions shall apply to participation in the Plan by the Company's directors elected prior to May 1, 1996 who are not Company employees. 2.1 Directors with fifteen (15) or more years of Board service as of the date hereof or within thirty (30) days of the date hereof shall continue to be eligible to receive benefits under the A&P Retirement Plan for Non- Employee Directors (the "Directors' Retirement Plan"). Such Directors shall not participate in the Plan except as to the amount of any credits to the Plan reallocated from the Directors' Retirement Plan pursuant to Section 2.3 below. 2.2 Directors with at least five (5) years but less than fifteen (15) years of Board service as of May 31, 1996 shall be eligible to accrue benefits under the Plan commencing June 1, 1996 until June 1st of the year in which they attain their fifteenth (15th) Board service anniversary date, or such earlier or later date as would cause the sum of such Director's credited years of service under the Directors' Retirement Plan plus months of credited service under the Plan to equal fifteen (15) full years of service. Such Directors shall have their benefits under the Directors' Retirement Plan frozen to the extent such benefits are accrued for benefit computation purposes as of May 1, 1996 or within thirty (30) days thereafter, and may reallocate Directors' Retirement Plan benefits to this Plan pursuant to Section 2.3 below. 2.3 All directors who would have vested benefits as of May 31, 1996 under the Directors' Retirement Plan (at least five (5) years of Board service) will be entitled to reallocate to their account in the Deferred Payment Plan by an election made on or prior to December 31, 1996, the lump-sum present value of their accrued pension benefit as of December 31, 1996. For purposes of computing the lump sum present value of accrued pension benefits at December 31, 1996, and to discount such amount if it is reallocated to the Deferred Payment Plan prior to December 31, 1996, a discount rate of 6.67 percent per annum, the ten (10) year Treasury note interest yield rate as in effect on May 1, 1996 will be used. Any such election, once made, shall terminate an electing director's benefits under the Directors' Retirement Plan. The calculation of the lump sum present value shall reflect the form and conditions under which such transferred account will subsequently be distributed from the Plan, assuming that the transferred account earns 6.67% annual interest (compounded semiannually) until the director reaches age 70. Directors who commence Board service after May 1, 1996, shall make their initial elections under Sections 6 and 7 hereof not later than the last day of the month in which elected to the Board. Such Directors shall be eligible to receive benefits under the Plan through their fifteenth (15th) year of Board service (that is, until their fifteenth (15th) anniversary date). Section 3. Deferred Payment Account. A deferred payment account shall be established for each eligible Director. Each such Director's deferred payment account shall consist of a stock equivalent subaccount and, if the Director elects to participate in the U.S. Treasury bond equivalent described below, a bond equivalent subaccount. Section 4. Amount of Deferral. The Company shall credit an amount equal to 75 percent of a Director's annual cash retainer (currently $18,000 which is 75 percent of $24,000) to the participant's deferred payment account. One twelfth of such credits will be made as of the last day of each calendar month beginning June 30, 1996. Section 5. Time of Credit. Credits to the participant's deferred payment accounts shall be made by the Company as of each date when the Company pays the Director's monthly cash retainer. Amounts reallocated from the Directors' Retirement Plan to this Plan pursuant to Section 2.3 hereof shall be credited to the Director's account on the date the Director's election is made pursuant to Section 2.3. Section 6. Stock Election. At least fifty (50) percent of each Director's deferred payment account shall be credited to the stock equivalent subaccount. A Director may elect in writing that additional amounts, in increments of twenty-five (25) percent, of the deferred payment account shall be credited to this stock equivalent subaccount. The initial election under this Section 6 must be received by the Company prior to May 31, 1996 and, for each subsequent calendar year after 1996 must be received by January 1st of the year during which the election is to be effective and shall be irrevocable for the entire year. Such election shall remain in effect for subsequent years unless changed prior to the January 1 of any such subsequent year. If no such election is made, amounts credited to the deferred payment account shall be allocated 100 percent to the stock equivalent subaccount. A bookkeeping entry shall be made on the number of whole shares of Company Common Stock which could be purchased at "fair market value" as defined below in this Section with the amount credited to such stock equivalent subaccount on the date as of which such credit is made except that for amounts reallocated to this Plan from the Directors' Retirement Plan, such fair market value shall be determined