-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SzzhP4dzXltTDywwaiwzINtGAq7LO8BLURq8nJ7uubW+ViDHNWjdBb4YCmPttAw3 AnXFHXrYwp3uYU9Sr8zGVA== 0000043300-05-000055.txt : 20051018 0000043300-05-000055.hdr.sgml : 20051018 20051017200313 ACCESSION NUMBER: 0000043300-05-000055 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20050910 FILED AS OF DATE: 20051018 DATE AS OF CHANGE: 20051017 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: 0225 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04141 FILM NUMBER: 051141855 BUSINESS ADDRESS: STREET 1: 2 PARAGON DR CITY: MONTVALE STATE: NJ ZIP: 07645 BUSINESS PHONE: 2015739700 MAIL ADDRESS: STREET 1: 2 PARAGON DRIVE CITY: MONTVALE STATE: NJ ZIP: 07645 10-Q 1 f10q22005.txt FORM 10Q - QUARTER ENDED SEPTEMBER 10, 2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q MARK ONE [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED SEPTEMBER 10, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ COMMISSION FILE NUMBER 1-4141 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. (Exact name of registrant as specified in 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) (201) 573-9700 Registrant's telephone number, including area code 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 WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT. YES [X] NO [ ] AS OF OCTOBER 11, 2005 THE REGISTRANT HAD A TOTAL OF 40,838,237 SHARES OF COMMON STOCK - $1 PAR VALUE OUTSTANDING. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. STATEMENTS OF CONSOLIDATED OPERATIONS (Dollars in thousands, except share and per share amounts) (Unaudited)
12 Weeks Ended 28 Weeks Ended -------------------------------------- ------------------------------------- Sept. 11, 2004 Sept. 11, 2004 (RESTATED (RESTATED Sept. 10, 2005 SEE NOTE 2) Sept. 10, 2005 SEE NOTE 2) ------------------ ------------------ ------------------ ----------------- Sales $ 2,168,249 $ 2,490,559 $ 5,551,882 $ 5,770,858 Cost of merchandise sold (1,551,585) (1,795,046) (3,997,260) (4,155,349) ------------ ------------ ------------ ------------ Gross margin 616,664 695,513 1,554,622 1,615,509 Store operating, general and administrative expense (761,730) (734,365) (1,737,828) (1,655,439) ------------ ------------ ------------ ------------ Loss from operations (145,066) (38,852) (183,206) (39,930) Gain on sale of Canadian operations 919,140 - 918,551 - Interest expense (25,262) (27,734) (61,385) (62,126) Interest income 3,157 768 4,343 1,609 Minority interest in earnings of consolidated franchisees 405 (342) (1,131) (1,718) ------------ ------------ ------------ ------------ Income (loss) from continuing operations before income taxes 752,374 (66,160) 677,172 (102,165) (Provision for) benefit from income taxes (160,103) 1,614 (173,968) (3,844) ------------ ------------ ------------ ------------ Income (loss) from continuing operations 592,271 (64,546) 503,204 (106,009) Discontinued operations (Note 10): (Loss) income from operations of discontinued businesses, net of tax provision of $0 for both the 12 weeks ended 9/10/05 and 9/11/04 and both the 28 weeks ended 9/10/05 and 9/11/04, respectively (296) 344 (464) (1,039) ------------ ------------ ------------ ------------ (Loss) income from discontinued operations (296) 344 (464) (1,039) ------------ ------------ ------------ ------------ Net income (loss) $ 591,975 $ (64,202) $ 502,740 $ (107,048) ============ ============ ============ ============ Net income (loss) per share - basic: Continuing operations $ 14.65 $ (1.68) $ 12.65 $ (2.75) Discontinued operations (0.01) 0.01 (0.01) (0.03) ------------ ------------ ------------ ------------ Net income (loss) per share - basic $ 14.64 $ (1.67) $ 12.64 $ (2.78) ============ ============ ============ ============ Net income (loss) per share - diluted: Continuing operations $ 14.41 $ (1.68) $ 12.48 $ (2.75) Discontinued operations (0.01) 0.01 (0.01) (0.03) ------------ ------------ ------------ ------------ Net income (loss) per share - diluted $ 14.40 $ (1.67) $ 12.47 $ (2.78) ============ ============ ============ ============ Weighted average number of common shares outstanding 40,434,194 38,521,685 39,758,780 38,520,732 Common stock equivalents 672,959 281,061 566,309 325,304 ------------ ------------ ------------ ------------ Weighted average number of common and common equivalent shares outstanding 41,107,153 38,802,746 40,325,089 38,846,036 ============ ============ ============ ============
See Notes to Quarterly Report 2 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Dollars in thousands, except share amounts) (Unaudited)
Accumulated Common Stock Additional Accumulated Other Total ----------------------------- Paid-in (Deficit) Comprehensive Stockholders' Shares Amount Capital Earnings (Loss)/Income Equity -------------- ------------- ------------- ------------- ----------------- --------------- 28 WEEK PERIOD ENDED SEPTEMBER 10, 2005 Balance at beginning of period 38,764,999 $ 38,765 $ 464,543 $ (266,198) $ (3,308) $ 233,802 Net income 502,740 502,740 Other comprehensive income 2,948 2,948 Stock options exercised 2,024,672 2,025 19,201 21,226 Other share based awards 5,303 5 4,922 4,927 ----------- ----------- ----------- ----------- ----------- ----------- Balance at end of period 40,794,974 $ 40,795 $ 488,666 $ 236,542 $ (360) $ 765,643 =========== =========== =========== =========== =========== =========== 28 WEEK PERIOD ENDED SEPTEMBER 11, 2004 Balance at beginning of period 38,518,905 $ 38,519 $ 459,579 $ (78,100) $ (27,239) $ 392,759 Net loss (107,048) (107,048) Other comprehensive income 12,651 12,651 Stock options exercised 3,375 3 13 16 ----------- ----------- ----------- ----------- ----------- ----------- Balance at end of period 38,522,280 $ 38,522 $ 459,592 $ (185,148) $ (14,588) $ 298,378 =========== =========== =========== =========== =========== ===========
COMPREHENSIVE LOSS
12 Weeks Ended 28 Weeks Ended -------------------------------------- ------------------------------------- Sept. 10, 2005 Sept. 11, 2004 Sept. 10, 2005 Sept. 11, 2004 ------------------ ------------------ ------------------ ----------------- Net income (loss) $ 591,975 $ (64,202) $ 502,740 $ (107,048) ------------ ----------- ----------- ----------- Foreign currency translation adjustment 6,883 18,970 2,920 12,197 Net unrealized (loss) gain on derivatives, net of tax - (381) (57) 454 Net unrealized gain on marketable securities, net of tax 85 - 85 - ------------ ------------ ----------- ----------- Other comprehensive income 6,968 18,589 2,948 12,651 ------------ ------------ ----------- ----------- Total comprehensive income (loss) $ 598,943 $ (45,613) $ 505,688 $ (94,397) ============ =========== =========== ===========
ACCUMULATED OTHER COMPREHENSIVE LOSS BALANCES
Net Unrealized Accumulated Foreign Gain on Net Unrealized Minimum Other Currency Marketable Gain (Loss) Pension Comprehensive Translation Securities on Derivatives Liability (Loss) Income --------------- ---------------- --------------- ---------------- --------------- Balance at February 26, 2005 $ 3,035 $ - $ 57 $ (6,400) $ (3,308) Current period change 2,920 85 (57) - 2,948 --------------- ----------- ----------- ----------- ----------- Balance at September 10, 2005 $ 5,955 $ 85 $ - $ (6,400) $ (360) =============== =========== ========== ============ =========== Balance at February 28, 2004 $ (23,892) $ - $ (158) $ (3,189) $ (27,239) Current period change 12,197 454 - 12,651 --------------- ----------- ---------- ----------- ----------- Balance at September 11, 2004 $ (11,695) $ - $ 296 $ (3,189) $ (14,588) =============== =========== ========== ============ ============
See Notes to Quarterly Report 3 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands except share amounts) (Unaudited)
September 10, 2005 February 26, 2005 -------------------- -------------------- ASSETS Current assets: Cash and cash equivalents $ 363,365 $ 257,748 Marketable securities 276,130 - Accounts receivable, net of allowance for doubtful accounts of $4,798 and $5,713 at September 10, 2005 and February 26, 2005, respectively 138,653 145,507 Inventories 488,480 720,799 Prepaid expenses and other current assets 80,921 40,627 ------------- -------------- Total current assets 1,347,549 1,164,681 ------------- -------------- Non-current assets: Property: Property owned 924,613 1,476,574 Property leased under capital leases 24,962 39,126 ------------- -------------- Property - net 949,575 1,515,700 Equity investment in Metro, Inc. 327,026 - Other assets 46,874 121,587 ------------- -------------- Total assets $ 2,671,024 $ 2,801,968 ============= ============== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 567 $ 2,278 Current portion of obligations under capital leases 2,634 8,331 Accounts payable 236,697 543,481 Book overdrafts 65,801 83,306 Accrued salaries, wages and benefits 120,696 181,173 Accrued taxes 61,206 51,991 Other accruals 210,609 207,642 ------------- -------------- Total current liabilities 698,210 1,078,202 ------------- -------------- Non-current liabilities: Long-term debt 246,942 634,028 Long-term obligations under capital leases 34,210 52,184 Long-term real estate liabilities 276,641 328,316 Other non-current liabilities 649,378 471,382 Minority interest in consolidated franchisees - 4,054 ------------- -------------- Total liabilities 1,905,381 2,568,166 ------------- -------------- Commitments and contingencies Stockholders' 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 - 40,794,974 and 38,764,999 shares at September 10, 2005 and February 26, 2005, respectively 40,795 38,765 Additional paid-in capital 488,666 464,543 Accumulated other comprehensive loss (360) (3,308) Accumulated earnings (deficit) 236,542 (266,198) ------------- -------------- Total stockholders' equity 765,643 233,802 ------------- -------------- Total liabilities and stockholders' equity $ 2,671,024 $ 2,801,968 ============= ==============
See Notes to Quarterly Report 4 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. STATEMENTS OF CONSOLIDATED CASH FLOWS (Dollars in thousands) (Unaudited)
28 Weeks Ended ---------------------------------------- (Restated-See Note 2) Sept. 10, 2005 Sept. 11, 2004 -------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 502,740 $ (107,048) Adjustments to reconcile net (income) loss to net cash provided by operating activities: Asset disposition initiative 84,681 381 Restructuring charge 61,039 - Depreciation and amortization 117,768 143,036 Other non-current income taxes 137,228 - Deferred income tax benefit - (2,236) (Gain) loss on disposal of owned property (27,427) 849 Impairment loss relating to Hurricane Katrina 670 - Other property impairments 11,142 2,708 Gain on sale of Canadian operations (918,551) - Loss on derivatives 15,446 - Loss on early extinguishment of debt 28,623 - Non-cash impact of early extinguishment of debt 809 - Other share based awards 4,927 - Other changes in assets and liabilities: (Increase) decrease in receivables (27,043) 31,370 Decrease (increase) in inventories 27,485 (28,818) Increase in prepaid expenses and other current assets (7,521) (23,568) Increase in other assets (298) (10,466) (Decrease) increase in accounts payable (71,052) 47,917 Decrease in accrued salaries, wages, benefits and taxes (4,123) (1,975) Increase in other accruals 53,117 7,169 Increase (decrease) in minority interest 1,830 (798) Decrease in other non-current liabilities (55,350) (4,767) Other operating activities, net (4,341) 1,259 ----------- ----------- Net cash (used in) provided by operating activities (68,201) 55,013 ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property (109,577) (107,357) Proceeds from disposal of property 53,873 10,127 Proceeds from sale of Canadian operations 905,845 - Payments for derivatives (15,446) - Purchases of marketable securities (306,266) - Proceeds from maturities of marketable securities 31,325 - Proceeds from dividends from Metro, Inc. 1,512 - ----------- ----------- Net cash provided by (used in) investing activities 561,266 (97,230) ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term borrowings - 109 Principal payments on long-term borrowings and other fees (413,529) (33) Net proceeds from long-term real estate liabilities 1,618 14,670 Principal payments on capital leases (7,997) (6,392) Proceeds from capital leases 10,000 - (Decrease) increase in book overdrafts (12,570) 10,983 Deferred financing fees (1,638) (955) Proceeds from exercises of stock options 21,226 16 ----------- ----------- Net cash (used in) provided by financing activities (402,890) 18,398 Effect of exchange rate changes on cash and cash equivalents 15,442 3,645 ----------- ----------- Net increase (decrease) in cash and cash equivalents 105,617 (20,174) Cash and cash equivalents at beginning of period 257,748 297,008 ----------- ----------- Cash and cash equivalents at end of period $ 363,365 $ 276,834 =========== ===========
See Notes to Quarterly Report 5 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 1. BASIS OF PRESENTATION The accompanying Consolidated Statements of Operations and Consolidated Statements of Cash Flows of The Great Atlantic & Pacific Tea Company, Inc. ("We," "Our," "Us" or "Our Company") for the 12 and 28 weeks ended September 10, 2005 and September 11, 2004, and the Consolidated Balance Sheets at September 10, 2005 and February 26, 2005, are unaudited and, in the opinion of management, contain all adjustments that are of a normal and recurring nature necessary for a fair statement of financial position and results of operations for such periods. The consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in our Fiscal 2004 Annual Report on Form 10-K. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements include the accounts of our Company and all majority-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. Our Company uses the equity method of accounting for our investment in Metro, Inc. as we can exert significant influence over substantive operating decisions made by Metro, Inc. through our membership on Metro, Inc.'s Board of Directors and its committees and joint purchasing and supplier arrangements. Certain reclassifications have been made to prior year amounts to conform to current year presentation. On May 10, 2005, we announced plans for a major strategic restructuring that would focus future effort and investment on our core operations in the Northeastern United States. Therefore, we initiated efforts to divest our businesses in Canada and the Midwestern United States. As further discussed in Note 4 - Divestiture of Our Businesses in Canada and the Midwestern United States, we sold our Canadian business at the close of business on August 13, 2005 to Metro, Inc., a supermarket and pharmacy operator in the Provinces of Quebec and Ontario, Canada. Although the Canadian operations have been sold at September 10, 2005, the criteria necessary to classify the Canadian operations as discontinued have not been satisfied as our Company retained significant continuing involvement in the operations of this business upon its sale. The assets and liabilities relating to our operations in the Midwestern United States have not been classified as held for sale at September 10, 2005 as the criteria for such classification have not been met as of the balance sheet date. As further discussed in Note 6 - Sale of our U.S. Distribution Operations and Warehouses, our Company currently acquires a significant amount of our saleable inventory from one supplier, C&S Wholesale Grocers. Although there are a limited number of distributors that can supply our stores, we believe that other suppliers could provide similar product on comparable terms. However, a change in suppliers could cause a delay in distribution and a possible loss of sales, which would affect operating results adversely. Restatement of Previously Issued Financial Statements As discussed in Note 2 - Restatement of Previously Issued Financial Statements, our Company has restated our Consolidated Statements of Operations and Cash Flows for the 12 and 28 weeks ended September 11, 2004 for corrections in our accounting for leases. Readers of the financial statements should read this restated information as opposed to the previously filed information. All referenced amounts for prior periods reflect the balances and amounts on a restated basis. 6 2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS In connection with the preparation of our fiscal 2004 consolidated financial statements, our Company completed a review of our historical lease accounting to determine whether our accounting for leases was in accordance with generally accepted accounting principles. As a result of our review, we corrected our accounting for leases in fiscal 2004 and restated our historical annual financial statements and certain financial information for prior periods in our Fiscal 2004 Annual Report to Stockholders, primarily to correct our accounting for landlord allowances. In certain situations, we receive allowances from our landlords in the form of direct cash reimbursements to offset the costs of structural improvements to the leased space. Historically, we have netted these reimbursements against the related leasehold improvement assets on the consolidated balance sheets and against capital expenditures in investing activities on the consolidated statements of cash flows. In accordance with SFAS 13, "Accounting Leases," Emerging Issues Task Force ("EITF") 97-10, "The Effect of Lessee Involvement in Asset Construction" and Question 2 of FASB Technical Bulletin 88-1 ("FTB 88-1"), "Issues Relating to Accounting for Leases," we should have accounted for our landlord allowances as follows: o In those situations where we did not meet the criteria of EITF 97-10 for being deemed the owner of the construction projects during the construction period, we should have recorded the landlord allowances as deferred credits as opposed to an offset to leasehold improvements on the consolidated balance sheets and as a component of operating activities as opposed to a component of investing activities on the consolidated statements of cash flows. In addition, the deferred credits should have been amortized over the term of the lease as a decrease to rent expense as opposed to an offset to depreciation expense. o In those situations where we did meet the criteria of EITF 97-10 for being deemed the owner of the construction projects, we should have been considered the owner of those construction projects during the construction period and we should have recorded the associated landlord allowances as long-term real estate liabilities as opposed to an offset to leasehold improvements as we had paid directly for a substantial portion of the structural improvement costs. In all situations upon completion of the construction, we were unable to meet the requirements under SFAS 98, "Accounting for Leases" to qualify for sale-leaseback treatment; thus, the long-term real estate liabilities should have been amortized based on rent payments designated in the lease agreements as opposed to an offset to depreciation expense. These adjustments resulted in a correction of an understatement of Property - net, Long-term real estate liabilities and Other non-current liabilities on our consolidated balance sheets, an overstatement of rent expense and an understatement of interest on our consolidated statements of operations for the related periods. 7 CONSOLIDATED STATEMENT OF OPERATIONS
