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<SEC-DOCUMENT>0000043300-98-000005.txt : 19980528
<SEC-HEADER>0000043300-98-000005.hdr.sgml : 19980528
ACCESSION NUMBER: 0000043300-98-000005
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 19980228
FILED AS OF DATE: 19980527
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:
SEC FILE NUMBER: 001-04141
FILM NUMBER: 98632379
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>
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<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 28, 1998
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 13-1890974
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Paragon Drive, Montvale, New Jersey 07645
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 201-573-9700
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock - $1 par value New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
None
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at May 1, 1998 was $539,668,344.
The number of shares of common stock outstanding at May 1, 1998 was
38,252,966.
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 1997 Annual
Report to Shareholders. The Registrant has filed with the S.E.C. since the
close of its last fiscal year ended February 28, 1998, 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 936 stores
averaging approximately 32,665 square feet per store as of February 28, 1998.
In addition, the Company began franchising its Canadian Food Basics stores in
fiscal 1995. As of February 28, 1998, the Company had 52 Food Basics
Franchise stores in Canada averaging approximately 26,720 square feet per
store. On the basis of reported sales for fiscal 1997, the Company believes
that it is one of the ten largest retail food chains in the United States and
that it had the largest market share in metropolitan New York and Detroit,
and the second largest market share in the Province of Ontario, the Company's
largest single markets in the United States and Canada.
Operating under the trade names A&P, Super Fresh, Sav-A-Center, Farmer Jack,
Kohl's, Food Emporium, Waldbaum's, Super Food Mart, Ultra Mart, Dominion, and
Food Basics, the Company sells groceries, meats, fresh produce and other
items commonly offered in supermarkets. In addition, many stores have
bakery, delicatessen, pharmacy, floral, fresh fish and cheese departments,
and on-site banking. National, regional and local brands are sold as well as
private label merchandise and generic (non-branded) products. In support of
its retail operations, the Company also operates two coffee roasting plants,
and a bakery in Canada. Through its Compass Foods Division, the Company
manufacturers and distributes a line of whole bean coffees under the Eight
O'Clock, Bokar and Royale labels, both for sale through its own stores as
well as other food and convenience retailers. The other private label
products sold in the Company's stores are sold under the Company's own brand
names which include America's Choice, Master Choice, Health Pride, Savings
Plus, Equality and Jane Parker.
Building upon a broad base of A&P supermarkets, the Company has expanded and
diversified within the retail food business through the acquisition of other
supermarket chains and the development of several alternative store types.
The Company now operates its stores with merchandise, pricing and identities
tailored to appeal to different segments of the market, including buyers
seeking gourmet and ethnic foods, unusual produce, a wide variety of premium
quality private label goods and health and beauty aids along with the array
of traditional grocery products.
Modernization of Facilities
The Company is engaged in a continuing program of modernizing its operations
and retail stores. During fiscal 1997, the Company expended approximately
$268 million for capital projects which included 33 new supermarkets, 3 new
liquor stores, 4 new Food Basics franchised stores and 45 remodels or
enlargements. The Company's plans for fiscal 1998 anticipate capital
expenditures of approximately $300 million which include the opening of 45
new supermarkets and the remodeling or expansion of 80 stores. In addition,
the Company is also developing plans to open approximately 50 to 55
supermarkets per year for the next several years and remodel an average of 50
stores per year.
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 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.
Employees
As of February 28, 1998, the Company had approximately 80,000 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 1997 Annual Report to
Shareholders on pages 26, 28, 29, 30 and 32 and is herein incorporated by
reference.
ITEM 2. Properties
At February 28, 1998, the Company operated 936 retail stores and serviced 52
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 52
Massachusetts 22
New Hampshire 1
Vermont 2
----
Total 77
Middle Atlantic States:
District of Columbia 1
Delaware 8
Maryland 51
New Jersey 113
New York 176
Pennsylvania 46
----
Total 395
Mid-Western States:
Michigan 101
Wisconsin 46
----
Total 147
Southern States:
Alabama 3
Georgia 45
Louisiana 24
Mississippi 4
North Carolina 4
South Carolina 4
Virginia 46
----
Total 130
----
Total United States 749
----
Ontario, Canada 187
----
Total Stores 936
====
Franchised Stores:
Ontario, Canada 52
----
Total Franchised Stores 52
====
The total area of all retail stores is approximately 30.6 million square feet
averaging approximately 32,665 square feet per store while the total area of
all franchised stores is approximately 1.4 million square feet averaging
approximately 26,720 square feet per store. The 33 new supermarkets opened
in fiscal 1997 had a range in size from 19,500 to 73,600 square feet, with an
average size of 54,200 square feet. The stores built by the Company over the
past several years and those planned for fiscal 1998, generally range in size
from 50,000 to 65,000 square feet, of which approximately 70% is utilized as
selling area.
The Company operates two coffee roasting plants in the United States and a
bakery in Canada. In addition, the Company maintains 16 warehouses which
service its store network. These warehouses are geographically located as
follows:
Company Warehouses:
Georgia 1
Indiana 1
Louisiana 1
Maryland 1
Michigan 2
New Jersey 3
New York 3
Pennsylvania 1
Wisconsin 1
----
Total United States 14
----
Ontario, Canada 2
----
Total Warehouses 16
====
The net book value of real estate pledged as collateral for all mortgage
loans amounted to approximately $14 million as of February 28, 1998.
ITEM 3. Legal Proceedings
The information required is contained in the 1997 Annual Report to
Shareholders on page 32 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 1997.
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The information required is contained in the 1997 Annual Report to
Shareholders on pages 33 and 35 and is herein incorporated by reference.
ITEM 6. Selected Financial Data
The information required is contained on page 35 of the 1997 Annual Report to
Shareholders and is herein incorporated by reference.
ITEM 7. Management's Discussion and Analysis
The information required is contained in the 1997 Annual Report to
Shareholders on pages 14 through 19 and is herein incorporated by reference.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required is contained in the 1997 Annual Report to
Shareholders on page 19 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 1997 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 33 of the 1997 Annual Report to Shareholders and is herein
incorporated by reference.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
ITEMS 10 and 11. Directors and Executive Officers of the Registrant and
Executive Compensation
Executive Officers of the Company
Name Age Current Position
James Wood 68 Chairman of the Board
Christian W.E. Haub 33 President and Chief Executive Officer
Fred Corrado 58 Vice Chairman of the Board and Chief Financial
Officer
Michael J. Larkin 56 Senior Executive Vice President - Chief Operating
Officer
Aaron Malinsky 49 Executive Vice President - Development and
Strategic Planning
Joseph McCaig 53 Executive Assistant to the Chief Executive Officer
Peter J. O'Gorman 59 Executive Vice President - International Store
and Product Development
George Graham 48 Executive Vice President - Chief Merchandising
Officer
William Louttit 51 Chairman and Chief Executive Officer - Greater
New York Operations
John Dunne 59 Chairman and Co-Chief Executive Officer - The
Great Atlantic & Pacific Company of Canada, Limited
Brian Piwek 51 Vice Chairman and Co-Chief Executive Officer - The
Great Atlantic & Pacific Company of Canada, Limited
Craig C. Sturken 54 Chairman and Chief Executive Officer - Mid-West
Operations
Ivan K. Szathmary 61 Executive Vice President - Chief Service Officer
Robert G. Ulrich 63 Senior Vice President - General Counsel
Executive officers of the Company are chosen annually and serve at the
pleasure of the Chief Executive Officer with the consent of the Board of
Directors.
Mr. Wood was elected Chairman of the Board and Chief Executive Officer on
April 29, 1980. Effective May 1, 1998 Mr. Wood relinquished his Co-Chief
Executive Officer title. From April 2, 1997 through April 30, 1998 Mr. Wood
was Co-Chief Executive Officer along 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 of the Board of Directors.
Mr. Haub was elected President and Chief Executive Officer on May 1, 1998.
Prior to assuming his present position he was President and Co-Chief
Executive Officer from April 2, 1997 to April 30, 1998. Prior thereto he was
President and Chief Operating Officer of the Company since December 7, 1993
and served as Corporate Vice President, Development and Strategic Planning,
since joining the Company in 1991. Mr. Haub has been a member of the Board
of Directors of the Company since December 3, 1991 and an ex officio member
of the Executive, Finance and Retirement Benefits Committees.
Mr. Corrado was elected Vice Chairman of the Board on October 6, 1992. He
also serves as Chief Financial Officer since joining the Company in January
1987. Mr. Corrado also served as Treasurer of the Company in 1987 and from
April 18, 1989 through December 5, 1995. Mr. Corrado has been a member of
the Board of Directors of the Company since December 4, 1990, and is
currently the Vice Chairman of the Executive Committee and a member of the
Finance and Retirement Benefits Committees.