at the average of the high and low prices on New York Stock Exchange - Composite Transactions on the date of the Director's election pursuant to Section 2.3. The stock equivalent subaccount also shall be credited on each dividend payment date with a bookkeeping entry indicating the number of additional whole shares which could be purchased with the dividend on the shares previously credited to the stock equivalent subaccount. Any deferred payment amounts which are insufficient to permit the crediting of a whole share of Company Common Stock and any amounts which would represent cash dividends on Company Common Stock credited to a stock equivalent subaccount shall be carried as a cash balance bookkeeping entry in such stock subaccount. At such time as the cash balance equals at least the fair market value of one share of Company Common Stock, the cash balance bookkeeping entry shall be converted to an entry representing the number of additional whole shares of Company Common Stock which could be purchased at fair market value with such balance. No interest shall be credited on any such stock equivalent subaccount cash balance. For purposes of the preceding provisions of this Section 6, "fair market value" of a share of Company Common Stock shall mean the average of the high and low prices of a single share of Company Common Stock as reported by the Wall Street Journal for New York Stock Exchange - Composite Trading on the trading day as of which such value is to be determined. No election may be made to have amounts previously credited to a Director's bond equivalent subaccount credited instead to his or her stock equivalent subaccount, and no election may be made to have amounts previously credited to a Director's stock equivalent subaccount credited instead to a bond equivalent subaccount except that upon retirement (i.e., as of the date of termination of service as a Director) each Director's stock equivalent account balance will be transferred in its entirety to the bond equivalent account. At such date of termination of service, the value of each share of stock of such stock equivalent subaccount shall be the average of the high and low prices of a single share of Company Common Stock as reported by the Wall Street Journal for the New York Stock Exchange, Composite Trading for the 180 calendar days next preceding such date of termination of service as a Director. The stock equivalent subaccounts shall be adjusted to reflect any stock split, stock dividend, recapitalization, merger, consolidation, reorganization or other similar change in the Company's Common Stock. Section 7. Bond Equivalent Subaccount. Each initial credit to the bond equivalent subaccount together with interest earned on the bond equivalent subaccount (described below) will be credited with interest from the date of initial credit until termination of service as a Director as follows. The bond equivalent subaccount will be credited at the end of each six month period with interest at 1/2 (one half) of the annual yield rate for U.S. Treasury debt obligations with a ten (10) year maturity effective at the date of each initial credit (with no change in such rate until the date of termination of service as a Director). Amounts so credited will be added to the balance in such subaccount. Section 8. Value of Deferred Payment Accounts. The value of each participant's deferred payment account shall include the amount which is credited to a Director's bond equivalent subaccount, the interest credited on such amount pursuant to Section 7, the value of any shares of Company Common Stock credited to the Director's stock equivalent subaccount and the cash balance credited to such stock equivalent subaccount, all with respect to the amount deferred pursuant to Section 4 and the amount, if any, reallocated from the Directors' Retirement Plan pursuant to Section 2.3, and less any payments made under Section 9. Section 9. Payment of Deferred Compensation. The value of a participant's deferred compensation account shall be fixed on the date of termination of service as a Director and shall be payable solely in cash. All payments of a participant's deferred compensation account shall be made in equal monthly installments over a period of 180 months or the Director's term of service, whichever is the shorter period, subject to the provisions of Sections 11 and 12 hereof. In all cases payment shall commence as soon as practicable following the date of termination of service as a Director. The amount of each payment from the deferred compensation account shall be a fraction of the value of the participant's account, the numerator of which is one and the denominator of which is the total number of installments, to be paid. Section 10. Designation of Beneficiary. A participant may designate a beneficiary by giving written notice to the Company. Attention: Secretary. If no beneficiary is designated, the beneficiary will be the participant's estate. If more than one beneficiary statement has been filed, the beneficiary designated in the statement bearing the most recent date will be deemed the valid beneficiary. Section 11. Death of Participant. Death of a participant shall end the participant's entitlement to receive any