Consolidated A&P for the Consolidated 12 weeks ended A&P for the Sept. 11, 2004 Corrections 12 weeks ended As Previously to lease Sept. 11, 2004 Reported accounting AS RESTATED ------------------------------------------------------- Sales $ 2,490,559 $ - $ 2,490,559 Cost of merchandise sold (1,795,046) - (1,795,046) ----------- ----------- ----------- Gross margin 695,513 - 695,513 Store operating, general and administrative expense (740,021) 5,656 (734,365) ----------- ----------- ----------- (Loss) income from operations (44,508) 5,656 (38,852) Interest expense (22,078) (5,656) (27,734) Interest income 768 - 768 Minority interest in earnings of consolidated franchisees (342) - (342) ----------- ----------- ----------- Loss from continuing operations before income taxes (66,160) - (66,160) Benefit from income taxes 1,614 - 1,614 ----------- ----------- ----------- Loss from continuing operations (64,546) - (64,546) Discontinued operations: Income from operations of discontinued businesses, net of tax 344 - 344 Gain on disposal of discontinued operations, net of tax - - - ----------- ----------- ----------- Income from discontinued operations 344 - 344 ----------- ----------- ----------- Net loss $ (64,202) $ - $ (64,202) =========== =========== =========== Net loss - basic & diluted $ (1.67) $ - $ (1.67) =========== =========== =========== Depreciation $ (62,397) $ 207 $ (62,190) ----------- ----------- -----------
8 CONSOLIDATED STATEMENT OF OPERATIONS
Consolidated A&P for the Consolidated 28 weeks ended A&P for the Sept. 11, 2004 Corrections 28 weeks ended As Previously to lease Sept. 11, 2004 Reported accounting AS RESTATED --------------- ----------- -------------- Sales $ 5,770,858 $ - $ 5,770,858 Cost of merchandise sold (4,155,349) - (4,155,349) ----------- ------------- ----------- Gross margin 1,615,509 - 1,615,509 Store operating, general and administrative expense (1,668,637) 13,198 (1,655,439) ----------- ------------- ----------- (Loss) income from operations (53,128) 13,198 (39,930) Interest expense (48,928) (13,198) (62,126) Interest income 1,609 - 1,609 Minority interest in earnings of consolidated franchisees (1,718) - (1,718) ----------- ------------- ----------- Loss from continuing operations before income taxes (102,165) - (102,165) Provision for income taxes (3,844) - (3,844) ----------- ------------- ----------- Loss from continuing operations (106,009) - (106,009) Discontinued operations: Loss from operations of discontinued businesses, net of tax (1,039) - (1,039) Loss on disposal of discontinued operations, net of tax - - - ----------- ------------- ----------- Loss from discontinued operations (1,039) - (1,039) ----------- ------------- ----------- Net loss $ (107,048) $ - $ (107,048) =========== ============= =========== Net loss - basic & diluted $ (2.78) $ - $ (2.78) =========== ============= =========== Depreciation $ (143,519) $ 483 $ (143,036) ----------- ------------- -----------
SELECTED CONSOLIDATED STATEMENT OF CASH FLOW DATA FOR THE 28 WEEKS ENDED SEPTEMBER 11, 2004:
As Corrections Consolidated Previously to Lease A&P Reported Accounting AS RESTATED ------------- --------------- -------------- Property impairments $ 1,679 $ 1,029 $ 2,708 Depreciation and amortization 143,519 (483) 143,036 (Increase) decrease in prepaid expenses and other current assets (23,647) 79 (23,568) (Increase) decrease in other assets (11,857) 1,391 (10,466) (Decrease) increase in other non-current liabilities (5,825) 1,058 (4,767) Net cash provided by operating activities 51,939 3,074 55,013 Expenditures for property (97,442) (9,915) (107,357) Net cash used in investing activities (87,315) (9,915) (97,230) Proceeds from long-term borrowings 7,365 (7,256) 109 Net proceeds from long-term real estate liabilities - 14,670 14,670 Principal payments on capital leases (6,458) 66 (6,392) Net cash provided by financing activities 10,918 7,480 18,398 Effect of exchange rate changes on cash and cash equivalents 4,284 (639) 3,645
9 3. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standard Board ("FASB") issued SFAS 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 requires that handling costs and waste material (spoilage) be recognized as current-period charges regardless of whether they meet the previous requirement of being abnormal. In addition, this Statement requires that allocations of fixed overhead to the cost of inventory be based on the normal capacity of the production facilities. SFAS 151 is effective for our 2006 fiscal year. We are currently assessing the impact of this statement on our Consolidated Financial Statements; however, we do not expect it to have a material impact on our consolidated financial position or results of operations. In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. This pronouncement amends APB No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005 (the quarter ended June 17, 2006 for our Company). We have evaluated the provisions of SFAS 153 and concluded that its adoption will not have a material impact on our consolidated financial position or results of operations. In December 2004, the FASB issued SFAS 123R (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, supersedes APB No. 25 and related interpretations and amends SFAS No. 95, "Statement of Cash Flows." Refer to Note 13 - Stock Based Compensation for further discussion regarding our Company's adoption of SFAS 123R. In March 2005, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 107, "Share Based Payments" ("SAB 107") to provide public companies additional guidance in applying the provisions of SFAS 123R. Among other things, SAB 107 describes the SEC staff's expectations in determining the assumptions that underlie the fair value estimates and discusses the interaction of Statement 123R with certain existing SEC guidance. We have adopted the provisions of SAB 107 in conjunction with the adoption of FAS 123R beginning February 27, 2005. Refer to Note 13 - Stock Based Compensation for further discussion and disclosure. In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Contingent Asset Retirement Obligations" ("FIN 47"), an interpretation of FASB Statement No. 143, "Asset Retirement Obligations" ("SFAS 143"). FIN 47 clarifies that the term "conditional asset retirement obligation" as used in SFAS 143 refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated, even if conditional on a future event. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005, or our fiscal year ending February 25, 2006. For existing contingent asset retirement obligations which are determined to be recognizable under FIN 47, the effect of applying FIN 47 would be recognized as a cumulative effect of a change in accounting principle. We are currently evaluating the provisions of FIN 47 and do not believe that its adoption will have a material impact on our Company's financial condition or results of operations. 10 In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error Corrections" ("SFAS 154") which replaces Accounting Principles Board Opinions No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28." SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, unless impracticable, as the required method for reporting a change in accounting principle and the reporting of a correction of an error and for reporting a change when retrospective application is impracticable. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 and is required to be adopted by our Company in the first quarter of fiscal 2006. Our Company is not currently contemplating an accounting change which would be impacted by SFAS 154. In October 2005, the FASB issued FASB Staff Position FAS 13-1 ("FSP FAS 13-1"), which requires companies to expense rental costs associated with ground or building operating leases that are incurred during a construction period. As a result, companies that are currently capitalizing these rental costs are required to expense them beginning in its first reporting period beginning after December 15, 2005. FSP FAS 13-1 is effective for our Company as of the first quarter of fiscal 2006. We evaluated the provisions of FSP FAS 13-1 and do not believe that its adoption will have a material impact on our Company's financial condition or results of operations. 4. DIVESTITURE OF OUR BUSINESSES IN CANADA AND THE MIDWESTERN UNITED STATES During the first quarter of fiscal 2005, we announced plans for a major strategic restructuring that focuses future effort and investment on our core operations in the Northeastern United States. Therefore, we initiated efforts to divest our businesses in Canada and the Midwestern United States. Canadian Operations At the close of business on August 13, 2005, our Company completed the sale of our Canadian business to Metro, Inc., a supermarket and pharmacy operator in the Provinces of Quebec and Ontario, Canada, for $1.5 billion in cash, stock and certain debt that was assumed by Metro, Inc. The stock received consisted of 18,076,645 Class A subordinate shares of Metro, Inc., representing approximately 15.83% of the outstanding shares of that class after issuance. We use the equity method of accounting to account for our investment in Metro, Inc. as we can exert significant influence over substantive operating decisions made by Metro, Inc. through our membership on Metro, Inc.'s Board of Directors and its committees and joint purchasing and supplier arrangements. The value of our equity investment in Metro, Inc. based upon Metro, Inc.'s quoted market price is $535.3 million at September 10, 2005. The following table summarizes the status and results of our Company's equity investment in Metro, Inc. from the date of ownership through September 10, 2005: Beginning investment at August 13, 2005 $ 494,578 Deferred portion of gain on sale of A&P Canada (171,701) Dividends and distributions received (1,512) Foreign currency translation 5,661 ------------------ Equity investment in Metro, Inc. $ 327,026 ================== 11 In accordance with Emerging Issues Task Force ("EITF") 01-2, "Interpretations of APB Opinion No. 29," we have indefinitely deferred $171.7 million of the gain resulting from the sale of our Canadian operations that directly related to the economic interest we retained in Metro, Inc. We have not recorded any equity earnings or losses relating to our equity investment in Metro, Inc. during the 12 and 28 weeks ended September 10, 2005 as we will record these earnings or losses on about a three-month lag period commencing in our third quarter of fiscal 2005 as permitted by APB 18, "The Equity Method of Accounting for Investments in Common Stock." The difference between the carrying value of our investment of $327.0 million and the amount of our underlying equity in Metro, Inc.'s net assets of $149.4 million is $177.6 million. As a result of the sale of our Canadian operations, our Company recorded a pretax gain of $919.1 million ($766.3 million after tax) and $918.6 million ($765.8 million after tax) in "Gain on sale of Canadian operations" in our Consolidated Statements of Operations for the 12 and 28 weeks ended September 10, 2005, respectively. Although the Canadian operations have been sold at September 10, 2005, the criteria necessary to classify the Canadian operations as discontinued have not been satisfied as our Company retained significant continuing involvement in the operations of this business upon its sale through our equity investment in Metro, Inc. Midwestern United States Operations Upon the decision to pursue selling the Midwest stores, we evaluated the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") to this business. As of the balance sheet date, September 10, 2005, the criteria set forth by SFAS 144 to reclassify our Midwestern United States assets and liabilities as properties held for sale were not met as the sale of this business was not probable with transfer of these assets to the buyer within one year of the balance sheet date. In addition, as further discussed in Note 11 - Asset Disposition Initiatives, we closed 31 of these stores at September 10, 2005. None of these stores in any combination comprised a complete asset grouping and thus, have not been disclosed as discontinued operations. However, as discussed in Note 9 - Valuation of Long-Lived Assets, we recorded impairment losses on property, plant and equipment related to property write-downs as a result of the divestiture of this portion of our Midwestern U.S. business. 5. TENDER OFFER AND REPURCHASE OF 7.75% NOTES DUE 2007 AND 9.125% SENIOR NOTES DUE 2011 In August 2005, our Company commenced a cash tender offer for all of the outstanding principal amount of our 7.75% Notes due April 15, 2007 and 9.125% Senior Notes due December 15, 2011. The tender offer expired on September 7, 2005. On September 8, 2005, our Company purchased pursuant to the tender offer $166.7 million of our $199 million 7.75% Notes due April 15, 2007 and $203.7 million of our $216.5 million 9.125% Senior Notes due December 15, 2011 using $370.4 million of the gross proceeds from the sale of our Canadian operations as discussed in Note 4 - Divestiture of Our Businesses in Canada and the Midwestern United States. Our Company also paid $28.6 million in tender premiums and other fees and expenses with our Company's gross proceeds from the sale of our Canadian operations and wrote off approximately $3.9 million of unamortized debt discount and issuance costs related to this tender offer. 12 In addition, due to the early extinguishment of a significant portion of the 7.75% Notes due April 15, 2007, we recognized $3.1 million of the deferred gain that resulted from the termination of three interest rate swaps we entered into during fiscal 2002 to effectively convert a portion of our 7.75% Notes due April 15, 2007 from fixed rate debt to floating rate debt. The portion of the deferred gain that was recognized related to the underlying debt instrument that was early extinguished. The remaining portion of the deferred gain will continue to be amortized as an offset to interest expense over the life of the remaining underlying debt instrument and is classified as "Long term debt" in our Consolidated Balance Sheets. Both the tender premiums and other fees and expenses as well as the recognition of the deferred gain are included in "Store operating, general and administrative expense" in our Consolidated Statements of Operations for the 12 and 28 weeks ended September 10, 2005. 6. SALE OF OUR U.S. DISTRIBUTION OPERATIONS AND WAREHOUSES During the first quarter of fiscal 2005, our Company held discussions to sell our U.S. distribution operations and some warehouse facilities and related assets to C&S Wholesale Grocers, Inc. On June 27, 2005, during the second quarter of fiscal 2005, the definitive agreements, including an Asset Purchase Agreement and a 15 year Supply Agreement, were finalized and signed. The Asset Purchase Agreement included the assignment of our leases in Central Islip, New York and Baltimore, Maryland, a sublease for our leased facility in New Orleans, Louisiana, and warranty deeds for our owned facilities in Dunmore, Pennsylvania and New Orleans, Louisiana. In the Supply Agreement, C&S Wholesale Grocers, Inc. will supply our Company with all of our requirements for groceries, perishables, frozen food and other merchandise in the product categories carried by C&S Wholesale Grocers, Inc. The transition of our owned warehouses and operations began in the second quarter of fiscal 2005 and is expected to be completed during the third quarter of fiscal 2005. Due to the scope of C&S Wholesale Grocers, Inc.'s distribution network, our owned warehouses in Edison, New Jersey and the Bronx, New York will not be sold as part of the transaction and have been closed. As a result of this decision, we recorded a charge of $18.9 million ($1.2 million in "Cost of merchandise sold" and $17.7 million in "Store, operating, general and administrative expense" in our Consolidated Statement of Operations) and $66.9 million ($2.2 million in "Cost of merchandise sold" and $64.7 million in "Store, operating, general and administrative expense" in our Consolidated Statement of Operations) relating to the closing of these facilities during the 12 and 28 weeks ended September 10, 2005, respectively. 13 These costs are detailed as follows:
12 weeks ended 28 weeks ended September 10, 2005 September 10, 2005 ------------------ ------------------ BALANCE SHEET ACCRUALS Occupancy related $ 3,400 $ 3,400 Severance and benefits 6,410 46,827 ------------------ ------------------ Total accrued to Balance Sheet 9,810 50,227 ------------------ ------------------ NON-ACCRUABLE ITEMS RECORDED ON STATEMENTS OF OPERATIONS Property writeoffs 2,760 8,571 Inventory markdowns 1,211 2,241 Non-accruable closing costs 5,159 5,860 ------------------ ------------------ Total non-accruable items 9,130 16,672 ------------------ ------------------ TOTAL AMOUNT RECORDED ON STATEMENTS OF OPERATIONS $ 18,940 66,899 ------------------ ------------------ Less non-accruable closing costs (5,860) ------------------ TOTAL AMOUNT RECORDED ON STATEMENT OF CASH FLOWS $ 61,039 ==================
We have been pursuing the sale of our Midwest warehouses separately as part of the divestiture of our Midwestern U.S. business. The following table summarizes the activity to date related to the charges recorded for the closing of these facilities. The table does not include property writeoffs as they are not part of any reserves maintained on the balance sheet. It also does not include inventory markdowns and non-accruable closing costs since they are expensed as incurred in accordance with generally accepted accounting principles. Severance and Occupancy Benefits Total ------------ ----------- ------------ Original charge (1) $ - $ 40,417 $ 40,417 Additions (2) 3,400 6,410 9,810 Utilization (3) - (40,884) (40,884) ----------- ------------- ------------ Balance at Sept. 10, 2005 $ 3,400 $ 5,943 $ 9,343 =========== =========== =========== (1) The original charge to severance and benefits during the first quarter of fiscal 2005 of $40.4 million related to (i.) individual severings as well as retention and productivity incentives that were accrued as earned of $7.6 million and (ii.) costs for future obligations for early withdrawal from multi-employer union pension plans of $32.8 million. (2) The additions to occupancy during the second quarter of fiscal 2005 related to future obligations for the warehouses sold to C&S Wholesale Grocers, Inc. The additions to severance and benefits during the second quarter of fiscal 2005 represented charges related to additional individual severings as well as retention and productivity incentives that were accrued as earned. (3) Severance and benefits utilization of $40.9 million for 28 weeks ended September 10, 2005, represents payments made to terminated employees during the period as well as payments made to pension funds for early withdrawal from multi-employer union pension plans. As of September 10, 2005, approximately $3.1 million of the liability was included in "Accrued salaries, wages and benefits" and the remaining amount was included in "Other non-current liabilities" on our Consolidated Balance Sheets. 14 We have evaluated the liability balance of $9.3 million as of September 10, 2005 based upon current available information and have concluded that it is adequate. We will continue to monitor the status of the warehouses and adjustments to the reserve balance may be recorded in the future, if necessary. 7. HURRICANE KATRINA AND IMPACT ON U.S. BUSINESS In August 2005, Hurricane Katrina had a major effect on certain portions of the Gulf Coast region and resulted in the closure of our 28 stores and warehouse facilities. As of September 10, 2005, 9 of these stores were open and operating. We are currently working to re-open additional stores and expect to re-open most of the remaining stores that are closed or damaged. We maintain insurance coverage for this type of loss which provides for reimbursement from losses resulting from property damage, loss of product as well as business interruption coverage. As of the balance sheet date, September 10, 2005, we were able to determine that we incurred impairment losses of $0.7 million for property, plant & equipment that was damaged during the hurricane. This amount has been included in "Impairment loss relating to Hurricane Katrina" in our Consolidated Statement of Cash Flows for the 28 weeks ended September 10, 2005. Our Company is currently assessing the remaining extent of our losses in the Gulf Coast region and we expect to recover the losses caused by Hurricane Katrina in excess of our estimated insurance deductible of approximately $5.0 million, which was recorded in "Store operating, general and administrative expense" in our Consolidated Statements of Operations for the 12 and 28 weeks ended September 10, 2005. 8. CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES Our Company considers all highly liquid investments with original maturities of ninety days or less to be cash equivalents. Investments with original maturities greater than ninety days are considered marketable securities. Our cash equivalents and marketable securities are principally comprised of money market funds, commercial paper, corporate bonds, securities of the U.S. government and its agencies, and auction rate securities. Our Company's investments are considered to be available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax, reported as a separate component of stockholder's equity. The Company records other than temporary declines in fair value to earnings as realized losses. 15 The following is a summary of cash and cash equivalents and marketable securities as of September 10, 2005 and February 26, 2005:
At September 10, 2005 ----------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Costs Gains Losses Value ------------- ------------- ------------- ------------- CLASSIFIED AS: Cash $ 107,467 $ - $ - $ 107,467 Cash equivalents: Money market funds 116,025 - - 116,025 Commercial paper 139,887 1 (15) 139,873 ----------- ----------- ------------ ----------- Total cash equivalents 255,912 1 (15) 255,898 ----------- ----------- ------------ ----------- Marketable securities: Corporate bonds 39,731 52 (31) 39,752 Securities of the U.S. government and its agencies 45,020 71 - 45,091 Auction rate securities 191,280 7 - 191,287 ----------- ----------- ----------- ----------- Total marketable securities 276,031 130 (31) 276,130 ----------- ----------- ------------ ----------- Total cash, cash equivalents and marketable securities $ 639,410 $ 131 $ (46) $ 639,495 =========== =========== ============ =========== SECURITIES AVAILABLE-FOR-SALE: Maturing within one year $ 459,108 $ 459,085 =========== =========== Maturing greater than one year $ 72,835 $ 72,943 =========== ===========
At February 26, 2005 ----------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Costs Gains Losses Value ------------- ------------- ------------- ------------- CLASSIFIED AS: Cash $ 153,791 $ - $ - $ 153,791 Cash equivalents: Money market funds 78,983 - - 78,983 Commercial paper 24,974 - - 24,974 ----------- ----------- ----------- ----------- Total cash equivalents 103,957 - - 103,957 ----------- ----------- ----------- ----------- Total cash and cash equivalents $ 257,748 $ - $ - $ 257,748 =========== =========== =========== =========== SECURITIES AVAILABLE-FOR-SALE: Maturing within one year $ 103,957 $ 103,957 =========== =========== Maturing greater than one year $ - $ - =========== ===========
The gross unrealized losses related to our investments at September 10, 2005 were primarily due to changes in interest rates and are considered temporary in nature. We review our investments for indications of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and our Company's intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. There were no gross realized gains or losses on sales of investments for the 12 and 28 weeks ended September 10, 2005. 16 9. VALUATION OF LONG-LIVED ASSETS In accordance with Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), we review the carrying values of our long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Such review is primarily based upon groups of assets and the undiscounted estimated future cash flows from such assets to determine if the carrying value of such assets is recoverable from their respective cash flows. If such review indicates an impairment exists, we measure such impairment on a discounted basis using a probability-weighted approach and a risk-free rate. During the 12 and 28 weeks ended September 10, 2005 and September 11, 2004, we recorded impairment losses on long-lived assets as follows:
12 weeks ended Sept. 10, 2005 12 weeks ended Sept. 11, 2004 -------------------------------- ----------------------------- U.S. Canada Total U.S. Canada Total --------- --------- --------- -------- ---------- ------- Impairments due to closure or conversion in the normal course of business $ 1,024 $ - $ 1,024 $ 1,679 $ - $ 1,679 Impairments due to unrecoverable assets 9,612 - 9,612 - - - Impairments related to the divestiture of the Midwestern U.S. business (1) 6,735 - 6,735 - - - Impairments related to the sale of U.S. distribution operations and warehouses (2) 2,779 - 2,779 - - - --------- ---------- --------- -------- ---------- -------- Total impairments $ 20,150 $ - $ 20,150 $ 1,679 $ - $ 1,679 ========= ========== ========= ======== ========== ========
28 weeks ended Sept. 10, 2005 28 weeks ended Sept. 11, 2004 -------------------------------- ----------------------------- U.S. Canada Total U.S. Canada Total --------- --------- --------- -------- ---------- ------- Impairments due to closure or conversion in the normal course of business $ 1,024 $ 506 $ 1,530 $ 1,679 $ - $ 1,679 Impairments due to unrecoverable assets 9,612 - 9,612 - - - Impairments related to the divestiture of the Midwestern U.S. business (1) 6,861 - 6,861 - - - Impairments related to the sale of U.S. distribution operations and warehouses (2) 8,590 - 8,590 - - - --------- ---------- --------- -------- ---------- -------- Total impairments $ 26,087 $ 506 $ 26,593 $ 1,679 $ - $ 1,679 ========= ========= ========= ======== ========== ========
(1) Refer to Note 11 - Asset Disposition Initiatives (2) Refer to Note 6 - Sale of our U.S. Distribution Operations and Warehouses Impairments due to closure or conversion in the normal course of business We review assets in stores planned for closure or conversion for impairment upon determination that such assets will not be used for their intended useful life. During the 12 and 28 weeks ended September 10, 2005, we recorded impairment losses on property, plant and equipment of $1.0 million and $1.5 million, respectively, related to stores that were or will be closed in the normal course of business as compared to $0.8 million in impairment losses on property, plant and equipment related to stores that were or will be closed in the normal course of business during both the 12 and 28 weeks ended September 11, 2004. Our impairment reviews may also be triggered by appraisals of or offers for our long-lived assets we receive in the normal course of business. During the 12 and 28 weeks ended September 11, 2004, we recorded an impairment loss of $0.9 million in the U.S. related to certain idle property that, based upon new information received about such assets, including an appraisal and an offer, was impaired and written down to its net realizable value. There were no such amounts recorded during the 12 and 28 weeks ended September 10, 2005. 17 These amounts were included in "Store operating, general and administrative expense" in our Consolidated Statements of Operations. Impairments due to unrecoverable assets Through the second quarter of fiscal 2005, we experienced operating losses for two of the past three years for one of our United States' asset groups, located in Long Island, New York, which we believe was a triggering event under SFAS 144 for potential impairment of the asset group's long-lived assets. Thus, we reviewed the carrying value of this asset group for potential impairment, and based upon internal analysis, we estimated the asset group's future cash flows from its long-lived assets, which primarily consisted of equipment and leasehold improvements. As this asset group's carrying value was not recoverable from its future cash flows, we determined the fair value of the related assets based on the same analysis, primarily using the discounted cash flow approach. As a result of this review, we recorded an impairment charge for the asset group's long-lived assets of $9.6 million as a component of operating loss in "Store operating, general and administrative expense" in our Consolidated Statements of Operations for the 12 and 28 weeks ended September 10, 2005. There were no such amounts recorded during the 12 and 28 weeks ended September 11, 2004. Impairments related to the divestiture of the Midwestern U.S. business During the 12 and 28 weeks ended September 10, 2005, we recorded impairment losses on property, plant and equipment of $6.7 million and $6.9 million, respectively, related to property write-downs as a result of the divestiture of a portion of our Midwestern U.S. business as discussed in Note 11 - Asset Disposition Initiatives. These amounts were included in "Store operating, general and administrative expense" in our Consolidated Statements of Operations for the 12 and 28 weeks ended September 10, 2005. There were no such amounts recorded during the 12 and 28 weeks ended September 11, 2004. Impairments related to the sale of U.S. distribution operations and warehouses During the 12 and 28 weeks ended September 10, 2005, we recorded impairment losses on property, plant and equipment of $2.8 million and $8.6 million, respectively, related to property write-downs as a result of our decision to sell our U.S. distribution operations and warehouses to C&S Wholesale Grocers as discussed in Note 6 - Sale of Our U.S. Distribution Operations and Warehouses. These amounts were included in "Store operating, general and administrative expense" in our Consolidated Statements of Operations for the 12 and 28 weeks ended September 10, 2005. There were no such amounts recorded during the 12 and 28 weeks ended September 11, 2004. The effects of changes in estimates of useful lives were not material to ongoing depreciation expense. 10. DISCONTINUED OPERATIONS In February 2003, we announced the sale of a portion of our non-core assets, including nine of our stores in northern New England and seven stores in Madison, Wisconsin. In March 2003, we entered into an agreement to sell an additional eight stores in northern New England. 18 Also, during fiscal 2003, we adopted a formal plan to exit the Milwaukee, Wisconsin market, where our remaining 23 Kohl's stores were located, as well as our Eight O'Clock Coffee business, through the sale and/or disposal of these assets. Upon the decision to sell these stores, we applied the provisions of SFAS 144 to these properties held for sale. SFAS 144 requires properties held for sale to be classified as a current asset and valued on an asset-by-asset basis at the lower of carrying amount or fair value less costs to sell. In applying those provisions, we considered, where available, the binding sale agreements related to these properties as an estimate of the assets' fair value. We have accounted for all of these separate business components as discontinued operations in accordance with SFAS 144. In determining whether a group of stores qualifies as discontinued operations treatment, we include only those stores for which (i.) the operations and cash flows will be eliminated from our ongoing operations as a result of the disposal and (ii.) we will not have any significant continuing involvement in the operations of the stores after the disposal. In making this determination, we consider the geographic location of the stores. If stores to be disposed of are replaced by other stores in the same geographic district, we would not include the stores as discontinued operations. Amounts in the financial statements and related notes for all periods shown have been reclassified to reflect the discontinued operations. Summarized below are the operating results for these discontinued businesses, which are included in our Consolidated Statements of Operations, under the caption "(Loss) income from operations of discontinued businesses, net of tax" for the 12 and 28 weeks ending September 10, 2005 and September 11, 2004.