Mr. Larkin was elected Senior Executive Vice President - Chief Operating
Officer on June 30, 1997. Prior to rejoining the Company, Mr. Larkin owned
and operated two supermarkets in the Pennsylvania area from April 1995
through June 1997. Prior thereto and for the past five years, Mr. Larkin was
Executive Vice President - Operations with the Company.
Mr. Malinsky was 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 Chairman and President of Victory Markets,
Inc. and New Almacs, Inc.
Mr. McCaig was appointed Executive Assistant to the Chief Executive Officer
on September 8, 1997. Prior thereto and for the past five years he was
President and Chief Executive Officer of the Grand Union Company.
Mr. 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.
Mr. Graham was elected Executive Vice President - Chief Merchandising Officer
on August 1, 1997. Prior to assuming his present position and for the past
five years, he was successively Executive Vice President - U.S. Operations,
and Senior Vice President - Chief Merchandising Officer.
Mr. Louttit was appointed Chairman and Chief Executive Officer - Greater
Metro New York Operations on April 7, 1997. Prior thereto and for the past
five years Mr. Louttit was Executive Vice President and Chief Operating
Officer of the Grand Union Company.
Mr. Dunne was elected by The Great Atlantic & Pacific Company of Canada,
Limited as Chairman and Co-Chief Executive Officer on October 5, 1997. Prior
thereto and for the past five years, Mr. Dunne was successively Chairman and
Chief Executive Officer, President and Chief Operating Officer, and Vice
Chairman and Chief Merchandising Officer of The Great Atlantic & Pacific
Company of Canada, Limited. Mr. Dunne also served as Chairman and Chief
Executive Officer of Food Basics Limited from December 1995 through September
1996.
Mr. Piwek was elected by The Great Atlantic & Pacific Company of Canada,
Limited as Vice Chairman and Co-Chief Executive Officer on October 2, 1997.
Prior thereto and for the past five years, Mr. Piwek was President of
Overwaitea Food Group, a retailer and franchisor in British Columbia and
Alberta, Canada.
Mr. Sturken was appointed Chairman and Chief Executive Officer - Mid-West
Operations on April 7, 1997. Prior thereto and for the past five years Mr.
Sturken was successively Group Vice President Michigan and Chairman and Chief
Executive Officer - The Great Atlantic & Pacific Company of Canada, Limited.
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. Effective April 11, 1998 Dr. Szathmary
retired from the Company.
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 28, 1998 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 13 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 1997 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 1997 definitive proxy
statement on pages 1 and 6 and is herein incorporated by reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report
1) Financial Statements: The financial statements required by Item 8
are included in the fiscal 1997 Annual Report to Shareholders. The
following required items, appearing on pages 20 through 34 of the 1997
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.
3) Exhibits:
Exhibit Incorporation by reference
Numbers Description (If applicable)
2) Not Applicable
3) Articles of Incorporation
and By-Laws
a) Articles of Incorporation Exhibit 3)a) to Form 10-K
as amended through for fiscal year ended
July 1987 February 27, 1988
b) By-Laws as amended through Exhibit 3)b) to Form 10-K
March 1989 for fiscal year ended
February 25, 1989
4) Instruments defining the Exhibit A to Form 10-Q
rights of security holders, for the quarter ended
including indentures August 27, 1977; and
Registration Statement
No. 33-14624 on Form S-3
filed May 29, 1987
9) Not Applicable
10) Material Contracts
a) Management Compensation Exhibit 10)b) to Form 10-K
Agreements for the fiscal years ended
February 25, 1989,
February 24, 1990, and
Exhibit 10)a) for the fiscal
years ended
February 26, 1994,
February 25, 1995,
February 22, 1997; 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; and attached
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 Exhibit 10)h) to Form 10-K
Payment Plan for the fiscal year ended
February 22, 1997.
i) Competitive Advance and Exhibit 10) to Form 8-K
Revolving Credit Facilities filed on June 12, 1997.
Agreement dated as of
June 10, 1997.
11) Not Applicable
12) Not Applicable
13) 1997 Annual Report to Shareholders
18) Not Applicable
21) Subsidiaries of Registrant
22) Not Applicable
23) Independent Auditors' Consent
24) Not Applicable
27) Financial Data Schedule
28) Not Applicable
(b) Reports on Form 8-K
Report on Form 8-K was filed on June 12, 1997 with respect to the
Competitive and Revolving Credit Facilities Agreement dated June 10,
1997, among The Great Atlantic & Pacific Tea Company, Inc., The Great
Atlantic & Pacific Company of Canada, Limited and The Chase Manhattan
Bank as agent.
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 12, 1998 By: /s/ Fred Corrado
(Signature)
Fred Corrado
Vice Chairman of the Board and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and as of the date indicated.
/s/ James Wood Chairman of the Board and Director
James Wood
/s/ Christian W.E. Haub President, Chief Executive Officer and
Christian W.E. Haub Director
/s/ Fred Corrado Vice Chairman of the Board,
Fred Corrado Chief Financial Officer and Director
/s/ John D. Barline Director
John D. Barline
/s/ Rosemarie Baumeister Director
Rosemarie Baumeister
/s/ Christopher F. Edley Director
Christopher F. Edley
/s/ Helga Haub Director
Helga Haub
/s/ Barbara Barnes Hauptfuhrer Director
Barbara Barnes Hauptfuhrer
/s/ William A. Liffers Director
William A. Liffers
/s/ Fritz Teelen Director
Fritz Teelen
/s/ R.L. "Sam" Wetzel Director
R.L. "Sam" Wetzel
The above-named persons signed this report on behalf of the registrant on
May 26, 1998.
/s/ Kenneth A. Uhl Vice President-Controller May 26, 1998
Kenneth A. Uhl Date
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
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<TEXT>
COMPARATIVE HIGHLIGHTS
The Great Atlantic & Pacific Tea Company, Inc.
(Dollars in thousands, except per share amounts)
- -----------------------------------------------
Fiscal 1997 Fiscal 1996 Fiscal 1995
(53 weeks) (52 weeks) (52 weeks)
----------- ----------- -----------
Sales $10,262,243 $10,089,014 $10,101,356
Income from operations 155,259 169,303 151,734
Income before extraordinary item 63,586 73,032 57,224
Net income 63,042 73,032 57,224
Income per share before
extraordinary item - basic
and diluted 1.66 1.91 1.50
Net income per share - basic
and diluted 1.65 1.91 1.50
Cash dividends per share .40 .20 .20
Expenditures for property 267,623 296,878 236,139
Depreciation and amortization 234,236 230,748 225,449
Working capital 262,097 215,374 190,967
Shareholders' equity 926,632 890,072 822,785
Debt to total capitalization .48 .49 .49
Book value per share 24.22 23.27 21.53
New store openings 40 30 30
Number of stores at year end 936 973 1,014
Number of franchised stores
served at year end 52 49 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATING RESULTS
Fiscal 1997 Compared with 1996
Sales for fiscal 1997 were $10,262 million, a net increase of $173 million or
1.7% when compared to fiscal 1996 sales of $10,089 million. U.S. sales
increased $62 million or 0.8% compared to fiscal 1996. U.S. same store
sales, which include replacement stores ("same store sales" referred to
herein includes replacement stores), were 2.0% below the prior year. In
Canada, sales increased $111 million or 6.1% from fiscal 1996 to $1,918
million. Canada same store sales were up 0.6% from the prior year.
Total Company same store sales for fiscal 1997 decreased 1.6% from the
prior year. Average weekly sales per supermarket were approximately $199,400
in fiscal 1997 versus $195,200 in fiscal 1996 for a 2.2% increase. During
fiscal 1997, the Company opened 33 new supermarkets, 3 new liquor stores and
4 new Food Basics franchised stores, remodeled or expanded 45 stores, and
closed 74 stores, of which 11 in the Carolina market were sold.
The sales increase of $173 million from last year was mainly the result of
new store openings and an extra week of sales in fiscal 1997. The Company
opened 36 stores, excluding 32 stores that replaced 32 older, outmoded
stores, since the beginning of fiscal 1996 which increased sales by
approximately $262 million or 2.6% in fiscal 1997. In addition, wholesale
sales to the Food Basics franchised stores increased $135 million or 66% to
$340 million for fiscal 1997, which increased total Company sales by 1.3%.
In fiscal 1997, sales increased $174 million or 1.7% as a result of an extra
week sales during this 53 week year compared to a 52 week year in fiscal
1996. These increases were partially offset by the closure of 114 stores,
excluding replacement stores, since the beginning of fiscal 1996, of which 11
were sold in the Carolina market reducing total sales by approximately $218
million or 2.1% in fiscal 1997. The store closures include 24 stores that
were subsequently converted to Food Basics franchised stores. The 1.6%
decrease in same store sales resulted in a sales decrease of $153 million in
fiscal 1997, while a lower Canadian exchange rate resulted in a sales
decrease of $45 million in fiscal 1997.
