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<SEC-DOCUMENT>0000043300-97-000008.txt : 19970520
<SEC-HEADER>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
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<TEXT>
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-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>2
<TEXT>
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