12 Weeks Ended September 10, 2005 -------------------------------------------------------------------- Eight Northern O'Clock New England Kohl's Coffee Total --------------- ---------------- --------------- ---------------- LOSS FROM OPERATIONS OF DISCONTINUED BUSINESSES Sales $ - $ - $ - $ - Operating expenses (10) (245) (41) (296) ------------- ------------- ------------- ------------- Loss from operations of discontinued businesses, before tax (10) (245) (41) (296) Tax provision - - - - ------------- ------------- ------------- ------------- Loss from operations of discontinued businesses, net of tax $ (10) $ (245) $ (41) $ (296) ============= ============= ============= ============= Disposal related costs included in operating expenses above: Non-accruable closing costs $ (10) $ (93) $ (41) $ (144) Interest accretion on present value of future occupancy costs - (152) - (152) ------------- ------------- ------------- ------------- Total disposal related costs $ (10) $ (245) $ (41) $ (296) ------------- ------------- ------------- -------------
19
12 Weeks ended September 11, 2004 -------------------------------------------------------------------- Eight Northern O'Clock New England Kohl's Coffee Total --------------- ---------------- --------------- ---------------- INCOME (LOSS) FROM OPERATIONS OF DISCONTINUED BUSINESSES Sales $ - $ - $ - $ - Operating expenses 699 (352) (3) 344 ------------- ------------- ------------- ------------- Income (loss) from operations of discontinued businesses, before tax 699 (352) (3) 344 Tax provision - - - - ------------- ------------- ------------- ------------- Income (loss) from operations of discontinued businesses, net of tax $ 699 $ (352) $ (3) $ 344 ============= ============= ============= ============= Disposal related costs included in operating expenses above: Non-accruable closing costs $ 702 $ (192) $ (3) $ 507 Interest accretion on present value of future occupancy costs (3) (160) - (163) ------------- ------------- ------------- ------------- Total disposal related costs $ 699 $ (352) $ (3) $ 344 ------------- ------------- ------------- -------------
28 Weeks Ended September 10, 2005 -------------------------------------------------------------------- Eight Northern O'Clock New England Kohl's Coffee Total --------------- ---------------- --------------- ---------------- LOSS FROM OPERATIONS OF DISCONTINUED BUSINESSES Sales $ - $ - $ - $ - Operating expenses (37) (376) (51) (464) ------------- ------------- ------------- ------------- Loss from operations of discontinued businesses, before tax (37) (376) (51) (464) Tax provision - - - - ------------- ------------- ------------- ------------- Loss from operations of discontinued businesses, net of tax $ (37) $ (376) $ (51) $ (464) =============== ================ =============== ================ Disposal related costs included in operating expenses above: Non-accruable closing costs $ (37) $ (18) $ (51) $ (106) Interest accretion on present value of future occupancy costs - (358) - (358) ------------- ------------- ------------- ------------- Total disposal related costs $ (37) $ (376) $ (51) $ (464) ------------- ------------- ------------- -------------
20
28 Weeks ended September 11, 2004 -------------------------------------------------------------------- Eight Northern O'Clock New England Kohl's Coffee Total --------------- ---------------- --------------- ---------------- INCOME (LOSS) FROM OPERATIONS OF DISCONTINUED BUSINESSES Sales $ - $ - $ - $ - Operating expenses 328 (774) (593) (1,039) ------------- ------------- ------------- ------------- Income (loss) from operations of discontinued businesses, before tax 328 (774) (593) (1,039) Tax provision - - - - ------------- ------------- ------------- ------------- Income (loss) from operations of discontinued businesses, net of tax $ 328 $ (774) $ (593) $ (1,039) ============= ============= ============= ============= Disposal related costs included in operating expenses above: Severance and benefits $ (326) $ - $ - $ (326) Non-accruable closing costs 660 (390) (593) (323) Interest accretion on present value of future occupancy costs (6) (384) - (390) ------------ ------------- ------------- ------------- Total disposal related costs $ 328 $ (774) $ (593) $ (1,039) ------------ ------------- ------------- -------------
NORTHERN NEW ENGLAND As previously stated, as part of our strategic plan, we decided, in February 2003, to exit the northern New England market by closing and/or selling 21 stores in that region in order to focus on our core geographic markets. At September 10, 2005, we have closed all locations in the northern New England market. During the 12 and 28 weeks ended September 10, 2005, we incurred additional costs to wind down our operations in this region subsequent to the sale of these stores of $0.01 million and $0.04 million, respectively, primarily related to non-accruable closing costs. During the 12 and 28 weeks ended September 11, 2004, we recorded gains of $0.7 million and $0.3 million, respectively, primarily due to favorable results of winding down this business. These amounts were included in "(Loss) income from operations of discontinued businesses, net of tax" on our Consolidated Statements of Operations for the 12 and 28 weeks ended September 10, 2005 and September 11, 2004. 21 The following table summarizes the reserve activity related to the exit of the northern New England market since the charge was recorded:
Severance and Occupancy Benefits Total ------------- ------------- --------------- Fiscal 2003 charge (1) $ 3,993 $ 2,670 $ 6,663 ------------ ------------- -------------- Additions (2) 6 - 6 Utilization (3) (3,547) (2,612) (6,159) ------------ ------------- -------------- Balance at February 28, 2004 $ 452 $ 58 $ 510 Additions (2) 8 326 334 Utilization (3) (460) (384) (844) ------------ ------------- -------------- Balance at February 26, 2005 $ - $ - $ - Additions (2) - - - Utilization (3) - - - ------------ ------------- -------------- Balance at Sept. 10, 2005 $ - $ - $ - ============ ============= ==============
(1) The fiscal 2003 charge to occupancy consists of $4.0 million related to future occupancy costs such as rent, common area maintenance and real estate taxes. The fiscal 2003 charge to severance and benefits of $2.7 million related to severance to be paid to employees terminated as a result of our exit from the northern New England market. (2) The additions to occupancy presented represent the interest accretion on future occupancy costs which were recorded at present value at the time of the original charge. The fiscal 2004 charge to severance and benefits of $0.3 million related to additional severance required to be paid to employees terminated in accordance with a union contract as a result of our exit from the northern New England market. (3) Occupancy utilization represents vacancy related payments for closed locations. Severance and benefits utilization represents payments made to terminated employees during the period. As of September 10, 2005, we paid approximately $3.0 million in severance and benefit costs, which resulted from the termination of approximately 300 employees. KOHL'S MARKET As previously stated, as part of our strategic plan we decided to exit the Madison and Milwaukee, Wisconsin markets, which comprised our Kohl's banner. During the 12 and 28 weeks ended September 10, 2005, we recorded costs of $0.3 million and $0.4 million primarily due to the costs of winding down this business. During the 12 and 28 weeks ended September 11, 2004, we recorded costs of $0.4 million and $0.8 million primarily due to the costs of winding down this business. These amounts were included in "(Loss) income from operations of discontinued businesses, net of tax" on our Consolidated Statements of Operations for the 12 and 28 weeks ended September 10, 2005 and September 11, 2004. 22 The following table summarizes the reserve activity related to the exit of the Kohl's market since the charge was recorded through the 28 weeks ended September 10, 2005:
Severance and Fixed Occupancy Benefits Assets Total ------------- ------------- --------------- ---------------- Fiscal 2003 charge (1) $ 25,487 $ 13,062 $ 18,968 $ 57,517 Additions (2) 352 - - 352 Utilization (3) (5,342) (8,228) (18,968) (32,538) Adjustments (4) (1,458) - - (1,458) ------------ ------------- ------------- ------------ Balance at February 28, 2004 19,039 4,834 - 23,873 Additions (2) 688 52 602 1,342 Utilization (3) (1,918) (2,201) (602) (4,721) Adjustments (4) (354) - - (354) ------------ ------------- ------------- ------------ Balance at February 26, 2005 $ 17,455 $ 2,685 $ - $ 20,140 Additions (2) 331 27 - 358 Utilization (3) (1,534) (1,086) - (2,620) ------------ ------------- ------------- ------------- Balance at Sept. 10, 2005 $ 16,252 $ 1,626 $ - $ 17,878 ============ ============= ============= ============
(1) The fiscal 2003 charge to occupancy consists of $25.5 million related to future occupancy costs such as rent, common area maintenance and real estate taxes. The fiscal 2003 charge to severance and benefits of $13.1 million related to severance costs of $6.6 million and costs for future obligations for early withdrawal from multi-employer union pension plans and a health and welfare plan of $6.5 million. The fiscal 2003 charge to property of $18.9 million represents the impairment losses at certain Kohl's locations. (2) The fiscal 2003, fiscal 2004 and the year to date second quarter of fiscal 2005 additions to occupancy and severance and benefits represent the interest accretion on future occupancy costs and future obligations for early withdrawal from multi-employer union pension plans which were recorded at present value at the time of the original charge. The addition to fixed assets represents additional impairment losses recorded as a result of originally estimated proceeds on the disposal of these assets not being achieved. (3) Occupancy utilization represents vacancy related payments for closed locations such as rent, common area maintenance, real estate taxes and lease termination payments. Severance and benefits utilization represents payments made to terminated employees during the period and payments for pension withdrawal. (4) At each balance sheet date, we assess the adequacy of the balance to determine if any adjustments are required as a result of changes in circumstances and/or estimates. During fiscal 2003, we recorded net adjustments of $1.5 million primarily related to reversals of previously accrued vacancy related costs due to favorable results of terminating and subleasing certain locations of $4.5 million offset by additional vacancy accruals of $3.0 million. During fiscal 2004, we recorded a reversal of previously accrued occupancy related costs due to favorable results of terminating leases. We paid $8.8 million of the total occupancy charges from the time of the original charge through September 10, 2005 which was primarily for occupancy related costs such as rent, common area maintenance, real estate taxes and lease termination costs. We paid $11.5 million of the total original severance and benefits charges from the time of the original charges through September 10, 2005, which resulted from the termination of approximately 2,000 employees. The remaining occupancy liability of $16.3 million relates to expected future payments under long term leases and is expected to be paid out in full by 2020. The remaining severance liability of $1.6 million relates to future obligations for early withdrawal from multi-employer union pension plans which will be paid by mid-2006. At September 10, 2005 and February 26, 2005, $5.8 million and $5.9 million, respectively, of the Kohl's exit reserves was included in "Other accruals" and $12.1 million and $14.2 million, respectively, was included in "Other non-current liabilities" on our Consolidated Balance Sheets. We have evaluated the liability balance of $17.9 million as of September 10, 2005 based upon current available information and have concluded that it is adequate. We will continue to monitor the status of the vacant properties and adjustments to the reserve balance may be recorded in the future, if necessary. 23 EIGHT O'CLOCK COFFEE During fiscal 2003, we completed the sale of our Eight O'Clock Coffee business, generating gross proceeds of $107.5 million and a net gain after transaction related costs of $85.0 million ($49.3 million after tax). The sale of the coffee business also included a contingent note for up to $20.0 million, the value and payment of which is based upon certain elements of the future performance of the Eight O'Clock Coffee business and therefore is not included in the gain. During the 12 and 28 weeks ended September 10, 2005, we incurred costs of $0.04 million and $0.05 million to wind down our operations in this business subsequent to the sale. Similarly, we incurred costs of nil and $0.6 million during the 12 and 28 weeks ended September 11, 2004, related to winding down this business subsequent to the sale. These amounts were included in "(Loss) income from operations of discontinued businesses, net of tax" on our Consolidated Statements of Operations for the 12 and 28 weeks ended September 10, 2005 and September 11, 2004. OTHER Although the Canadian operations have been sold as of September 10, 2005, the criteria necessary to classify the Canadian operations as discontinued have not been satisfied as our Company retained significant continuing involvement in the operations of this business upon its sale. 11. ASSET DISPOSITION INITIATIVES OVERVIEW In fiscal 1998 and fiscal 1999, we announced a plan to close two warehouse facilities and a coffee plant in the U.S., a bakery plant in Canada and 166 stores including the exit of the Richmond, Virginia and Atlanta, Georgia markets (Project Great Renewal). In addition, during the third quarter of fiscal 2001, we announced that certain underperforming operations, including 39 stores (30 in the United States and 9 in Canada) and 3 warehouses (2 in the United States and 1 in Canada) would be closed and/or sold, and certain administrative streamlining would take place (2001 Asset Disposition). During the fourth quarter of fiscal 2003, we announced an initiative to close 6 stores and convert 13 stores to our Food Basics banner in the Detroit, Michigan and Toledo, Ohio markets (Farmer Jack Restructuring). In addition, during the first and second quarters of fiscal 2005, we initiated efforts to divest our businesses in the Midwestern United States and closed 31 of those stores (Divestiture of the Midwestern U.S. Business). Presented below is a reconciliation of the charges recorded on our Consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the 12 and 28 weeks ended September 10, 2005 and September 11, 2004. Present value ("PV") interest represents interest accretion on future occupancy costs which were recorded at present value at the time of the original charge. Non-accruable items represent charges related to the restructuring that are required to be expensed as incurred in accordance with SFAS 146 "Accounting for Costs Associated with Exit or Disposal Activities". 24
12 Weeks Ended September 10, 2005 ----------------------------------------------------------------------------------- Project 2001 Farmer Divestiture Great Asset Jack of Midwest Renewal Disposition Restructuring Operations Total ----------- ----------- --------------- ------------- ----------- BALANCE SHEET ACCRUALS Vacancy $ (2,570) $ - $ 3,360 $ 56,752 $ 57,542 -------- -------- -------- -------- -------- PV interest 375 519 143 136 1,173 Severance - - - 782 782 Total accrued to -------- -------- -------- -------- -------- balance sheets (2,195) 519 3,503 57,670 59,497 -------- -------- -------- -------- -------- NON-ACCRUABLE ITEMS RECORDED ON STATEMENTS OF OPERATIONS Property writeoffs - - - 6,735 6,735 Inventory markdowns - - - 544 544 Loss on sale of property - - - 3,215 3,215 Gain on sale of pharmacy scripts - - - - - Closing costs - - - 2,525 2,525 -------- -------- -------- -------- -------- Total non-accruable items - - - 13,019 13,019 Less PV interest (375) (519) (143) (136) (1,173) -------- -------- -------- -------- -------- TOTAL AMOUNT RECORDED ON STATEMENTS OF OPERATIONS EXCLUDING PV INTEREST (2,570) - 3,360 70,553 71,343 ======== ======== ======== ======== ========