Gross margin as a percent of sales decreased 0.4% to 28.6% from 29.0% for
the prior year resulting primarily from the increase of the lower margin
wholesale sales from 2.0% to 3.3% of total Company sales in fiscal 1997,
partially offset by an increase in the retail supermarket margin rate in the
U.S. The gross margin percentage in the retail stores remained flat from the
prior year. The gross margin dollar increase of $13 million is primarily the
result of an increase in sales volume which had an impact of increasing
margin by $66 million, partially offset by a decrease in gross margin rates
of $40 million and a lower Canadian exchange rate which decreased margin by
$13 million. The U.S. gross margin increased $24 million principally as a
result of an increase in sales volume which had an impact of increasing
margin by $19 million and an increase in gross margin rates of $5 million.
The Canadian operations gross margin decreased $11 million which was
primarily the result of the wholesale sales increase from the prior year.
Store operating, general and administrative expense of $2,780 million in
fiscal 1997 increased by approximately $27 million from fiscal 1996. As a
percent of sales, store operating, general and administrative expense for
fiscal 1997 decreased to 27.1% from 27.3% for the prior year. U.S. expenses
increased $36 million, principally as a result of increased store labor and
occupancy costs on the new superstores opened in fiscal 1997. In addition,
store closing costs increased by $8 million which was offset by gains on
sales of real estate of $11 million. Canadian expenses decreased $9 million,
principally as a result of reduced store labor and occupancy costs due to
converting 24 stores to Food Basics franchised stores.
Interest expense increased $7 million from the previous year, primarily
due to an increase in average debt of approximately $95 million. The
increase in debt is mainly the result of the Company issuing $300 million 10
year notes in April 1997 to refinance 10 year notes that were becoming due in
January 1998. The debt outstanding in April 1997 subsequent to the issuance
of the $300 million 10 year notes was approximately $862 million, which was
reduced to $712 million at February 28, 1998.
Interest income increased $3 million from the previous year, primarily due
to interest income on equipment leases relating to the Food Basics franchise
business and higher interest income on short-term investments. The interest
income on short-term investments was mainly the result of the Company
investing a portion of the proceeds from the $300 million 10 year notes in
April 1997 prior to the use of the cash to refinance the bonds due in January
1998.
PAGE 14
Income before taxes and extraordinary item for fiscal 1997 was $83 million
as compared to $101 million in fiscal 1996 for a decrease of $18 million or
18%. Income before taxes for U.S. operations decreased $23 million from $68
million in fiscal 1996 to $45 million in fiscal 1997. The U.S. decrease was
partially offset by an increase in Canadian operations income before taxes of
$5 million to $37 million in fiscal 1997 from $32 million in fiscal 1996.
The effective tax rate for fiscal 1997 was 23.3% as compared to an
effective tax rate of 27.4% in fiscal 1996. During fiscal 1997, since the
Canadian operations generated pretax earnings, the Company reversed
approximately $17 million of the valuation allowance, which was an increase
of $3 million from the fiscal 1996 reversal of $14 million. Accordingly, the
decrease in the effective tax rate is mainly attributable to the change in
the Canadian income tax valuation allowance. The Company is reversing the
income tax valuation allowance to the extent that its Canadian operations
generate taxable income.
Although Canada generated pretax earnings in fiscal 1997 of $37 million and
$32 million in fiscal 1996, the Company was unable to conclude that the
Canadian deferred tax assets were more likely than not to be realized. This
conclusion was based in part on Management's assessment of the competitive
Canadian marketplace and the level of the Canadian earnings. Accordingly,
at February 28, 1998 the Company is continuing to fully reserve its Canadian
net deferred tax asset. 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 net deferred tax asset. The positive evidence that
Management believes is necessary in order to reverse some or all of the
Canadian deferred tax asset valuation allowance is a trend in earnings to a
level which would allow Management to conclude that it is more likely than
not that a portion or all of the deferred tax assets would be realized. The
Canadian pretax income for financial statement purposes are higher than the
taxable income for tax purposes due to certain differences between the
financial statement and income tax treatment of certain items. This is of
further significance since the largest portion of the Canadian deferred tax
asset relates to net operating loss carryforwards which expire between
fiscal 1999 and fiscal 2002 (see "Income Taxes" footnote for further
discussion).
In the second quarter of fiscal 1997, the Company recorded an
extraordinary charge of $0.5 million, net of a tax benefit of $0.4 million
relating to the early extinguishment of debt which amounted to $.01 per share
- - basic and diluted. The Company retired at a premium approximately $20
million in mortgages with a weighted average interest rate of 9.4%.
Net income for fiscal 1997 after recording an extraordinary charge of $.01
per share - basic and diluted, was $63 million or $1.65 per share - basic and
diluted, as compared to $73 million or $1.91 per share - basic and diluted,
for fiscal 1996. The decrease in net income is the result of higher store
operating, general and administrative expenses of $27 million, partially
offset by higher gross margins of $13 million coupled with a lower effective
income tax rate.
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
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 were up
0.5% from the prior year.
Total Company same store sales 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.
PAGE 15
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 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 an
effective 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 - basic and diluted, 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 1996, since the Canadian operations generated pretax
earnings, the Company reversed approximately $14 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. Accordingly, at February 22, 1997 the Company continued 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 (see
"Income Taxes" footnote for further discussion).
Net income for fiscal 1996 was $73 million or $1.91 per share - basic and
diluted as compared to $57 million or $1.50 per share - basic and diluted for
fiscal 1995. Excluding the $6.5 million or $0.17 per share - basic and
diluted Canadian tax refund, fiscal 1995 net income would have been $51
million or $1.33 per share - basic and diluted. Accordingly, excluding the
effect of such refund, net income increased $22 million or $0.58 per share -
basic and diluted. 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.
PAGE 16
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the 1997 fiscal year with working capital of $262 million
compared to $215 million and $191 million at February 22, 1997 and February
24, 1996, respectively. The Company had cash and short-term investments
aggregating $71 million at the end of fiscal 1997 compared to $99 million and
$100 million at the end of fiscal 1996 and 1995, respectively.
On June 10, 1997, the Company executed an unsecured five year $465 million
U.S. credit agreement and a five year C$50 million Canadian credit agreement
(the "1997 Credit Agreement") with a syndicate of banks, enabling it to
borrow funds on a revolving basis sufficient to refinance short-term
borrowings. This 1997 Credit Agreement replaced a previous five year $400
million U.S. revolving credit agreement and a C$100 million revolving credit
agreement dated December 12, 1995. The 1997 Credit Agreement resulted in
the Company obtaining a lower cost of borrowing, reduced facility fees, and
extended the maturity to June 2002. The Company pays a facility fee ranging
from 3/16% to 1/2% per annum on the total commitment of the U.S. and
Canadian revolving credit facilities. Borrowings under the U.S. revolving
credit agreement were $90 million and $95 million at February 28, 1998 and
February 22, 1997, respectively. The Canadian subsidiary had no outstanding
borrowings at February 28, 1998 and $59 million at February 22, 1997. As of
February 28, 1998, the Company had available $375 million under its U.S.
credit agreement and C$50 million (U.S. $35 million at February 28, 1998)
under the Canadian credit agreement. As of February 22, 1997, the Company
had 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. In
addition, the U.S. has uncommitted lines of credit with various banks
amounting to $149 million and $145 million as of February 28, 1998 and
February 22, 1997, respectively. Borrowings under these uncommitted lines
of credit amounted to $38 million and $52 million as of February 28, 1998
and February 22, 1997, respectively.
As of February 28, 1998, the Company had outstanding a total of $575
million of unsecured, non-callable public debt securities in the form of $75
million 7.78% Notes due November 1, 2000, $200 million 7.70% Notes due
January 15, 2004 and $300 million 7.75% Notes due April 15, 2007. As of
February 28, 1998, the Company had $410 million available under the 1997
Credit Agreement and $111 million in uncommitted lines of credit.
On April 15, 1997, the Company issued $300 million 7.75% 10 year Notes due
April 15, 2007. The Company used the net proceeds to reduce bank borrowings
under the U.S. and Canadian revolving credit facilities, prepay other
indebtedness and for general corporate purposes. The Company borrowed funds
available under the U.S. credit facility to repay at maturity, indebtedness
owing in respect of the Company's 9 1/8% Notes due January 15, 1998.
On June 12, 1997, the Company offered to exchange its 7.75% 10 year Notes
due April 15, 2007, which were registered under the Securities Act, for
outstanding 7.75% 10 year Notes due April 15, 2007, which had not been so
registered. The exchange offer expired on July 10, 1997 with all outstanding
unregistered 10 year Notes exchanged for registered 10 year Notes.