further deferred payments except as set forth in Section 12 hereof. Section 12. Ten Year Certain Payment. Provided that a Director has at least ten (10)years of service as of the date of his or her death or termination of service as a Director, such Director or his or her beneficiary or estate shall be entitled to receive monthly installment payments payable over a ten (10) year period inclusive of the period of installment payments prior to the death of the Director. Directors having less than ten (10) years of service shall be entitled to receive payments to themselves and/or their beneficiary or estate over a period equivalent to the full period of such Director's service as a Director. Section 13. Participant's Rights Unsecured. The right of any participant to receive payments under the provisions of the Plan shall be contractual in nature only; however, the Company reserves the right to establish a trust to provide an alternative source of benefit payments under the Plan, the assets of which shall be subject to the claims of the Company's general creditors in the event of bankruptcy or insolvency only. Any payments paid from such trust shall reduce the amount of benefits owed by the Company. Section 14. Vesting. A Director's right to deferred compensation earned under the terms of the Plan shall be 100% vested at all times. Section 15. Statement of Account. Statements will be sent to participants by the end of February of each year as to the value of their deferred payment accounts as of the end of December of the preceding year. Section 16. Assignability. No right to receive payments hereunder shall be transferable or assignable by a participant or beneficiary, except by will or by the laws of descent and distribution. Section 17. Participation in Other Plans. Nothing in the Plan will affect any right which a participant may otherwise have to participate in any other retirement plan or agreement which the Company may have now or hereafter. Section 18. Amendment. This Plan may at any time or from time to time be amended, modified or terminated by the Board of Directors of the Company. No amendment, modification or termination shall, without the consent of a participant, adversely affect such participant's balances in his or her deferred payment account. Section 19. Governing Law. This Plan shall be governed by and construed in accordance with the laws of the State of New Jersey. THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. DIRECTORS' DEFERRED PAYMENT PLAN ELECTION APPLICABLE TO PAYMENTS A. In accordance with the provisions of The Great Atlantic & Pacific Tea Company, Inc. Directors' Deferred Payment Plan (the "Plan"), I hereby elect that the following percentage of initial credits by the Company to my account under the Plan shall be credited to The Great Atlantic & Pacific Tea Company, Inc. common stock equivalent subaccount under Section 6 of the Plan: Percentage Treated as Invested in Stock (check one) 50% __________ 75% __________ 100% ____________ I hereby elect that the percentage, which reflects the balance not credited to the stock equivalent subaccount, shall be credited to the bond equivalent subaccount (10-year U.S. Treasury bond equivalent) under Section 7 of the Plan: B. I hereby designate the person(s) named below as my beneficiary(ies) to receive my interest in my deferred payment account in the event of my death, and I hereby revoke all prior designation(s) of beneficiary(ies). Name Address ___________________________ ________________________________________ ___________________________ ________________________________________ ___________________________ ________________________________________ ___________________________ ________________________________________ I hereby agree that in the event of my death payment will be continued of any outstanding monthly installments of payments to be made of my account(s) under the Plan to my designated beneficiary(ies). C. (Please fill this in only if you will have five (5) years or more of Board service at May 31, 1996.) I hereby elect to have the present value of my vested benefits in the Directors Retirement Plan reallocated to my account in the Deferred Payment Plan effective on the date hereof, and to terminate my coverage in the Directors Retirement Plan. I hereby elect that the following percentage of my account in the Deferred Payment Plan (as reallocated from the Directors Retirement Plan) shall be credited to The Great Atlantic & Pacific Tea Company, Inc. common stock equivalent subaccount in accordance with Sections 2.3 and 6 of the Deferred Payment Plan Percentage Treated as Invested in Stock (check one) 50% ____________ 75% __________ 100% ____________ I hereby elect that the percentage, which reflects the balance not credited to the stock equivalent subaccount, shall be credited to the bond equivalent subaccount (10-year U.S. Treasury bond equivalent) under Section 7 of the Plan. Note: If any of the elections in Part A, B or C are not completed, the elections contained in the most recent Election form under the Plan will remain in effect. This election is subject to all the terms of the Plan. Signature Dated:____________________, 19___ Print Name -----END PRIVACY-ENHANCED MESSAGE-----