12 Weeks Ended September 11, 2004 -------------------------------------------------------------- Project 2001 Farmer Great Asset Jack Renewal Disposition Restructuring Total --------- ----------- ------------- ------- BALANCE SHEET ACCRUALS PV interest $ 446 $ 568 $ 158 $ 1,172 Total accrued to ------- ------- ------- ------- balance sheets 446 568 158 1,172 ------- ------- ------- ------- NON-ACCRUABLE ITEMS RECORDED ON STATEMENTS OF OPERATIONS Property writeoffs - - - - Inventory markdowns - - - - Closing costs - - 9 9 ------- ------- ------- ------- Total non-accruable items - - 9 9 ------- ------- ------- ------- Less PV interest (446) (568) (158) (1,172) ------- ------- ------- ------- TOTAL AMOUNT RECORDED ON STATEMENTS OF OPERATIONS EXCLUDING PV INTEREST - - 9 9 ======= ======= ======= =======
25
28 Weeks Ended September 10, 2005 ------------------------------------------------------------------------------------ Project 2001 Farmer Divestiture Great Asset Jack of Midwest Renewal Disposition Restructuring Operations Total ----------- ----------- --------------- ------------- ----------- BALANCE SHEET ACCRUALS Vacancy $ (2,570) $ - $ 3,360 $ 71,518 $ 72,308 PV interest 900 1,232 337 136 2,605 Severance - - - 2,119 2,119 Total accrued to -------- -------- -------- -------- -------- balance sheets (1,670) 1,232 3,697 73,773 77,032 -------- -------- -------- -------- -------- NON-ACCRUABLE ITEMS RECORDED ON STATEMENTS OF OPERATIONS Property writeoffs - - - 6,861 6,861 Inventory markdowns - - - 1,130 1,130 Loss on sale of property - - - 2,263 2,263 Gain on sale of pharmacy scripts - - - (870) (870) Closing costs - - - 2,957 2,957 -------- -------- -------- -------- -------- Total non-accruable items - - - 12,341 12,341 -------- -------- -------- -------- -------- Less PV interest (900) (1,232) (337) (136) (2,605) -------- -------- -------- -------- -------- TOTAL AMOUNT RECORDED ON STATEMENTS OF OPERATIONS EXCLUDING PV INTEREST (2,570) - 3,360 85,978 86,768 -------- -------- -------- -------- -------- Less Gain on sale of pharmacy scripts - - - 870 870 Less closing costs - - - (2,957) (2,957) -------- -------- -------- -------- -------- TOTAL AMOUNT RECORDED ON STATEMENTS OF CASH FLOWS (2,570) - 3,360 83,891 84,681 ======== ======== ======== ======== ========
28 Weeks Ended September 11, 2004 ----------------------------------------------------------------- Project 2001 Farmer Great Asset Jack Renewal Disposition Restructuring Total ------- ----------- ------------- -------- BALANCE SHEET ACCRUALS PV interest $ 1,076 $ 1,349 $ 380 $ 2,805 Total accrued to ------- ------- ------- ------- balance sheets 1,076 1,349 380 2,805 ------- ------- ------- ------- NON-ACCRUABLE ITEMS RECORDED ON STATEMENTS OF OPERATIONS Property writeoffs - - 90 90 Inventory markdowns - - 291 291 Closing costs - - 689 689 ------- ------- ------- ------- Total non-accruable items - - 1,070 1,070 ------- ------- ------- ------- Less PV interest (1,076) (1,349) (380) (2,805) ------- ------- ------- ------- TOTAL AMOUNT RECORDED ON STATEMENTS OF OPERATIONS EXCLUDING PV INTEREST - - 1,070 1,070 ------- ------- ------- ------- Less closing costs - - (689) (689) ------- ------- ------- ------- TOTAL AMOUNT RECORDED ON STATEMENTS OF CASH FLOWS - - 381 381 ======= ======= ======= =======
26 PROJECT GREAT RENEWAL In May 1998, we initiated an assessment of our business operations in order to identify the factors that were impacting our performance. As a result of this assessment, in fiscal 1998 and 1999, we announced a plan to close two warehouse facilities and a coffee plant in the U.S., a bakery plant in Canada and 166 stores (156 in the United States and 10 in Canada) including the exit of the Richmond, Virginia and Atlanta, Georgia markets. As of September 10, 2005, we had closed all stores and facilities related to this phase of the initiative. The following table summarizes the activity related to this phase of the initiative over the last three fiscal years:
Occupancy Severance and Benefits Total ------------------------------ ------------------------------ ------------------------------- U.S. Canada Total U.S. Canada Total U.S. Canada Total -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at February 23, 2002 $ 62,802 $ 575 $ 63,377 2,177 $ - $ 2,177 64,979 575 65,554 Addition (1) 2,861 298 3,159 - - - 2,861 298 3,159 Utilization (2) (13,230) (386) (13,616) (370) - (370) (13,600) (386) (13,986) Adjustments (3) (3,645) - (3,645) 639 - 639 (3,006) - (3,006) --------- -------- --------- -------- -------- -------- --------- --------- --------- Balance at February 22, 2003 $ 48,788 $ 487 $ 49,275 $ 2,446 $ - $ 2,446 $ 51,234 $ 487 $ 51,721 Addition (1) 2,276 372 2,648 - - - 2,276 372 2,648 Utilization (2) (19,592) (407) (19,999) (289) - (289) (19,881) (407) (20,288) -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at February 28, 2004 $ 31,472 $ 452 $ 31,924 $ 2,157 $ - $ 2,157 $ 33,629 $ 452 $ 34,081 Addition (1) 1,902 20 1,922 - - - 1,902 20 1,922 Utilization (2) (5,410) (222) (5,632) (497) - (497) (5,907) (222) (6,129) -------- -------- -------- -------- -------- -------- --------- ---------- --------- Balance at February 26, 2005 $ 27,964 $ 250 $ 28,214 $ 1,660 $ - $ 1,660 $ 29,624 $ 250 $ 29,874 Addition (1) 893 7 900 - - - 893 7 900 Utilization (2) (3,280) (167) (3,447) (152) - (152) (3,432) (167) (3,599) Adjustments (3) (2,570) (90) (2,660) - - - (2,570) (90) (2,660) --------- --------- --------- -------- -------- -------- --------- ---------- --------- Balance at Sept. 10, 2005 $ 23,007 $ - $ 23,007 $ 1,508 $ - $ 1,508 $ 24,515 $ - $ 24,515 ======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $3.2 million, $2.6 million, and $1.9 million during fiscal 2002, 2003 and 2004, respectively, and $0.9 million during the 28 weeks ended September 10, 2005 represent the interest accretion on future occupancy costs which were recorded at present value at the time of the original charge. (2) Occupancy utilization of $13.6 million, $20.0 million, and $5.6 million for fiscal 2002, 2003 and 2004, respectively, and $3.5 million during the 28 weeks ended September 10, 2005 represents payments made during those periods for costs such as rent, common area maintenance, real estate taxes and lease termination costs. Severance utilization of $0.4 million, $0.3 million, and $0.5 million for fiscal 2002, 2003 and 2004, respectively, and $0.2 million during the 28 weeks ended September 10, 2005 represents payments to individuals for severance and benefits, as well as payments to pension funds for early withdrawal from multi-employer union pension plans. (3) At each balance sheet date, we assess the adequacy of the balance to determine if any adjustments are required as a result of changes in circumstances and/or estimates. We have continued to make favorable progress in marketing and subleasing the closed stores. As a result, during fiscal 2002, we recorded a reduction of $3.6 million in occupancy accruals related to this phase of the initiative. Further, we increased our reserve for future minimum pension liabilities by $0.6 million to better reflect expected future payouts under certain collective bargaining agreements. During the 28 weeks ended September 10, 2005, we recorded an additional reduction of $2.6 million in occupancy accruals due to subleasing additional closed stores. As discussed in Note 4 - Divestiture of Our Businesses in Canada and the Midwestern United States, we sold our Canadian business and as a result, the Canadian occupancy accruals of $0.1 million are no longer consolidated in our Consolidated Balance Sheet at September 10, 2005. 27 We paid $101.8 million of the total occupancy charges from the time of the original charges through September 10, 2005 which was primarily for occupancy related costs such as rent, common area maintenance, real estate taxes and lease termination costs. We paid $30.1 million of the total net severance charges from the time of the original charges through September 10, 2005, which resulted from the termination of approximately 3,400 employees. The remaining occupancy liability of $23.0 million relates to expected future payments under long term leases and is expected to be paid in full by 2020. The remaining severance liability of $1.5 million primarily relates to expected future payments for early withdrawals from multi-employer union pension plans and will be fully paid out in 2020. None of these stores were open during either of the first or second quarters of fiscal 2004 or 2005. As such, there was no impact on the Statements of Consolidated Operations from the 166 stores included in this phase of the initiative. At September 10, 2005 and February 26, 2005, approximately $5.7 million and $5.4 million, respectively, of the reserve was included in "Other accruals" and the remaining amount was included in "Other non-current liabilities" on the Company's Consolidated Balance Sheets. Based upon current available information, we evaluated the reserve balances as of September 10, 2005 of $24.5 million for this phase of the asset disposition initiative and have concluded that they are adequate to cover expected future costs. The Company will continue to monitor the status of the vacant properties and adjustments to the reserve balances may be recorded in the future, if necessary. 2001 ASSET DISPOSITION During the third quarter of fiscal 2001, the Company's Board of Directors approved a plan resulting from our review of the performance and potential of each of the Company's businesses and individual stores. At the conclusion of this review, our Company determined that certain underperforming operations, including 39 stores (30 in the United States and 9 in Canada) and 3 warehouses (2 in the United States and 1 in Canada) should be closed and/or sold, and certain administrative streamlining should take place. As of September 10, 2005, we had closed all stores and facilities related to this phase of the initiative. 28 The following table summarizes the activity related to this phase of the initiative recorded on the Consolidated Balance Sheets over the last three fiscal years:
Occupancy Severance and Benefits Total ------------------------------ ------------------------------ ------------------------------- U.S. Canada Total U.S. Canada Total U.S. Canada Total -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at February 23, 2002 $ 78,386 $ 1,937 $ 80,323 13,743 $ 6,217 $ 19,960 $ 92,129 $ 8,154 $ 100,283 Addition (1) 4,041 49 4,090 2,578 966 3,544 6,619 1,015 7,634 Utilization (2) (18,745) (1,642) (20,387) (12,508) (6,952) (19,460) (31,253) (8,594) (39,847) Adjustments (3) (10,180) - (10,180) - 250 250 (10,180) 250 (9,930) --------- -------- --------- -------- -------- -------- --------- --------- --------- Balance at February 22, 2003 $ 53,502 $ 344 $ 53,846 $ 3,813 $ 481 $ 4,294 $ 57,315 $ 825 $ 58,140 Addition (1) 2,847 3 2,850 - - - 2,847 3 2,850 Utilization (2) (9,987) (974) (10,961) (2,457) (1,026) (3,483) (12,444) (2,000) (14,444) Adjustments (3) (6,778) 1,002 (5,776) 955 603 1,558 (5,823) 1,605 (4,218) -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at February 28, 2004 $ 39,584 $ 375 $ 39,959 $ 2,311 $ 58 $ 2,369 $ 41,895 $ 433 $ 42,328 Addition (1) 2,449 - 2,449 - - - 2,449 - 2,449 Utilization (2) (5,646) (375) (6,021) (2,197) (58) (2,255) (7,843) (433) (8,276) Adjustments (3) (4,488) - (4,488) - - - (4,488) - (4,488) -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at February 26, 2005 $ 31,899 $ - $ 31,899 $ 114 $ - $ 114 $ 32,013 $ - $ 32,013 Addition (1) 1,232 - 1,232 - - - 1,232 - 1,232 Utilization (2) (2,593) - (2,593) (52) - (52) (2,645) - (2,645) -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at Sept. 10, 2005 $ 30,538 $ - $ 30,538 $ 62 $ - $ 62 $ 30,600 $ - $ 30,600 ======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $4.1 million, $2.9 million, and $2.4 million during fiscal 2002, 2003 and 2004, respectively, and $1.2 million during the 28 weeks ended September 10, 2005 represent the interest accretion on future occupancy costs which were recorded at present value at the time of the original charge. The addition to severance of $3.5 million during fiscal 2002 related to retention and productivity incentives that were accrued as earned. (2) Occupancy utilization of $20.4 million, $11.0 million, and $6.0 during fiscal 2002, 2003 and 2004, respectively, and $2.6 million during the 28 weeks ended September 10, 2005 represent payments made during those periods for costs such as rent, common area maintenance, real estate taxes and lease termination costs. Severance utilization of $19.5 million, $3.5 million, and $2.3 million during fiscal 2002, 2003 and 2004, respectively, and $0.1 million during the 28 weeks ended September 10, 2005 represent payments made to terminated employees during the period. (3) At each balance sheet date, we assess the adequacy of the reserve balance to determine if any adjustments are required as a result of changes in circumstances and/or estimates. During fiscal 2002, we recorded adjustments of $10.2 million related to reversals of previously accrued occupancy related costs due to the following: o Favorable results of assigning leases at certain locations of $3.6 million; o The decision to continue to operate one of the stores previously identified for closure due to changes in the competitive environment in the market in which that store is located of $3.3 million; and o The decision to proceed with development at a site that we had chosen to abandon at the time of the original charge due to changes in the competitive environment in the market in which that site is located of $3.3 million. During fiscal 2003, we recorded net adjustments of $5.8 million related to reversals of previously accrued occupancy costs due to favorable results of subleasing, assigning and terminating leases. We also accrued $1.6 million for additional severance and benefit costs that were unforeseen at the time of the original charge. Finally, during fiscal 2004, we recorded adjustments of $4.5 million related to the reversals of previously accrued occupancy costs due to the disposals and subleases of locations at more favorable terms than originally anticipated at the time of the original charge. 29 We paid $41.8 million ($38.8 million in the U.S. and $3.0 million in Canada) of the total occupancy charges from the time of the original charges through September 10, 2005 which was primarily for occupancy related costs such as rent, common area maintenance, real estate taxes and lease termination costs. We paid $28.1 million ($19.1 million in the U.S. and $9.0 million in Canada) of the total net severance charges from the time of the original charges through September 10, 2005, which resulted from the termination of approximately 1,100 employees. The remaining occupancy liability of $30.5 million primarily relates to expected future payments under long term leases through 2017. The remaining severance liability of $0.1 million relates to expected future payments for severance and benefits payments to individual employees and will be fully paid out by 2006. At September 10, 2005 and February 26, 2005, approximately $7.2 million and $7.1 million of the reserve, respectively, was included in "Other accruals" and the remaining amount was included in "Other non-current liabilities" on the Company's Consolidated Balance Sheets. None of these stores were open during either of the first or second quarters of fiscal 2004 or 2005. As such, there was no impact on the Statements of Consolidated Operations from the 39 stores that were identified for closure as part of this asset disposition. Based upon current available information, we evaluated the reserve balances as of September 10, 2005 of $30.6 million for this phase of the asset disposition initiative and have concluded that they are adequate to cover expected future costs. The Company will continue to monitor the status of the vacant properties and adjustments to the reserve balances may be recorded in the future, if necessary. FARMER JACK RESTRUCTURING In the fourth quarter of fiscal 2003, we announced an initiative to close 6 stores and convert 13 stores to our Food Basics banner in the Detroit, Michigan and Toledo, Ohio markets. As of September 10, 2005, we had closed all 6 stores and successfully completed the conversions related to this phase of the initiative. The following table summarizes the activity to date related to the charges recorded for this initiative all of which were in the U.S. The table does not include property writeoffs as they are not part of any reserves maintained on the balance sheet. It also does not include non-accruable closing costs and inventory markdowns since they are expensed as incurred in accordance with generally accepted accounting principles. 30