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 was executed for protection against the effect
of a decrease in Canadian exchange rates on both the semi-annual interest
payments and the final principal payment due to the Company's U.S.
bondholders. The cross-currency swap enables the Company to pay in Canadian
dollars a fixed rate of interest of 9.23% on a notional amount of C$100
million for the $75 million 7.78% Notes denominated in U.S. dollars. The
cost of the cross-currency swap of 1.45% is charged to interest expense. The
Company records an asset or liability to the extent that an eventual
transaction gain or loss is expected to be recorded upon the settlement of
the notional amount of the underlying debt. Accordingly, the Company has
recorded in other assets the receivable due from the counterparty amounting
to approximately $4.5 million and $1.4 million as of February 28, 1998 and
February 22, 1997, respectively. The fair value of the cross-currency swap
was favorable to the Company by $1 million as of February 28, 1998 and
unfavorable to the Company by $5.4 million as of February 22, 1997. 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.
PAGE 17
On April 15, 1997, the Company's Canadian subsidiary entered into an
interest rate swap agreement with a notional amount of C$100 million where
the Company receives a fixed rate of interest and pays a variable rate of
interest. The fair value of the interest rate swap was favorable to the
Company by $1.4 million as of February 28, 1998. This interest rate swap
agreement has the same counterparty as the cross-currency swap agreement.
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 28, 1998, and
believes that it will continue to be in compliance.
During fiscal 1997, 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 $128 million at February 28, 1998 as compared to
$147 million at February 22, 1997. U.S. bank borrowings during fiscal 1997
were at an average interest rate of 6.0% compared to 5.8% in fiscal 1996.
Canada had no bank borrowings at February 28, 1998 and $59 million at
February 22, 1997. Canadian bank and commercial paper borrowings during
fiscal 1996 were at an average interest rate of 5.3%.
Pursuant to a Shelf Registration Statement dated January 23, 1998, the
Company may offer up to $500 million of debt and equity securities at terms
determined by market conditions at the time of sale.
Capital expenditures totaled $268 million during fiscal 1997, which included
33 new supermarkets, 3 new liquor stores, 4 new Food Basics franchised
stores, and 45 remodels and enlargements.
For fiscal 1998, the Company has planned capital expenditures of
approximately $300 million and plans to open 45 new supermarkets and remodel
or expand 80 stores. It has been the Company's experience over the past
several years that it typically takes 12 to 15 months after opening for a new
store to recoup its opening costs and become profitable thereafter. Risks
inherent in retail real estate investments are primarily associated with
competitive pressures in the marketplace. Beginning in fiscal 1998 through
fiscal 2000, the Company intends to improve the use of technology to improve
customer service, store operations, warehousing/distribution and
merchandising and to intensify advertising and promotions. The Company
currently expects to close approximately 60 stores in fiscal year 1998.
The Company plans to open approximately 50 new supermarkets in fiscal 1999
and approximately 55 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.
The fiscal 1997 quarterly dividend was $0.10 per share and amounted to $15.3
million. The Company expects to maintain the same dividend amount for fiscal
1998.
At fiscal year end, the Company's existing senior debt rating was Baa3 with
Moody's Investors Service and BBB- with Standard & Poor's Ratings Group. A
change in either of these ratings could affect the availability and cost of
financing.
The Company's current cash resources, together with cash generated from
operations, will be sufficient for the Company's 1998 capital expenditure
program, mandatory scheduled debt repayments and dividend payments throughout
fiscal 1998.
PAGE 18
MARKET RISK
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company. The
Company is exposed to market risk in the areas of interest rates and foreign
currency exchange rates.
Interest rates
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's debt obligations. The Company has no cash flow
exposure due to rate changes on its $500 million in notes. However, the
Company does have cash flow exposure on its committed and uncommitted bank
lines of credit due to its variable LIBOR pricing. In addition, during 1997
the Company entered into an interest rate swap agreement whereby the Company
receives a fixed interest rate while paying a variable rate of interest on
the $75 million Canadian notes. Accordingly, a 1% change in LIBOR will
result in interest expense fluctuating approximately $2.5 million.
Foreign Exchange Risk
The Company is exposed to foreign exchange risk to the extent of adverse
fluctuations in the Canadian dollar. Based upon historical Canadian currency
movement, the Company does not believe that reasonably possible near-term
changes in the Canadian currency will result in a material effect on future
earnings, financial position or cash flows of the Company.
The Company entered into a five year cross-currency swap agreement to hedge
five year notes in Canada that are denominated in U.S. dollars. The Company
does not have any currency risk regarding the Canadian 5 year notes. The
Company is exposed to currency risk in the event of default by the
counterparty. Such default is remote as the counterparty is a widely
recognized investment banker.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year.
Accordingly, computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. To
the extent that the Company's software applications contain source code that
is unable to appropriately interpret the upcoming calendar year 2000 and
beyond, some level of modification or replacement of such applications will
be necessary to avoid the possibility of system failures and the temporary
inability to process transactions or engage in other normal business
activities.
The Company has implemented a formal plan to address the year 2000 issue
which includes assessing the extent of affected software and developing
procedures to resolve the potential problems associated with that software.
In addition, the Company is communicating with its major vendors to determine
the extent to which the Company might be affected by their year 2000
compliance issues.
Based on current information, costs of addressing potential problems are not
expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows in future periods. However, if
the Company, or its vendors are unable to resolve such processing issues in a
timely manner, it could result in a material financial risk. Accordingly,
the Company has allocated the resources it believes are necessary to resolve
all significant year 2000 issues in a timely manner.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income" ("SFAS 130") and SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130
relates to the change in the equity of a business during a reporting period
from transactions of the business. The Company currently intends to adopt
this new accounting standard effective in the first quarter of fiscal 1998.
The expected impact in the adoption of SFAS 130 is not readily determinable
as the impact is predicated on the future changes in the Canadian exchange
rate. SFAS 131 supersedes SFAS No. 14 "Financial Reporting for Segments of a
Business Enterprise". SFAS 131 provides for the disclosure of financial
information disaggregated by the way management organizes the segments of the
enterprise for making operating decisions. The Company is currently
assessing the extent of disclosures that will be required by SFAS 131 and
will adopt this statement in fiscal 1998.
In February 1998, the FASB issued SFAS No. 132 "Employer's Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132
standardizes the disclosure requirements for pensions and other
postretirement benefits. It does not address the accounting for such
benefits. SFAS 132 is effective for fiscal years beginning after December
31, 1997 and requires restatement of disclosures for all prior periods
presented. The Company will adopt SFAS 132 in fiscal 1998 and believes it
will impact the financial statements to the extent that it is necessary to
provide additional disclosure about the Company's pensions and other
postretirement benefits.
PAGE 19
STATEMENTS OF CONSOLIDATED OPERATIONS
The Great Atlantic & Pacific Tea Company, Inc.
(Dollars in thousands, except per share amounts)
- -----------------------------------------------
Fiscal 1997 Fiscal 1996 Fiscal 1995
(53 weeks) (52 weeks) (52 weeks)
----------- ------------ -----------
Sales $10,262,243 $10,089,014 $10,101,356
Cost of merchandise sold (7,327,365) (7,167,315) (7,166,119)
----------- ----------- -----------
Gross margin 2,934,878 2,921,699 2,935,237
Store operating, general
and administrative expense (2,779,619 (2,752,396) (2,783,503)
----------- ----------- ----------
Income from operations 155,259 169,303 151,734
Interest expense (80,152) (73,208) (73,143)
Interest income 7,793 4,496 2,501
----------- ----------- ----------
Income before income taxes and
extraordinary item 82,900 100,591 81,092
Provision for income taxes (19,314) (27,559) (23,868)
----------- ----------- ----------
Income before extraordinary item 63,586 73,032 57,224
Extraordinary loss on early
extinguishment of debt (net
of income tax benefit of $394) (544) - -
----------- ----------- ----------
Net income $ 63,042 $ 73,032 $ 57,224
=========== =========== ==========
Basic earnings (loss) per share:
Income before extraordinary item $ 1.66 $ 1.91 $ 1.50
Extraordinary loss on early
extinguishment of debt (0.01) - -
----------- ----------- ----------
Net income per share - basic $ 1.65 $ 1.91 $ 1.50
=========== =========== ==========
Diluted earnings (loss) per share:
Income before extraordinary item $ 1.66 $ 1.91 $ 1.50
Extraordinary loss on early
extinguishment of debt (0.01) - -
----------- ----------- ----------
Net income per share - diluted $ 1.65 $ 1.91 $ 1.50
=========== =========== ==========
See Notes to Consolidated Financial Statements.
PAGE 20
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
The Great Atlantic & Pacific Tea Company, Inc.