Severance and Occupancy Benefits Total ------------ ------------ ---------- Original charge (1) $ 20,999 $ 8,930 $ 29,929 Addition (1) 56 - 56 Utilization (2) (1,093) (4,111) (5,204) ------------ ------------- ---------- Balance at February 28, 2004 $ 19,962 $ 4,819 $ 24,781 Addition (1) 687 - 687 Utilization (2) (4,747) (4,813) (9,560) ------------ ------------- ---------- Balance at February 26, 2005 $ 15,902 $ 6 $ 15,908 Addition (1) 337 - 337 Utilization (2) (1,504) (6) (1,510) Adjustment (3) 3,360 - 3,360 ------------ ------------- ---------- Balance at Sept. 10, 2005 $ 18,095 $ - $ 18,095 ============ ============= ==========
(1) The original charge to occupancy during fiscal 2003 represents charges related to closures and conversions in the Detroit, Michigan market of $21.0 million. The additions to occupancy during fiscal 2003, fiscal 2004 and the 28 weeks ended September 10, 2005 represent interest accretion on future occupancy costs which were recorded at present value at the time of the original charge. The original charge to severance during fiscal 2003 of $8.9 million related to individual severings as a result of the store closures, as well as a voluntary termination plan initiated in the Detroit, Michigan market. (2) Occupancy utilization of $1.1 million, $4.7 million and $1.5 million during fiscal 2003, fiscal 2004 and the 28 weeks ended September 10, 2005, respectively, represents payments made for costs such as rent, common area maintenance, real estate taxes and lease termination costs. Severance utilization of $4.1 million, $4.8 million and $0.01 million during fiscal 2003, fiscal 2004 and the 28 weeks ended September 10, 2005, respectively, represent payments made to terminated employees during the period. (3) At each balance sheet date, we assess the adequacy of the balance to determine if any adjustments are required as a result of changes in circumstances and/or estimates. During the 28 weeks ended September 10, 2005, we recorded an increase of $3.4 million in occupancy accruals due to changes in our original estimate of when we would terminate certain leases and obtain sublease rental income related to such leases. We paid $7.3 million of the total occupancy charges from the time of the original charge through September 10, 2005 which was primarily for occupancy related costs such as rent, common area maintenance, real estate taxes and lease termination costs. We paid $8.9 million of the total net severance charges from the time of the original charges through September 10, 2005, which resulted from the termination of approximately 300 employees. The remaining occupancy liability of $18.1 million relates to expected future payments under long term leases and is expected to be paid out in full by 2022. The severance liability has been fully utilized as of September 10, 2005 and no additional future payments for severance and benefits to individual employees will be paid out. 31 Included in the Statements of Consolidated Operations for the 12 and 28 weeks ended September 10, 2005 and September 11, 2004 are the sales and operating results of the 6 stores that were identified for closure as part of this phase of the initiative. The results of these operations are as follows:
12 Weeks Ended 28 Weeks Ended ----------------------------------- ----------------------------------- September 10, September 11, September 10, September 11, 2005 2004 2005 2004 --------------- --------------- ---------------- --------------- Sales $ - $ - $ - $ 2,433 ============== ============== =============== ============== Loss from operations $ - $ - $ - $ (43) ============== ============== =============== ==============
At September 10, 2005 and February 26, 2005, approximately $1.6 million and $2.1 million, respectively, of the liability was included in "Other accruals" and the remaining amount was included in "Other non-current liabilities" on our Consolidated Balance Sheets. We have evaluated the liability balance of $18.1 million as of September 10, 2005 based upon current available information and have concluded that it is adequate. We will continue to monitor the status of the vacant properties and adjustments to the reserve balance may be recorded in the future, if necessary. DIVESTITURE OF THE MIDWESTERN U.S. BUSINESS During the first quarter of fiscal 2005, we announced plans for a major strategic restructuring that would focus future effort and investment on our core operations in the Northeastern United States. Thus, we initiated efforts to divest our businesses in the Midwestern United States. Although this planned divestiture includes the closing of a total of 35 stores, we have closed 31 of these stores as of September 10, 2005. During the 12 and 28 weeks ended September 10, 2005, we recorded charges of $70.6 million and $86.0 million, respectively, related to these closures ($0.5 million and $1.1 million in "Cost of merchandise sold," respectively, and $70.1 million and $84.9 million, respectively, in "Store operating, general and administrative expense" in our Consolidated Statement of Operations), excluding PV interest. Included in property writeoffs for the 12 and 28 weeks ended September 10, 2005, is an impairment loss on property, plant and equipment of $2.7 million related to the additional closure of four stores that will close in the third quarter of fiscal 2005.
12 Weeks Ended 28 Weeks Ended September 10, 2005 September 10, 2005 ------------------ ------------------ Occupancy related $ 56,752 $ 71,518 Severance and benefits 782 2,119 Property writeoffs 6,735 6,861 Loss on the sale of fixed assets 3,215 2,263 Sale of pharmacy scripts - (870) Inventory markdowns 544 1,130 Nonaccruable closing costs 2,525 2,957 -------------- --------------- Total charges $ 70,553 $ 85,978 ============== ===============
The following table summarizes the activity to date related to the charges recorded for this divestiture. The table does not include property writeoffs as they are not part of any reserves maintained on the balance sheet. It also does not include non-accruable closing costs and inventory markdowns since they are expensed as incurred in accordance with generally accepted accounting principles. 32
Severance and Occupancy Benefits Total ----------- ------------ ------------ Original charge (1) $ 14,766 $ 1,337 $ 16,103 Additions (2) 56,888 782 57,670 Utilization (3) (2,710) (1,142) (3,852) ------------ ------------- ---------- Balance at Sept. 10, 2005 $ 68,944 $ 977 $ 69,921 ============ ============= ==========
(1) The original charge to occupancy during the first quarter of fiscal 2005 represents charges related to closures of the first 8 stores in conjunction with our decision to divest our Midwestern business of $14.7 million. The original charge to severance during the first quarter of fiscal 2005 of $1.3 million related to individual severings as a result of these store closures. (2) The additions to occupancy during the 28 weeks ended September 10, 2005 represents charges related to the closures of an additional 23 stores in the amount of $56.8 million and interest accretion on future occupancy costs which were recorded at present value at the time of the original charge in the amount of $0.1 million. The additional charge to severance during the 28 weeks ended September 10, 2005 of $0.8 million related to individual severings as a result of these store closures. (3) Occupancy utilization of $2.7 million for 28 weeks ended September 10, 2005, represents payments made for costs such as rent, common area maintenance, real estate taxes and lease termination costs. Severance utilization of $1.1 million for the 28 weeks ended September 10, 2005 represents payments made to terminated employees during the period. We paid $2.7 million of the total occupancy charges from the time of the original charge through September 10, 2005 which was primarily for occupancy related costs such as rent, common area maintenance, real estate taxes and lease termination costs. We paid $1.1 million of the total net severance charges from the time of the original charges through September 10, 2005, which resulted from the termination of approximately 125 employees. The remaining occupancy liability of $68.9 million relates to expected future payments under long term leases and is expected to be paid out in full by 2021. The remaining severance liability of $1.0 million relates to expected future payments for severance and benefits to individual employees and will be fully paid out by February 25, 2006. Included in the Statements of Consolidated Operations for the 12 and 28 weeks ended September 10, 2005 and September 11, 2004 are the sales and operating results of the 31 stores that were closed as part of this divestiture. The results of these operations are as follows:
12 Weeks Ended 28 Weeks Ended ----------------------------------- ----------------------------------- September 10, September 11, September 10, September 11, 2005 2004 2005 2004 --------------- --------------- ---------------- --------------- Sales $ 10,462 $ 71,924 $ 85,906 $ 157,608 ============== ============== =============== ============== Loss from operations $ (10,520) $ (7,843) $ (18,755) $ (18,337) ============== ============== =============== ==============
At September 10, 2005, approximately $15.5 million of the liability was included in "Other accruals" and the remaining amount was included in "Other non-current liabilities" on our Consolidated Balance Sheets. 33 We have evaluated the liability balance of $69.9 million as of September 10, 2005 based upon current available information and have concluded that it is adequate. We will continue to monitor the status of the vacant properties and adjustments to the reserve balance may be recorded in the future, if necessary. 12. RETIREMENT PLANS AND BENEFITS DEFINED BENEFIT PLANS We provide retirement benefits to certain non-union and union employees under various defined benefit plans. Our 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. We fund these plans in amounts consistent with the statutory funding requirements. The components of net pension cost were as follows:
For the 12 Weeks Ended ----------------------------------------------------- September 10, 2005 September 11, 2004 ---------------------- ----------------------- U.S. Canada U.S. Canada --------- --------- -------- --------- Service cost $ 1,384 $ 1,537 $ 836 $ 1,976 Interest cost 2,744 2,190 1,963 2,955 Expected return on plan assets (3,098) (2,812) (2,282) (3,823) Amortization of unrecognized net transition asset - - (3) - Amortization of unrecognized net prior service (gain) cost (67) 96 22 109 Amortization of unrecognized net loss (gain) 13 302 (30) 433 Administrative expenses and other - 46 2,825 63 --------- --------- -------- --------- Net pension cost $ 976 $ 1,359 $ 3,331 $ 1,713 ========= ========= ======== =========
For the 28 Weeks Ended ----------------------------------------------------- September 10, 2005 September 11, 2004 ---------------------- ----------------------- U.S. Canada U.S. Canada --------- --------- -------- --------- Service cost $ 3,230 $ 4,576 $ 1,951 $ 4,549 Interest cost 6,401 6,519 4,580 6,803 Expected return on plan assets (7,228) (8,369) (5,325) (8,802) Amortization of unrecognized net transition asset - - (7) - Amortization of unrecognized net prior service (gain) cost (158) 286 51 252 Amortization of unrecognized net loss (gain) 31 900 (70) 998 Administrative expenses and other - 138 2,825 144 --------- --------- -------- --------- Net pension cost $ 2,276 $ 4,050 $ 4,005 $ 3,944 ========= ========= ======== =========
CONTRIBUTIONS We previously disclosed in our consolidated financial statements for the year ended February 26, 2005, that we expected to contribute $5.8 million in cash to our defined benefit plans in fiscal 2005. As of September 10, 2005, we contributed approximately $2.2 million to our defined benefit plans. We plan to contribute approximately $3.6 million to our plans in the remainder of fiscal 2005. 34 POSTRETIREMENT BENEFITS We provide postretirement health care and life benefits to certain union and non-union employees. We recognize the cost of providing postretirement benefits during employees' active service periods. We use a December 31 measurement date for both the U.S. and Canadian postretirement benefits. The components of net postretirement benefits (income) cost are as follows:
For the 12 Weeks Ended ----------------------------------------------------- September 10, 2005 September 11, 2004 ---------------------- ---------------------- U.S. Canada U.S. Canada --------- --------- -------- --------- Service cost $ 78 $ 25 $ 66 $ 57 Interest cost 276 91 268 151 Amortization of (gain) loss (64) 40 (110) 81 Prior service gain (311) (50) (311) (121) --------- --------- -------- --------- Net postretirement benefits (income) cost $ (21) $ 106 $ (87) $ 168 ========== ========= ========= =========
For the 28 Weeks Ended ----------------------------------------------------- September 10, 2005 September 11, 2004 ---------------------- ---------------------- U.S. Canada U.S. Canada --------- --------- -------- --------- Service cost $ 182 $ 75 $ 154 $ 129 Interest cost 646 270 659 348 Amortization of (gain) loss (150) 118 (194) 186 Prior service gain (725) (148) (725) (277) --------- --------- -------- --------- Net postretirement benefits (income) cost $ (47) $ 315 $ (106) $ 386 ========== ========= ========= =========
13. STOCK BASED COMPENSATION In December 2004, the FASB issued FAS 123R. FAS 123R is a revision of FAS No. 123, as amended, "Accounting for Stock-Based Compensation" ("FAS 123") and supersedes Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." FAS 123R eliminates the alternative to use the intrinsic value method of accounting that was provided in FAS 123, which generally resulted in no compensation expense recorded in the financial statements related to the issuance of equity awards to employees. FAS 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. FAS 123R establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all companies to apply a fair-value-based measurement method in accounting for generally all share-based payment transactions with employees. On February 27, 2005 (the first day of our fiscal 2005 fiscal year), our Company adopted FAS 123R. While the provisions of FAS 123R are not required to be effective until the first annual reporting period that begins after June 15, 2005, we elected to adopt FAS 123R before the required effective date. Our Company adopted FAS 123R using a modified prospective application, as permitted under FAS 123R. Accordingly, prior period amounts have not been restated. Under this application, we are required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Prior to the adoption of FAS 123R, we applied APB 25 to account for our stock-based awards. Under APB 25, we generally only recorded stock-based compensation expense for our performance stock options issued under our 1998 Long Term Incentive and Share Award Plan and common stock issued under our 2004 Non-Employee Director Compensation Plan. Under the provisions of APB 25, we were not required to recognize compensation expense for the cost of stock options. Beginning with our fiscal 2005 year, with the adoption of FAS 123R, we recorded stock-based compensation expense for the cost of stock options. 35 The following table details the effect on net income and earnings per share had stock-based compensation expense been recorded for each quarter of fiscal 2004 based on the fair value method under FAS 123R. Net loss for the year ended February 26, 2005 would have been $2.6 million higher, at $190.7 million, had share-based compensation expense been accounted for under SFAS 123R, and net loss per basic & diluted share for the year ended February 26, 2005 would have been $4.94 under FAS 123R, rather than $4.88.