(Dollars in thousands, except share amounts)
- ------------------------------------------------
Fiscal 1997 Fiscal 1996 Fiscal 1995
----------- ----------- -----------
Common stock:
Shares:
Issued and outstanding
at beginning of year 38,247,716 38,220,333 38,220,333
Stock options exercised 5,250 27,383 -
----------- ---------- -----------
Issued and outstanding
at end of year 38,252,966 38,247,716 38,220,333
=========== =========== ===========
Balance at beginning of year $ 38,247 $ 38,220 $ 38,220
Stock options exercised 6 27 -
----------- ----------- -----------
Balance at end of year $ 38,253 $ 38,247 $ 38,220
=========== =========== ===========
Capital surplus:
Balance at beginning of year $ 453,751 $ 453,121 $ 453,121
Stock options exercised 143 630 -
----------- ----------- -----------
Balance at end of year $ 453,894 $ 453,751 $ 453,121
=========== =========== ===========
Cumulative translation adjustment:
Balance at beginning of year $ (49,694)$ (50,936) $ (49,227)
Exchange adjustment (5,121) 1,242 (1,709)
----------- ----------- -----------
Balance at end of year $ (54,815)$ (49,694) $ (50,936)
=========== =========== ===========
Minimum pension liability adjustment:
Balance at beginning of year $ - $ - $ -
Minimum pension liability adjustment (6,210) - -
----------- ----------- -----------
Balance at end of year $ (6,210) $ - $ -
=========== =========== ===========
Retained earnings:
Balance at beginning of year $ 447,768 $ 382,380 $ 332,800
Net income 63,042 73,032 57,224
Cash dividends (15,300) (7,644) (7,644)
----------- ----------- -----------
Balance at end of year $ 495,510 $ 447,768 $ 382,380
=========== =========== ===========
See Notes to Consolidated Financial Statements.
PAGE 21
CONSOLIDATED BALANCE SHEETS
The Great Atlantic & Pacific Tea Company, Inc.
February 28, February 22,
(Dollars in thousands) 1998 1997
- --------------------- ------------ -----------
Assets
Current assets:
Cash and short-term investments $ 70,937 $ 98,830
Accounts receivable 227,703 213,888
Inventories 882,229 881,288
Prepaid expenses and other assets 36,358 37,373
---------- ----------
Total current assets 1,217,227 1,231,379
---------- ----------
Property:
Land 138,139 128,779
Buildings 368,201 343,076
Equipment and leasehold improvements 2,122,860 2,118,808
---------- ----------
Total-at cost 2,629,200 2,590,663
Less accumulated depreciation
and amortization (1,122,381) (1,104,159)
---------- ----------
1,506,819 1,486,504
Property leased under capital leases 90,058 103,474
---------- ----------
Property-net 1,596,877 1,589,978
Other assets 181,149 181,315
---------- ----------
$2,995,253 $3,002,672
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 16,824 $ 18,290
Current portion of obligations
under capital leases 12,293 12,708
Accounts payable 441,149 468,808
Book overdrafts 151,846 182,305
Accrued salaries, wages and benefits 146,064 146,737
Accrued taxes 57,856 52,269
Other accruals 129,098 134,888
---------- ----------
Total current liabilities 955,130 1,016,005
---------- ----------
Long-term debt 695,292 701,609
---------- ----------
Obligations under capital leases 120,980 137,886
---------- ----------
Deferred income taxes 120,618 113,188
---------- ----------
Other non-current liabilities 176,601 143,912
---------- ----------
Commitments and contingencies
Shareholders' equity:
Preferred stock-no par value;
authorized - 3,000,000 shares;
issued-none
Common stock-$1 par value;
authorized - 80,000,000 shares;
issued and outstanding
38,252,966 shares and
38,247,716 shares, respectively 38,253 38,247
Capital surplus 453,894 453,751
Cumulative translation adjustment (54,815) (49,694)
Minimum pension liability adjustment (6,210) -
Retained earnings 495,510 447,768
---------- ----------
Total shareholders' equity 926,632 890,072
---------- ----------
$2,995,253 $3,002,672
========== ==========
See Notes to Consolidated Financial Statements.
PAGE 22
STATEMENTS OF CONSOLIDATED CASH FLOWS
The Great Atlantic & Pacific Tea Company, Inc.
(Dollars in thousands) Fiscal 1997 Fiscal 1996 Fiscal 1995
- --------------------- ----------- ----------- -----------
Cash Flows From Operating Activities:
Net income $ 63,042 $ 73,032 $ 57,224
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 234,236 230,748 225,449
Deferred income tax provision (benefit)
on income before extraordinary item 11,425 (1,067) 9,496
(Gain) loss on disposal of owned
property, net (11,363) 1,338 (3,177)
(Increase) decrease in receivables (14,116) (5,615) 556
Increase in inventories (6,090) (53,672) (13,103)
(Increase) decrease in prepaid expenses
and other current assets (2,630) 6,401 (573)
Increase in other assets (1,435) (26,753) (12,066)
Increase (decrease) in accounts payable (24,542) 15,950 3,944
Increase (decrease) in accrued expenses 8,594 (2,657) (4,251)
Increase (decrease) in store closing
reserves 6,104 (8,600) (18,240)
Increase (decrease) in other accruals
and other liabilities 14,052 (13,307) 16,518
Other operating activities, net (1,050) 271 193
--------- --------- ---------
Net cash provided by operating activities 276,227 216,069 261,970
--------- --------- ---------
Cash Flows From Investing Activities:
Expenditures for property (267,623) (296,878) (236,139)
Proceeds from disposal of property 31,783 19,408 34,576
--------- --------- ---------
Net cash used in investing activities (235,840) (277,470) (201,563)
--------- --------- ---------
Cash Flows From Financing Activities:
Changes in short-term debt (34,500) 37,000 13,000
Proceeds under revolving lines of credit 947,148 459,312 1,182,183
Payments on revolving lines of credit (991,296) (439,591) (1,329,409)
Proceeds from long-term borrowings 304,213 4,978 75,000
Payments on long-term borrowings (233,348) (6,155) (4,005)
Principal payments on capital leases (13,711) (13,166) (17,953)
Increase (decrease) in book overdrafts (28,145) 24,901 (1,075)
Deferred financing fees (2,471) - -
Proceeds from stock options exercised 149 657 -
Cash dividends (15,300) (7,644) (7,644)
--------- --------- ----------
Net cash provided by (used in)
financing activities (67,261) 60,292 (89,903)
--------- --------- ---------
Effect of exchange rate changes on cash and
short-term investments (1,019) 167 338
--------- --------- ---------
Net Decrease in Cash and
Short-term Investments (27,893) (942) (29,158)
Cash and Short-term Investments
at Beginning of Year 98,830 99,772 128,930
--------- --------- ---------
Cash and Short-term Investments
at End of Year $ 70,937 $ 98,830 $ 99,772
========= ========= =========
See Notes to Consolidated Financial Statements.
PAGE 23
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, 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
1997 ended February 28, 1998, fiscal 1996 ended February 22, 1997 and fiscal
1995 ended February 24, 1996. Fiscal 1997 was comprised of 53 weeks while
fiscal 1996 and fiscal 1995 were each comprised of 52 weeks.
Common Stock
The principal shareholder of the Company, Tengelmann
Warenhandelsgesellschaft, owned 54.67% of the Company's common stock as of
February 28, 1998.
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 each of the three fiscal years in
the period ended February 28, 1998.
Properties
Depreciation and amortization are provided on the straight-line basis over
the estimated useful lives of the assets. Buildings are depreciated based
on lives varying from twenty to fifty years and equipment based on lives
varying from three to ten years. Real property leased under capital leases
is amortized over the lives of the respective leases or over their economic
useful lives, whichever is less. During fiscal 1997 the Company disposed of
certain assets which resulted in a pretax gain of approximately $11 million.
Pre-opening Costs
The costs of opening new stores are expensed in the year incurred.
Earnings Per Share
In the fourth quarter of fiscal 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
SFAS 128 requires dual presentation of basic and diluted earnings per share
("EPS") on the face of the statements of consolidated operations and
requires a reconciliation of the numerators and denominators of the basic
and diluted EPS calculations. Basic EPS is computed by dividing net income
by the weighted average shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if options to issue common
stock were exercised and converted to common stock. Earnings per share for
prior periods have been computed in accordance with SFAS 128.
The weighted average shares outstanding utilized in the basic earnings per
share calculations were 38,249,832 for fiscal 1997, 38,221,329 for fiscal
1996 and 38,220,333 for fiscal 1995. The common stock equivalents that were
added to the weighted average shares outstanding for purposes of diluted
earnings per share were 19,926 for fiscal 1997, 66,260 for fiscal 1996 and
1,374 for fiscal 1995.
Excess of Cost over Net Assets Acquired
The excess of cost over fair value of net assets acquired is amortized on a
straight-line basis over forty years. The Company recorded amortization
expense of $1.5 million for each of the three fiscal years in the period
ended February 28, 1998. The accumulated amortization relating to goodwill
amounted to $11.7 million and $10.2 million at February 28, 1998 and
February 22, 1997, 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 28, 1998, the Company estimates that the cash flows projected to be
generated by the respective businesses on an undiscounted basis should be
sufficient to recover the existing goodwill balance over its remaining life.
Long-Lived Assets
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.
PAGE 24
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 book balances for accounting purposes. Such amounts are
classified as "Book overdrafts" in the accompanying balance sheets.
The Company accrues for vested and non-vested vacation pay. Liabilities
for compensated absences of $79 million at both February 28, 1998 and
February 22, 1997, 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 pro forma 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.
New Accounting Pronouncements Not Yet Adopted
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income" ("SFAS 130") and SFAS No. 131 "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130
relates to the change in the equity of a business during a reporting period
from transactions of the business. The Company currently intends to adopt
this new accounting standard effective in the first quarter of fiscal 1998.
The expected impact in the adoption of SFAS 130 is not readily determinable
as the impact is predicated on the future changes in the Canadian exchange
rate. SFAS 131 supersedes SFAS No. 14 "Financial Reporting for Segments of a
Business Enterprise". SFAS 131 provides for the disclosure of financial
information disaggregated by the way management organizes the segments of the
enterprise for making operating decisions. The Company is currently
assessing the extent of disclosures that will be required by SFAS 131 and
will adopt this statement in fiscal 1998.
In February 1998, the FASB issued SFAS No. 132 "Employer's Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132
standardizes the disclosure requirements for pensions and other
postretirement benefits. It does not address the accounting for such
benefits. SFAS 132 is effective for fiscal years beginning after December
31, 1997 and requires restatement of disclosures for all prior periods
presented. The Company will adopt SFAS 132 in fiscal 1998 and believes it
will impact the financial statements to the extent that it is necessary to
provide additional disclosure about the Company's pensions and other
postretirement benefits.
INVENTORY
Approximately 27% of the Company's inventories are valued using the last-in,
first-out ("LIFO") method at both February 28, 1998 and February 22, 1997.
Such inventories would have been $14 million and $15 million higher at
February 28, 1998 and February 22, 1997, respectively, if the retail and
first-in, first-out methods were used. The Company recorded LIFO charges of
approximately $1 million and $2 million during fiscal years 1996 and 1995,
respectively. During fiscal year 1997, the Company recorded a LIFO credit
of $0.4 million. Liquidation of LIFO layers in the periods reported did not
have a significant effect on the results of operations.
PAGE 25
FOOD BASICS FRANCHISE BUSINESS
The Company serviced 52 Food Basics franchised stores as of February 28,
1998 and 49 stores as of February 22, 1997. These franchised stores are
required to purchase inventory exclusively from the Company which acts as a
wholesaler to the franchisees. During fiscal 1997 and 1996, the Company had
wholesale sales to these franchised stores of $340 million and $205 million,
respectively. A majority of the Food Basics franchised stores were
converted from Company operated supermarkets. The Company subleases the
stores and leases the equipment in the stores to the franchisees. The
Company also provides merchandising, advertising, accounting and other
consultative services to the franchisees for which it receives a nominal fee
which mainly represents the reimbursements of costs incurred to provide such
services (see "Lease Obligations" footnote).
Included in other assets are Food Basics franchised business receivables,
net of allowance for doubtful accounts, amounting to $37.6 million as of
February 28, 1998 and $40.2 million as of February 22, 1997. The inventory
notes are collateralized by the inventory in the stores, while the equipment
lease receivables are collateralized by the equipment in the stores. The
current portion of the inventory and equipment leases of approximately $1.9
million as of February 28, 1998 and $2.4 million as of February 22, 1997 are
included in accounts receivable. The repayment of the inventory notes and
equipment leases are dependent on positive operating results of the stores.
To the extent that the franchisee incur operating losses, the Company
establishes an allowance for doubtful accounts. The Company continually
assesses the sufficiency of the allowance on a store by store basis based
upon the operating losses incurred and the related collateral underlying the
amounts due from the franchisees. In the event of default by a franchisee,
the Company reserves the option to reacquire the inventory and equipment at
the store and operate the franchise as a corporate owned store.
Included below are the amounts due to the Company for the next five years
and thereafter from the franchised stores for equipment leases and inventory
notes.
- --------------------------------------------------------------
(Dollars in thousands)
- --------------------------------------------------------------
1998 $5,379
1999 6,595
2000 6,595
2001 6,595
2002 6,595
2003 and thereafter 20,694
-------
52,453
Less interest portion 12,897
-------
Due from Food Basics franchise business $39,556
=======
For the fiscal years ended February 28, 1998 and February 22, 1997
approximately $2 million and $34 million, respectively, of the franchise
business notes relate to equipment leases which were non-cash transactions
and accordingly, have been excluded from the consolidated statements of cash
flows.
INDEBTEDNESS
Debt consists of:
February 28, February 22,
(Dollars in thousands) 1998 1997
- --------------------- ----------- -----------
7.75% Notes, due April 15, 2007 $300,000 $ -
9 1/8% Notes, due January 15, 1998 - 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
1998 through 2014 (average interest
rates at year end of 6.70% and
9.35%, respectively) 11,972 38,878
U.S. Bank Borrowings at 5.86%
and 5.76%, respectively 127,500 147,000
Canadian Commercial Paper at 3.44% - 2,192
Canadian Bank Borrowings at 3.65% - 56,956
Less unamortized discount on 7.75%
and 9 1/8% Notes (2,356) (127)
-------- --------
712,116 719,899
Less current portion (16,824) (18,290)
-------- --------
Long-term debt $695,292 $701,609
======== ========
On June 10, 1997, the Company executed an unsecured five year $465 million
U.S. credit agreement and a five year C$50 million Canadian credit agreement
(the "1997 Credit Agreement") with a syndicate of banks, enabling it to
borrow funds on a revolving basis sufficient to refinance short-term
borrowings. This 1997 Credit Agreement replaced a previous five year $400
million U.S. revolving credit agreement and a C$100 million revolving credit
agreement dated December 12, 1995. The 1997 Credit Agreement resulted in
the Company obtaining lower cost of borrowing, reduced facility fees, and
extended the maturity to June 2002. The Company pays a facility fee ranging
from 3/16% to 1/2% per annum on the total commitment of the U.S. and
Canadian revolving credit facilities. Borrowings under the U.S. revolving
credit agreement were $90 million and $95 million at February 28, 1998 and
February 22, 1997, respectively. The Canadian subsidiary had no outstanding
borrowings at February 28, 1998 and $59 million at February 22, 1997. As of
February 28, 1998, the Company had available $375 million under its U.S.
agreement and C$50 million (U.S. $35 million at February 28, 1998) under the
Canadian credit agreement. As of February 22, 1997, the Company had
available $305 million under its U.S. agreement and C$19 million (U.S. $14
million at February 22, 1997) under the Canadian credit agreement. In
addition, the U.S. has uncommitted lines of credit with various banks
amounting to $149 million and $145 million as of February 28, 1998 and
February 22, 1997, respectively.
PAGE 26
Borrowings under these uncommitted lines of credit amounted to $38 million
and $52 million as of February 28, 1998 and February 22, 1997, respectively.
As of February 28, 1998, the Company had outstanding a total of $575
million of unsecured, non-callable public debt securities in the form of $75
million 7.78% Notes due November 1, 2000, $200 million 7.70% Notes due
January 15, 2004 and $300 million 7.75% Notes due April 15, 2007. As of
February 28, 1998, the Company had $410 million available under the 1997
Credit Agreement and $111 million in uncommitted lines of credit.
On April 15, 1997, the Company issued $300 million 7.75% 10 year Notes due
April 15, 2007. The Company used the net proceeds to reduce bank borrowings
under the U.S. and Canadian revolving credit facilities, prepay other
indebtedness and for general corporate purposes. The Company borrowed funds
available under the U.S. credit facility to repay at maturity indebtedness
owing in respect of the Company's 9 1/8% Notes due January 15, 1998.
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 was executed for protection against the effect
of a decrease in Canadian exchange rates on both the semi-annual interest
payments and the final principal payment due to the Company's U.S.
bondholders. The cross-currency swap enables the Company to pay in Canadian
dollars a fixed rate of interest of 9.23% on a notional amount of C$100
million for the $75 million 7.78% Notes denominated in U.S. dollars. The
cost of the cross-currency swap of 1.45% is charged to interest expense. The
Company records an asset or liability to the extent that an eventual
transaction gain or loss is expected to be recorded upon the settlement of
the notional amount of the underlying debt. Accordingly, the Company has
recorded in other assets the receivable due from the counterparty amounting
to approximately $4.5 million and $1.4 million as of February 28, 1998 and
February 22, 1997, respectively. The fair value of the cross-currency swap
was favorable to the Company by $1 million as of February 28, 1998 and
unfavorable to the Company by $5.4 million as of February 22, 1997. The
Company is exposed to credit losses in the event of nonperformance by the
counterparty to its currency swap. However, the Company anticipates that the
counterparty will be able to fully satisfy its obligations under the
contracts.