Quarter Ended Year Ended ------------------------------------------------------------------- ------------- June 19, 2004 Sept. 11, 2004 Dec. 4, 2004 Feb. 26, 2005 Feb. 26, 2005 ------------- -------------- ------------ ------------- ------------- Net loss, as reported $ (42,846) $ (64,202) $ (75,343) $ (5,707) $ (188,098) Add: Share-based compensation expense included in net loss under APB 25, net of tax - - - 1,617 1,617 Deduct: Net impact of SFAS 123R, net of tax (1,287) (858) (836) (1,199) (4,180) ----------- ----------- ---------- ----------- ----------- Pro-forma net loss $ (44,133) $ (65,060) $ (76,179) $ (5,289) $ (190,661) =========== =========== ========== =========== =========== Net loss per common share: Basic & diluted, as reported $ (1.11) $ (1.67) $(1.96) $(0.15) $(4.88) Basic & diluted, pro-forma $ (1.15) $ (1.69) $(1.98) $(0.14) $(4.94)
During the 12 and 28 weeks ended September 10, 2005, compensation expense related to share-based incentive plans was $2.7 million and $4.9 million, after tax, compared to nil during the 12 and 28 weeks ended September 11, 2004. Included in share-based compensation expense recorded during the 12 and 28 weeks ended September 10, 2005 was $0.5 and $1.4 million, respectively, related to expensing of stock options, $1.0 million and $2.2 million, respectively, relating to expensing of restricted stock, $1.1 million relating to the immediate vesting of certain stock options during the second quarter ended September 10, 2005, $0.08 million and $0.2 million, respectively, relating to expensing of common stock to be granted to our Board of Directors at the Annual Meeting of Stockholders. There was no effect on the Consolidated Statement of Cash Flows from the adoption of FAS 123R as we adopted FAS 123R using the modified prospective application and did not grant any new stock options during the 28 weeks ended September 10, 2005. At September 10, 2005, we had two stock-based compensation plans. The general terms of each plan, the method of estimating fair value for each plan and fiscal 2005 activity is reported below. I. The 1998 Long Term Incentive and Share Award Plan: This plan provides for the granting of 5,000,000 shares in the form of options, SAR's, performance units or stock awards to our Company's officers and key employees. Options and SAR's issued under this plan vest 25% on each anniversary date of issuance over a four year period. Performance restricted stock units issued under this plan are earned based on our Company achieving in Fiscal 2007 a profit after taxes, after adjusting for specific matters which our Company considers to be of a non-operating nature, with an outlook for continued, sustainable profitability on the same basis. The shares will vest 50% based on achievement of a net profit in fiscal 2007 and 50% based on achievement of a net profit in fiscal 2008. However, if our Company achieves profitability in fiscal 2006, the shares will be earned and vesting will commence in fiscal 2006 in one-third increments, based on achievement of profitability in each year and the outlook for continued, sustainable profitability. 36 The stock option awards under The 1998 Long Term Incentive and Share Award Plan are granted at the fair market value of the Company's common stock at the date of grant. Fair value calculated under SFAS 123 is used to recognize expense upon adoption of SFAS 123R. Fair values for each grant were estimated using a Black-Scholes valuation model which utilized assumptions as detailed in the following table for expected life based upon historical option exercise patterns, historical volatility for a period equal to the stock option's expected life, and risk-free rate based on the U.S. Treasury constant maturities in effect at the time of grant. During the 12 and 28 weeks ended September 10, 2005, our Company did not grant any stock options under this plan. The following assumptions were in place during the 12 and 28 weeks ended September 11, 2004:
12 weeks ended 28 weeks ended Sept. 11, 2004 Sept. 11, 2004 -------------- -------------- Expected life 7 years 7 years Volatility 53% 53% Risk-free interest rate range 3.82% - 4.37% 3.20% - 4.41%
The SAR awards under The 1998 Long Term Incentive and Share Award Plan were granted at the fair market value of the Company's common stock at the date of grant. Performance restricted stock units issued under The 1998 Long Term Incentive and Share Award Plan are granted at the fair market value of the Company's common stock at the date of grant, adjusted by an estimated forfeiture rate. Stock options The following is a summary of the stock option activity during the 28 weeks ended September 10, 2005:
Weighted Weighted Average Average Remaining Aggregate Exercise Contractual Intrinsic Shares Price Term (years) Value ------------- ------------- ------------ ------------- Outstanding at February 26, 2005 4,464,134 $ 14.53 Granted - - Canceled or expired (353,109) 20.43 Exercised (2,024,672) 10.46 ------------- ---------- Outstanding at Sept. 10, 2005 2,086,353 $ 17.49 5.5 $ 20,932 ============= ========== ============= =========== Exercisable at: Sept. 10, 2005 1,471,547 $ 21.53 4.7 $ 8,812 ============= =========== Nonvested at: Sept. 10, 2005 614,806 $ 7.81 7.5 $ 12,120 ============= ===========
The total intrinsic value of options exercised during the 28 weeks ended September 10, 2005 was $34.5 million. As of September 10, 2005, approximately $2.1 million, after tax, of total unrecognized compensation expense related to unvested stock option awards will be recognized over a weighted average period of 1.5 years. 37 The amount of cash received from the exercise of stock options was approximately $21.2 million. There was no related tax benefit recorded in the first and second quarter of fiscal 2005 as we adopted FAS 123R using the modified prospective application and did not grant any new stock options during the 12 and 28 weeks ended September 10, 2005. SAR's The following is a summary of the SAR's activity during the 28 weeks ended September 10, 2005: Weighted Average Exercise Shares Price ------ -------------- Outstanding at February 26, 2005 12,500 $ 31.63 Granted - - Canceled or expired (12,500) 31.63 Exercised - - ------- ------------- Outstanding at Sept. 10, 2005 - $ - ======= ============= Performance Restricted Stock Units During the 12 and 28 weeks ended September 10, 2005, our Company granted 150,000 and 1,750,000 shares of performance restricted stock units to selected employees, respectively, for a total grant date fair value of $21.7 million. Approximately $14.2 million of unrecognized fair value compensation expense relating to these performance restricted stock units is expected to be recognized through fiscal 2008 based on estimates of attaining vesting criteria. The following is a summary of the performance restricted stock units activity during the 28 weeks ended September 10, 2005: Weighted Average Exercise Shares Price ------ -------------- Nonvested at February 26, 2005 - $ - Granted 1,750,000 12.38 Canceled or expired (332,500) 11.12 Exercised - - --------- ------------- Nonvested at Sept. 10, 2005 1,417,500 $ 12.67 ========= ============= II. 2004 Non-Employee Director Compensation Plan: This plan provides for the annual grant of Company common stock equivalent to $45 to members of our Board of Directors. The $45 grant of common stock shall be made on the first business day following the Annual Meeting of Stockholders held in July of each year. The number of shares of our Company's $1.00 common stock granted annually to each non-employee Director will be based on the closing price of the common stock on the New York Stock Exchange, as reported in the Wall Street Journal on the date of grant. Only whole shares will be granted; any remaining amounts will be paid in cash as promptly as practicable following the date of grant. This plan replaced The 1994 Stock Option Plan for the Board of Directors which provided for the granting of 100,000 stock options at the fair value of our common stock at the date of grant to members of our Board of Directors. One-third of the options granted under The 1994 Stock Option Plan for the Board of Directors on a given date vested on each anniversary date of issuance over a 3 year period. 38 14. INCOME TAXES The income tax provision recorded for the 28 weeks ended September 10, 2005 and September 11, 2004 reflects our estimated expected annual tax rates applied to our respective domestic and foreign financial results. SFAS No. 109 "Accounting for Income Taxes" ("SFAS 109") provides that a deferred tax asset is recognized for temporary differences that will result in deductible amounts in future years and for carryforwards. In addition, SFAS 109 requires that a valuation allowance be recognized if, based on existing facts and circumstances, it is more likely than not that some portion or all of the deferred tax asset will not be realized. Based upon our continued assessment of the realization of our U.S. net deferred tax asset and our historic cumulative losses, we concluded that it was appropriate to record a valuation allowance in an amount that would reduce our net U.S. deferred tax asset to zero. For the 12 and 28 weeks ended September 10, 2005, the valuation allowance was decreased by $260.5 million and $257.0 million, respectively, as compared to increased by $27.0 million and $40.3 million during the 12 and 28 weeks ended September 11, 2004, respectively. To the extent that our U.S. operations generate sufficient taxable income in future periods, we will reverse the income tax valuation allowance. In future periods, we will continue to record a valuation allowance against net deferred tax assets that are created by U.S. losses until such time as the certainty of future tax benefits can be reasonably assured. In October 2004, the U.S. government passed the "Homeland Investment Act" which allows companies to repatriate cash balances from their controlled foreign subsidiaries at a reduced tax rate. This is achieved by permitting a one time 85% dividends received deduction. As discussed in Note 4 - Divestiture of Our Businesses in Canada and the Midwestern United States, our Company completed the sale of our Canadian subsidiary to Metro, Inc. during the second quarter of fiscal 2005. As a result of this transaction, our Company repatriated $949.0 million from our foreign subsidiaries, of which $500.0 million is intended to qualify for the 85% dividends received deduction. Until such time as the taxing authorities have affirmed the adequacy of our Company's Domestic Reinvestment Plan, we have recorded a tax provision of $137.2 million for the potential disallowance of the 85% dividend received deduction. This amount was recorded in "Provision for (benefit from) income taxes" on our Consolidated Statements of Operations for the 12 and 28 weeks ended September 10, 2005 and in "Other non-current liabilities" in our Consolidated Balance Sheet at September 10, 2005. For the second quarter of fiscal 2005, our effective income tax rate of 21.3% changed from the effective income tax rate of 2.4% in the second quarter of fiscal 2004 as follows:
12 Weeks Ended -------------------------------------------------------------------- September 10, 2005 September 11, 2004 --------------------------------- --------------------------------- Tax Effective Tax (Provision) Effective Provision Tax Rate Benefit Tax Rate --------------- ---------------- --------------- ---------------- United States $ (154,045) 20.5% $ (1,035) 1.6% Canada (6,058) 0.8% 2,649 (4.0%) --------------- ---------------- ------------- ---------------- $ (160,103) 21.3% $ 1,614 (2.4%) =============== ================ =============== ================
39 The change in our effective tax rate was primarily due to the tax provisions we recorded in connection with (i.) our Company's Domestic Reinvestment Plan as discussed above and (ii.) the sale of our Canadian operations that occurred during the second quarter of fiscal 2005, in addition to the impact of the higher mix of Canadian income from continuing operations as a percentage of our Company's income (loss) from continuing operations in the second quarter of fiscal 2005 as compared to the second quarter of fiscal 2004. For the 28 weeks ended September 10, 2005, our effective income tax rate of 25.7% changed from the effective income tax rate of 3.8% for the 28 weeks ended September 11, 2004 as follows:
28 Weeks Ended -------------------------------------------------------------------- September 10, 2005 September 11, 2004 --------------------------------- --------------------------------- Effective Effective Tax Provision Tax Rate Tax Provision Tax Rate --------------- ---------------- --------------- ---------------- United States $ (155,429) 23.0% $ (2,415) 2.4% Canada (18,539) 2.7% (1,429) 1.4% --------------- ---------------- --------------- ---------------- $ (173,968) 25.7% $ (3,844) 3.8% =============== ================ =============== ================
The change in our effective tax rate was primarily due to the tax provisions we recorded in connection with (i.) our Company's Domestic Reinvestment Plan as discussed above and (ii.) the sale of our Canadian operations that occurred during the 28 weeks ended September 10, 2005, in addition to the impact of the higher mix of Canadian income from continuing operations as a percentage of our Company's income (loss) from continuing operations for the 28 weeks ended September 10, 2005 as compared to the 28 weeks ended September 11, 2004. At September 10, 2005 and February 26, 2005, we had a net current deferred tax asset which is included in "Prepaid expenses and other current assets" on our Consolidated Balance Sheet totaling $47.4 million and $10.7 million, respectively, and a net non-current deferred tax liability which is included in "Other non-current liabilities" on our Consolidated Balance Sheets totaling $47.4 million and $22.9 million, respectively. 15. OPERATING SEGMENTS Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our President and Chief Executive Officer. During the 12 and 28 weeks ended September 10, 2005 and September 11, 2004, we operated in three reportable segments: United States, Canada, and our investment in Metro, Inc. Our United States and Canadian segments are comprised of retail supermarkets. Our equity investment represents our economic interest in Metro, Inc. and is required to be reported as an operating segment in accordance with SFAS 131, "Disclosure about Segments of an Enterprise and Related Information" as our investment is greater than 10% of our Company's combined assets of all operating segments and we can exert significant influence over substantive operating decisions through our membership on Metro, Inc.'s Board of Directors and its committees and joint purchasing and supplier arrangements. The accounting policies for these segments are the same as those described in the summary of significant accounting policies included in our Fiscal 2004 Annual Report. We measure segment performance based upon income (loss) from operations. 40 Interim information on segments is as follows:
12 Weeks Ended 28 Weeks Ended ---------------------------------------- --------------------------------------- September 10, September 11, September 10, September 11, 2005 2004 2005 2004 ------------------ ------------------ ----------------- ----------------- Sales United States $ 1,598,085 $ 1,708,460 $ 3,828,003 $ 3,938,110 Canada * 570,164 782,099 1,723,879 1,832,748 ------------------ ------------------ ----------------- ----------------- Total Company $ 2,168,249 $ 2,490,559 $ 5,551,882 $ 5,770,858 ================== ================== ================= ================= Sales by category Grocery (1) $ 1,410,451 $ 1,625,208 $ 3,611,153 $ 3,780,163 Meat (2) 449,490 530,987 1,145,777 1,204,478 Produce (3) 307,010 334,364 793,654 786,217 Other (4) 1,298 - 1,298 - ------------------ ------------------ ----------------- ----------------- Total Company $ 2,168,249 $ 2,490,559 $ 5,551,882 $ 5,770,858 ================== ================== ================= =================
(1) The grocery category includes grocery, frozen foods, dairy, general merchandise/health and beauty aids, liquor, pharmacy and fuel. (2) The meat category includes meat, deli, bakery and seafood. (3) The produce category includes produce and floral. (4) Other includes sales from an information technology services agreement with Metro, Inc.