On April 15, 1997, A&P Canada entered into an interest rate swap agreement
with a notional amount of C$100 million where the Company receives a fixed
rate of interest and pays a variable rate of interest. The fair value of the
interest rate swap was favorable to the Company by $1.4 million as of
February 28, 1998.
The Company's loan agreements and certain of its notes contain various
financial covenants which require, among other things, minimum net worth and
maximum levels of indebtedness and lease commitments. The Company was in
compliance with all such financial covenants as of February 28, 1998 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 $14 million and $48 million as of February
28, 1998 and February 22, 1997, respectively.
In the second quarter of fiscal 1997, the Company recorded an extraordinary
charge of $0.5 million, net of a tax benefit of $0.4 million relating to the
early extinguishment of debt which amounted to $0.01 per share - basic and
diluted. The Company retired at a premium approximately $20 million in
mortgages with a weighted average interest rate of 9.4%.
The U.S. bank borrowings of $118 million as of February 28, 1998 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: 1998-$17
million; 1999-$14 million; 2000-$106 million; 2001-$40 million; 2002-$37
million; 2003 and thereafter - $498 million. Interest payments on
indebtedness were approximately $58 million for fiscal 1997, $49 million for
fiscal 1996 and $54 million for fiscal 1995.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
(Dollars in thousands) February 28, 1998 February 22, 1997
- --------------------- ----------------- -----------------
Carrying Fair Carrying Fair
Liabilities: Amount Value Amount Value
-------- -------- -------- --------
7.75% Notes, due
April 15, 2007 $297,644 $299,531 $ - $ -
-------- -------- -------- --------
9 1/8% Notes, due
January 15, 1998 $ - $ - $199,873 $204,296
-------- -------- -------- --------
7.70% Senior Notes, due
January 15, 2004 $200,000 $205,376 $200,000 $203,390
-------- -------- -------- --------
7.78% Notes, due
November 1, 2000 $ 75,000 $ 75,832 $ 75,000 $ 76,912
-------- -------- -------- --------
Total Indebtedness $712,116 $720,211 $719,899 $729,624
======== ======== ======== ========
Fair value for the public debt securities is based on quoted market prices.
With respect to all other indebtedness, Management has evaluated such debt
instruments and has determined, based on interest rates and terms, that the
fair value of such indebtedness approximates carrying value at February 28,
1998 and February 22, 1997. As of February 28, 1998 and February 22, 1997,
the carrying
PAGE 27
values of cash and short-term investments, accounts receivable and accounts
payable approximated fair values due to the short-term maturities of these
instruments.
On April 15, 1997, the Company's Canadian subsidiary entered into an
interest rate swap agreement with a notional amount of C$100 million where
the Company receives a fixed rate of interest and pays a variable rate of
interest.
At February 28, 1998 and February 22, 1997, the estimated fair values of
the cross-currency swap and interest rate swap agreements were as follows:
(Dollars in thousands) February 28, 1998 February 22, 1997
- --------------------- ----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Cross-currency swap $4,504 $1,077 $1,432 $(5,387)
Interest rate swap - 1,350 - -
------ ------- ------- --------
Total cross-currency/
interest rate swap $4,504 $2,427 $1,432 $(5,387)
======= ======= ======= ========
The fair values were determined by the counterparty which is a widely
recognized investment banker.
As of the end of fiscal 1997, the Company holds equity securities of both
common and cumulative preferred stock in Isosceles PLC which were written-
off in their entirety during fiscal 1992. There are no quoted market prices
for these securities and it is not practicable, considering the materiality
of these securities to the Company, to obtain an estimate of their fair
value. The Company believes that the fair value for these securities is
zero based upon Isosceles' current and prior years' results.
LEASE OBLIGATIONS
The Company operates primarily in leased facilities. Lease terms generally
range up to twenty-five years for store leases and thirty years for other
leased facilities, with options to renew for additional periods. The
majority of the leases contain escalation clauses relating to real estate
tax increases and certain store leases provide for increases in rentals when
sales exceed specified levels. In addition, the Company also leases some
store equipment and trucks.
The consolidated balance sheets include the following:
February 28, February 22,
(Dollars in thousands) 1998 1997
- --------------------- ------------ ------------
Real property leased under capital leases $ 213,076 $223,507
Accumulated amortization (123,018) (120,033)
--------- --------
$ 90,058 $103,474
========= ========
The Company did not enter into any new capital leases during fiscal 1997 and
1995. During fiscal 1996, the Company entered into new capital leases
totaling $22 million. These capital lease amounts are non-cash transactions
and, accordingly, have been excluded from the consolidated statement of cash
flows. Interest paid as part of capital lease obligations was approximately
$16, $17 and $18 million in fiscal 1997, 1996 and 1995, respectively.
Rent expense for operating leases consists of:
(Dollars in thousands) Fiscal 1997 Fiscal 1996 Fiscal 1995
- --------------------- ----------- ----------- -----------
Minimum rentals $181,061 $162,752 $154,439
Contingent rentals 5,109 5,383 5,890
-------- -------- --------
$186,170 $168,135 $160,329
======== ======== ========
Future minimum annual lease payments for capital leases and noncancelable
operating leases in effect at February 28, 1998 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 52 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
- ------ -------- ---------
1998 $27,146 $192,841
1999 25,355 185,661
2000 24,271 178,189
2001 23,135 169,274
2002 21,113 156,747
2003 and thereafter 127,328 1,406,972
--------- ----------
248,348 $2,289,684
Less executory costs (1,818)
---------
Net minimum rentals 246,530
Less interest portion (113,257)
---------
Present value of net minimum rentals $ 133,273
=========
INCOME TAXES
The components of income before income taxes and extraordinary item are as
follows:
(Dollars in thousands) Fiscal 1997 Fiscal 1996 Fiscal 1995
- ---------------------- ----------- ----------- -----------
United States $45,644 $ 68,478 $73,364
Canadian 37,256 32,113 7,728
-------- -------- ---------
Total $82,900 $100,591 $81,092
======== ======== =========
The provision for income taxes before extraordinary item consists of the
following:
(Dollars in thousands) Fiscal 1997 Fiscal 1996 Fiscal 1995
- --------------------- ----------- ----------- -----------
Current:
Federal $4,171 $24,228 $15,129
Canadian 700 700 (5,622)
State and local 3,018 3,698 4,865
------- -------- --------
7,889 28,626 14,372
------- -------- --------
Deferred:
Federal 11,076 (926) 9,387
Canadian 16,624 14,329 3,448
State and local 349 (141) 109
Canadian valuation
allowance (16,624) (14,329) (3,448)
------- -------- --------
11,425 (1,067) 9,496
------- -------- --------
$19,314 $27,559 $23,868
======= ======== ========
The deferred income tax provision (benefit) results primarily from the
annual change in temporary differences between amounts of
PAGE 28
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.
During fiscal 1994, 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, the Company recorded a valuation allowance of $119.6
million against Canadian deferred tax assets. 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 1994.
During fiscal 1997, since the Canadian operations generated pretax earnings,
the Company reversed approximately $17 million of the valuation allowance,
which was an increase of $3 million from the fiscal 1996 reversal of $14
million. Although Canada generated pretax earnings in fiscal 1997 of $37
million and $32 million in fiscal 1996, the Company was unable to conclude
that the Canadian deferred tax assets were more likely than not to be
realized. This conclusion was based in part on Management's assessment of
the competitive Canadian marketplace and the level of the Canadian earnings.
Accordingly, at February 28, 1998 the Company is continuing to fully reserve
its Canadian net deferred tax asset. 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 net deferred tax asset. The
positive evidence that Management believes is necessary in order to reverse
some or all of the Canadian deferred tax asset valuation allowance is a trend
in earnings to a level which would allow Management to conclude that it is
more likely than not that a portion or all of the deferred tax assets would
be realized. The Canadian pretax income for financial statement purposes are
higher than the taxable income for tax purposes due to certain differences
between the financial statement and income tax treatment of certain items.
This is of further significance since the largest portion of the Canadian
deferred tax asset relates to net operating loss carryforwards which to
expire between fiscal 1999 and fiscal 2002.
During fiscal 1994, the Company made an election to permanently reinvest
prior years' earnings of the Canadian subsidiary. Accordingly, the Company
does not provide for taxes associated with Canada's undistributed earnings.
The Company's Canadian net operating tax loss carryforwards of
approximately $135 million will expire between February 2000 and February
2003.
A reconciliation of income taxes at the 35% federal statutory income tax
rate for fiscal 1997, 1996 and 1995 to income taxes as reported is as
follows:
(Dollars in thousands) Fiscal 1997 Fiscal 1996Fiscal 1995
- --------------------- ----------- ----------------------
Income taxes computed at federal
statutory income tax rate $ 29,015 $35,207 $28,382
State and local income taxes, net of
federal tax benefit 2,188 2,312 3,233
Tax rate differential relating
to Canadian operations 4,155 3,789 (4,879)
Canadian valuation allowance (16,624) (14,329) (3,448)
Goodwill 580 580 580
-------- -------- -------
Income taxes, as reported $ 19,314 $27,559 $23,868
======== ======== =======
The fiscal 1995 tax rate differential relating to Canadian operations in 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 and 1995 were
approximately $13 and $19 million, respectively. For fiscal 1997 the Company
had net income tax refunds of $1 million.
The components of net deferred tax assets (liabilities) are as follows:
February 28, February 22,
(Dollars in thousands) 1998 1997
- --------------------- ------------ ------------
Current assets:
Insurance reserves $22,420 $ 24,186
Other reserves 5,031 6,552
Accrued postretirement and
postemployment benefits 3,038 3,038
Lease obligations 1,619 1,817
Pension obligations 3,827 2,390
Miscellaneous 2,870 3,013
-------- --------
38,805 40,996
-------- --------
Current liabilities:
Inventories (14,819) (14,819)
Health and welfare (9,960) (9,534)
Miscellaneous (7,083) (5,997)
-------- --------
(31,862) (30,350)
-------- --------
Valuation allowance (3,005) (3,337)
-------- --------
Deferred income taxes included in
prepaid expenses and other assets $ 3,938 $ 7,309
======== ========
Non-current assets:
Isosceles investment $ 42,617 $ 42,617
Fixed assets 4,077 4,061
Other reserves 6,177 5,420
Lease obligations 17,354 19,166
Canadian loss carryforwards 60,270 80,494
Insurance reserves 4,200 6,720
Accrued postretirement and
postemployment benefits 29,808 28,110
Pension obligations 6,800 6,300
Step rents 11,352 9,625
Miscellaneous 7,759 8,677
--------- ---------
190,414 211,190
--------- ---------
Non-current liabilities:
Fixed assets (212,044) (205,153)
Pension obligations (22,981) (21,050)
Miscellaneous (2,404) (1,936)
--------- ---------
(237,429) (228,139)
--------- ---------
Valuation allowance (73,603) (96,239)
--------- ---------
Deferred income taxes $(120,618) $(113,188)
========= =========
PAGE 29
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 1997 Fiscal 1996 Fiscal 1995
- --------------------- ----------- ----------- -----------
Service cost $11,942 $ 10,826 $ 9,340
Interest cost 26,192 24,798 23,976
Actual return on plan assets (45,893) (34,921) (42,724)
Net amortization and deferral 14,908 5,254 16,362
-------- -------- --------
Net pension cost $ 7,149 $ 5,957 $ 6,954
======== ======== ========
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:
1997 1996
---------------------- ----------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
(Dollars in thousands) Benefits Assets Benefits Assets
- --------------------- ----------- ---------- ----------- ----------
Accumulated benefit obligation:
Vested $286,909 $100,618 $300,111 $ 38,726
Nonvested 3,568 2,001 3,766 1,907
-------- -------- -------- --------
$290,477 $102,619 $303,877 $ 40,633
======== ======== ======== ========
Projected benefit obligation $296,333 $107,637 $312,762 $ 42,969
Plan assets at fair value 362,538 81,870 378,903 22,600
-------- -------- -------- --------
Excess (deficiency) of assets
over projected benefit
obligation 66,205 (25,767) 66,141 (20,369)
Unrecognized net transition
(asset) obligation (5,880) 398 (7,446) 483
Unrecognized net (gain) loss
from experience differences (17,809) 7,119 (15,059) (1,109)
Unrecognized prior service cost 2,311 4,130 3,082 3,964
Additional minimum liability - (8,985) - (2,824)
-------- -------- -------- --------
Prepaid pension asset
(pension liability) $44,827 $ (23,105) $ 46,718 $(19,855)
======== ======== ======== ========
The prepaid pension asset is included in other assets while the pension
liability is included in accrued salaries, wages and benefits and other non-
current liabilities.
At February 28, 1998, the Company's additional minimum pension liability for
its defined benefit plans was in excess of the unrecognized prior service
costs and net transition obligation and accordingly, $6.2 million was
reflected as a reduction to shareholders' equity. The amount was not tax
effected as it related to the Canadian subsidiary which has its deferred tax
assets fully reserved by a valuation allowance.
During the year ended February 25, 1995, the Company's Canadian subsidiary
and the United Food & Commercial Workers International Union, Locals 175 and
633, entered into an agreement which will result in the amalgamation of three
of the Company's Canadian defined benefit pension plans with the Canadian
Commercial Workers Industry Pension Plan ("CCWIPP"), retroactive to July 1,
1994, subject to the approval of the CCWIPP trustees and the appropriate
regulatory bodies. Under the terms of this agreement, CCWIPP will assume the
assets and defined benefit liabilities of the three pension plans and the
Company will be required to make defined contributions to CCWIPP based upon
hours worked by employees who are members of CCWIPP. The Company expects
that the necessary approvals will be received by January 1999. The transfer
to CCWIPP has been delayed for the past three 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 28, 1998 and February 22,
1997, prepaid pension assets of approximately $11 million and $15 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:
1997 1996
---------------- ---------------
U.S. Canada U.S. Canada
----- ------ ----- ------
Discount rate 7.00% 6.75% 7.50% 7.75%
Weighted average rate of
compensation increase 4.00% 4.00% 4.50% 4.00%
Expected long-term rate of
return on plan assets 8.00% 8.40% 8.50% 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 1998.
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 28, 1998.
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 each of the three fiscal years in the
period ended February 28, 1998. The Company could, under certain
PAGE 30
circumstances, be liable for unfunded vested benefits or other expenses of
jointly administered union/management plans. At this time, the Company has
not established any liabilities because such withdrawal from these plans is
not probable.
Postretirement Benefits
The Company provides postretirement health care and life benefits to certain
union and non-union employees. The Company recognizes the cost of providing
postretirement benefits during employees' active service period.
The components of net postretirement benefits cost are as follows:
(Dollars in thousands) Fiscal 1997 Fiscal 1996 Fiscal 1995
- ---------------------- ----------- ----------- -----------
Service cost $ 788 $ 794 $ 600
Interest cost 2,518 2,394 2,900
Net amortization and deferra l (1,056) (1,100) (800)
------- ------ ------
Net postretirement
benefits cost $ 2,250 $2,088 $2,700
======= ====== ======
The unfunded status of the plans is as follows:
(Dollars in thousands) Fiscal 1997 Fiscal 1996
- --------------------- ----------- -----------
Unfunded accumulated benefit obligation:
Retirees $19,102 $17,680
Fully eligible active plan participants 10,760 4,026
Other active plan participants 19,118 13,225
------- -------
48,980 34,931
Unrecognized net gain from
experience differences 1,976 16,407
------- -------
Accrued postretirement costs $50,956 $51,338
======= =======
Assumed discount rate 7.0% 7.5%
======= ======
The assumed rate of future increase in health care benefit cost was 9.50% in
fiscal 1997 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 approximately $0.6 million and $5.0 million,
respectively.
Postemployment Benefits
The Company accrues costs for preretirement postemployment benefits provided
to former or inactive employees and recognizes an obligation for these
benefits. The costs of these benefits have been included in operations for
each of the three fiscal years in the period ended February 28, 1998. As of
February 28, 1998 and February 22, 1997, the Company has a liability
reflected in the balance sheet of $25 million with respect to such benefits.
STOCK OPTIONS
Effective February 25, 1996, the Company adopted SFAS 123 which establishes
financial accounting and reporting standards for stock-based employee
compensation plans. SFAS 123 encourages all entities to adopt a fair value
based method of accounting for stock-based compensation plans in which
compensation cost is measured at the date the award is granted based on the
fair value of the award and is recognized over the employees' service period.
However, SFAS 123 allows an entity to continue to use the intrinsic value-
based method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), with pro forma
disclosures of net income and earnings per share as if the fair value based
method had been applied. APB 25 requires compensation expense to be
recognized over the employees' service period based on the excess, if any, of
the quoted market price of the stock at the date the award is granted or
other measurement date, as applicable, over an amount an employee must pay to
acquire the stock.
At February 28, 1998, 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 327,500 options and 10,000 SAR's was
granted in fiscal 1997 under the 1994 pl