Depreciation and amortization United States $ 45,846 $ 47,432 $ 106,826 $ 109,385 Canada * 47 14,758 10,942 33,651 ------------------ ------------------ ----------------- ----------------- Total Company $ 45,893 $ 62,190 $ 117,768 $ 143,036 ================== ================== ================= ================= (Loss) income from operations United States $ (162,593) $ (24,887) $ (240,430) $ (43,319) Canada * 17,527 (13,965) 57,224 3,389 ------------------ ------------------ ----------------- ----------------- Total Company $ (145,066) $ (38,852) $ (183,206) $ (39,930) ================== =================== ================== ================== Income (loss) from continuing operations before income taxes United States $ 736,944 $ (48,088) $ 628,971 $ (94,983) Canada * 15,430 (18,072) 48,201 (7,182) Equity investment in Metro, Inc.** - - - - ------------------ ------------------ ----------------- ----------------- Total Company $ 752,374 $ (66,160) $ 677,172 $ (102,165) ================== ================== ================= ================= Capital expenditures United States $ 22,742 $ 28,521 $ 62,376 $ 71,462 Canada * 17,015 17,679 47,201 35,895 ------------------ ------------------ ----------------- ----------------- Total Company $ 39,757 $ 46,200 $ 109,577 $ 107,357 ================== ================== ================= ================= September 10, February 26, 2005 2005 ----------------- ----------------- Total assets United States $ 2,343,998 $ 1,958,566 Canada - 843,402 Equity investment in Metro, Inc. 327,026 - ----------------- ----------------- Total Company $ 2,671,024 $ 2,801,968 ================= =================
41 * As discussed in Note 4 - Divestiture of Our Businesses in Canada and the Midwestern United States, we sold our Canadian operations during the second quarter ended September 10, 2005; thus, we have included the operating results of our Canadian subsidiary through the date of the sale. ** There was no income (loss) from continuing operations before incomes taxes relating to our equity investment in Metro, Inc. for the 12 and 28 weeks ended September 10, 2005 as any equity earnings or losses are recorded on about a three-month lag period commencing in our third quarter of fiscal 2005. 16. HEDGE OF NET INVESTMENT IN FOREIGN OPERATIONS From time to time, we may enter hedging agreements in order to manage risks incurred in the normal course of business including forward exchange contracts to manage our exposure to fluctuations in foreign exchange rates. During the first quarter of fiscal 2005, we entered into a six month currency exchange forward contract totaling $900 million Canadian dollar notional value to hedge our net investment in our Canadian foreign operation against adverse movements in exchange rates. Our Company measures ineffectiveness based upon the change in forward exchange rates. In the second quarter of fiscal 2005 and upon completion of the sale of our Canadian operations, this forward contract was terminated prior to its expiration. Upon settlement, the effective portion of this net investment hedge contract resulted in a loss, after tax, of approximately $12.8 million and $21.1 million during the 12 and 28 weeks ended September 10, 2005, respectively, and was recognized as an offset to the gain recorded in connection with the sale of our Canadian subsidiary as discussed in Note 4 - Divestiture of Our Businesses in Canada and the Midwestern United States. The gain was recorded in "Gain on sale of Canadian operations" in our Consolidated Statements of Operations for the 12 and 28 weeks ended September 10, 2005. In addition, the amount excluded from the measure of effectiveness on this net investment hedge amounted to $12.5 million and $15.4 million, before income taxes, and was recorded as "Store operating, general and administrative expense" in our Consolidated Statements of Operations for the 12 and 28 weeks ended September 10, 2005, respectively. 17. COMMITMENTS AND CONTINGENCIES We are subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. We are also subject to certain environmental claims. While the outcome of these claims cannot be predicted with certainty, Management does not believe that the outcome of any of these legal matters will have a material adverse effect on our consolidated results of operations, financial position or cash flows. 42 18. SUBSEQUENT EVENTS During the second quarter ended September 10, 2005 and due to the sale of our Canadian operations as discussed in Note 4 - Divestiture of Our Businesses in Canada and the Midwestern United States, our $400 million secured Revolving Credit Agreement was amended, reducing the Canadian portion of the agreement by $65 million. At September 10, 2005, we had a $335 million Revolving Credit Agreement with a syndicate of lenders enabling us to borrow funds on a revolving basis for short-term borrowings and provide working capital as needed. On October 14, 2005, the Revolving Credit Agreement was terminated. Concurrently, we entered into new, cash collateralized, Letter of Credit Agreement that enables us to issue letters of credit up to $200 million. We are also in the process of negotiating an additional $150 million revolving credit agreement that will be collateralized by inventory, certain accounts receivable and pharmacy scripts. We expect to complete the new revolving credit agreement by early November 2005. 43 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION This Management's Discussion and Analysis describes matters considered by Management to be significant to understanding the financial position, results of operations and liquidity of our Company, including a discussion of the results of continuing operations as well as liquidity and capital resources. These items are presented as follows: o Basis of Presentation - a discussion of our Company's results during the 12 and 28 weeks ended September 10, 2005 and September 11, 2004. o Restatement of Previously Issued Financial Statements - a discussion of our Company's restatement of previously issued financial statements resulting from a correction in our accounting for leases. o Overview - a general description of our business; the value drivers of our business; measurements; opportunities; challenges and risks; and initiatives. o Outlook - a discussion of certain trends or business initiatives for the remainder of fiscal 2005 that Management wishes to share with the reader to assist in understanding the business. o Review of Continuing Operations and Liquidity and Capital Resources -- a discussion of the following: - Results for the 12 weeks ended September 10, 2005 compared to the 12 weeks ended September 11, 2004 and results for the 28 weeks ended September 10, 2005 compared to the 28 weeks ended September 11, 2004; - Our Company's Asset Disposition Initiatives; and - Current and expected future liquidity. o Market Risk - a discussion of the impact of market changes on our consolidated financial statements. o Critical Accounting Estimates -- a discussion of significant estimates made by Management. BASIS OF PRESENTATION The accompanying consolidated financial statements of The Great Atlantic & Pacific Tea Company, Inc. for the 12 and 28 weeks ended September 10, 2005 and September 11, 2004 are unaudited and, in the opinion of management, contain all adjustments that are of a normal and recurring nature necessary to present fairly the financial position and results of operations for such periods. The consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in our Fiscal 2004 Annual Report to Stockholders on Form 10-K. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements include the accounts of our Company, all majority-owned subsidiaries, and franchise operations. Our Company uses the equity method of accounting for our investment in and earnings or losses of Metro, Inc. as we can exert significant influence over substantive operating decisions made by Metro, Inc. through our membership on Metro, Inc.'s Board of Directors and its committees and joint purchasing and supplier arrangements. Restatement of Previously Issued Financial Statements As discussed in Note 2 - Restatement of Previously Issued Financial Statements, our Company has restated our Consolidated Statements of Operations and Cash Flows for the 12 and 28 weeks ended September 11, 2004 for corrections in our accounting for leases. Readers of the financial statements should read this restated information as opposed to the previously filed information. All referenced amounts for prior periods reflect the balances and amounts on a restated basis. 44 OVERVIEW THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., based in Montvale, New Jersey, operates conventional supermarkets, combination food and drug stores and discount food stores in 10 U.S. states and the District of Columbia. Our Company's business consists strictly of its retail grocery operations, comprised of 417 stores as of September 10, 2005. Commencing in the second half of fiscal 2005, our UNITED STATES retail operations are now organized in three regions: North Region, operating A&P supermarkets in New York, The Food Emporium in Westchester County, N.Y, A&P/Super Foodmart stores in Connecticut, and all Food Basics discount stores; Central Region, operating all Waldbaum's supermarkets, The Food Emporium in Manhattan, and the Farmer Jack supermarkets in Michigan; and South Region, operating Super Fresh supermarkets in Baltimore and Philadelphia, A&P supermarkets in New Jersey and Sav-A-Center supermarkets in the greater New Orleans market. During the second quarter of fiscal 2005, we made significant progress in the restructuring of the Company and other strategic measures geared to position the business for turnaround and future growth. In August, we completed the sale of A&P Canada to Metro, Inc., resulting in proceeds of $1.5 billion to our Company, including a significant investment position in Metro, Inc. which combined with our former Canadian operations forms one of the strongest and most profitable retail entities in North America. The cash proceeds from the sale are being utilized primarily to reduce debt and strengthen our balance sheet, and to finance the ongoing conversion of our store network. Our remaining Company was unprofitable in the second quarter, with sales and earnings progress challenged by a difficult selling and operating environment throughout our key markets. Both consumer spending and product and distribution costs were affected negatively by steadily rising gasoline prices throughout the period, resulting in stiff competition as retailers sought to protect their business under those circumstances. In order to strengthen our ability to deal with these challenges, we maintained our strict focus on expense reduction and cost control. On July 20, 2005, our Company announced changes in senior executive management responsibility, in alignment with the new scope and structure of the business resulting from the sale of A&P Canada. Christian Haub, previously Chairman and Chief Executive Officer, was elected Executive Chairman of our Company. Eric Claus, previously President and CEO of A&P Canada, was elected President and Chief Executive Officer of the Company. Brian Piwek, previously President and Chief Operating Officer of the Company, retired effective July 31, 2005. On September 6, 2005, our Company announced that Mitchell P. Goldstein will resign from his position as Executive Vice President, Chief Financial Officer & Secretary of our Company, effective December 31, 2005 (or an earlier date if decided upon by our Company). Our Company also announced that upon Mitchell P. Goldstein's resignation from our Company, Brenda Galgano, currently Senior Vice President and Corporate Controller, will assume the role of Senior Vice President & Chief Financial Officer. 45 OUTLOOK Our primary objectives in the third quarter and beyond are as follows: o Improve store operations and merchandising effectiveness, including the conversion of stores to the new Fresh and Discount retail format. o Realign specific units such as our Midwest and Supply & Logistics operations. o Restructure the organization, to align functionality and administrative and other overheads to the needs of our smaller U.S. retail business. In addition to the emphasis on those major initiatives, day-to-day expense reduction remains a high priority as we continue to seek and exploit additional means of improving labor productivity, and lowering administrative, advertising, occupancy and operating expenses. As our rebuilding efforts proceed, we remain conservative regarding anticipated results in the day-to-day business. Our operations in New Orleans and surrounding areas were shut down by Hurricane Katrina, and as of this writing, we are in the process of reopening stores, where possible, and assessing overall damage and recovery prospects. The likely impact will be continued stiff competition in our markets, as retailers strive to keep costs stable while marketing aggressively to protect market share until conditions improve. We are confident that our strong financial condition positions us well to compete as needed to maintain our presence, while we accelerate the renewal of our store network. Our primary goal remains the achievement of sustainable profitability by Fiscal 2007, and the pursuit of growth opportunities afterward, and all of our efforts are being focused toward achievement of those objectives. Various factors could cause us to fail to achieve these goals. These include, among others, the following: o Actions of competitors could adversely affect our sales and future profits. The grocery retailing industry continues to experience fierce competition from other food retailers, super-centers, mass merchandiser clubs, warehouse stores, drug stores and restaurants. Our continued success is dependent upon our ability to effectively compete in this industry and to reduce operating expenses, including managing health care and pension costs contained in our collective bargaining agreements. The competitive practices and pricing in the food industry generally and particularly in our principal markets may cause us to reduce our prices in order to gain or maintain share of sales, thus reducing margins. o Changes in the general business and economic conditions in our operating regions, including the rate of inflation, population growth, the nature and extent of continued consolidation in the food industry and employment and job growth in the markets in which we operate, may affect our ability to hire and train qualified employees to operate our stores. This would negatively affect earnings and sales growth. General economic changes may also affect the shopping habits and buying patterns of our customers, which could affect sales and earnings. We have assumed economic and competitive situations will not worsen in fiscal 2005 and 2006. However, we cannot fully foresee the effects of changes in economic conditions, inflation, population growth, customer shopping habits and the consolidation of the food industry on A&P's business. 46 o Our capital expenditures could differ from our estimate if we are unsuccessful in acquiring suitable sites for new stores, if development and remodel costs vary from those budgeted. o Our ability to achieve our profit goals will be affected by (i.) our success in executing category management and purchasing programs that we have underway, which are designed to improve our gross margins and reduce product costs while making our product selection more attractive to consumers, (ii.) our ability to achieve productivity improvements and shrink reduction in our stores, (iii.) our success in generating efficiencies in our supporting activities, and (iv.) our ability to eliminate or maintain a minimum level of supply and/or quality control problems with our vendors. o The vast majority of our employees are members of labor unions. While we believe that our relationships with union leaderships and our employees are satisfactory, we operate under collective bargaining agreements which periodically must be renegotiated. In the coming year, we have several contracts expiring and under negotiation. In each of these negotiations rising health care and pension costs will be an important issue, as will the nature and structure of work rules. We are hopeful, but cannot be certain, that we can reach satisfactory agreements without work stoppages in these markets. However, the actual terms of the renegotiated collective bargaining agreements, our future relationships with our employees and/or a prolonged work stoppage affecting a substantial number of stores could have a material effect on our results. o The amount of contributions made to our pension and multi-employer plans will be affected by the performance of investments made by the plans, the extent to which trustees of the plans reduce the costs of future service benefits as well as our internal execution of our overall company strategic initiatives which could lead to further pension withdrawal liabilities. o We have estimated our exposure to claims, administrative proceedings and litigation and believe we have made adequate provisions for them, where appropriate. Unexpected outcomes in both the costs and effects of these matters could result in an adverse effect on our earnings. Other factors and assumptions not identified above could also cause actual results to differ materially from those set forth in the forward-looking information. Accordingly, actual events and results may vary significantly from those included in or contemplated or implied by forward-looking statements made by us or our representatives. 47 RESULTS OF CONTINUING OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES Our consolidated financial information presents the results related to our operations of discontinued businesses separate from the results of our continuing operations. The discussion and analysis that follows focus on continuing operations. As further discussed in Note 4 - Divestiture of Our Businesses in Canada and the Midwestern United States, we sold our Canadian operations to Metro, Inc. at the close of business on August 13, 2005. Therefore, comparative information relating to our Canadian business that follows was comprised of 8 weeks and 12 weeks during the second quarters ended September 10, 2005 and September 11, 2004, respectively, and 24 weeks and 28 weeks during the year to date periods ended September 10, 2005 and September 11, 2004, respectively. 12 WEEKS ENDED SEPTEMBER 10, 2005 COMPARED TO THE 12 WEEKS ENDED SEPTEMBER 11, 2004 OVERALL Sales for the second quarter of fiscal 2005 were $2.2 billion compared to $2.5 billion with the second quarter of fiscal 2004; comparable store sales, which includes stores that have been in operation for two full fiscal years and replacement stores, decreased -0.6%. This decrease in comparable store sales excludes the impact of sales from the 28 stores that were effected by Hurricane Katrina as those sales are not considered comparable year over year. Loss from continuing operations decreased from $64.5 million for the second quarter of fiscal 2004 to income from continuing operations of $592.3 million for the second quarter of fiscal 2005. Net income per share - basic and diluted for the second quarter of fiscal 2005 was $14.64 and $14.40, respectively, compared to a net loss per share - basic and diluted of $1.67 for the second quarter of fiscal 2004.
12 Weeks 12 Weeks Ended Ended (Unfavorable) / Sept. 10, 2005 Sept. 11, 2004 Favorable % Change ---------------------- -------------------- -------------------- --------- Sales $ 2,168.2 $ 2,490.6 $ (322.4) (12.9%) (Decrease) increase in comparable store sales (0.6%) 0.1% NA NA Income (loss) from continuing operations 592.3 (64.5) 656.8 >100.0% (Loss) income from discontinued operations (0.3) 0.3 (0.6) >100.0% Net income (loss) 592.0 (64.2) 656.2 >100.0% Net income (loss) per share - basic 14.64 (1.67) 16.31 >100.0% Net income (loss) per share - diluted 14.40 (1.67) 16.07 >100.0%
48 SALES Sales for the second quarter of fiscal 2005 of $2,168.2 million decreased $322.4 million or 12.9% from sales of $2,490.6 million for second quarter of fiscal 2004. The lower sales were due to a decrease in U.S. sales of $110.4 million and a decrease in Canadian sales of $212.0 million. The following table presents sales for each of our operating segments for the second quarter of fiscal 2005 and the second quarter of fiscal 2004:
12 Weeks Ended 12 Weeks Ended Sept. 10, 2005 Sept. 11, 2004 Decrease % Change ----------------- ----------------- ---------- ----------- United States $ 1,598.1 $ 1,708.5 $ (110.4) (6.5%) Canada 570.1 782.1 (212.0) (27.1) ----------------- ----------------- ---------- ----------- Total $ 2,168.2 $ 2,490.6 $ (322.4) (12.9%) ================= ================= ========== ===========
The following details the dollar impact of several items affecting the decrease in sales by operating segment from the second quarter of fiscal 2004 to the second quarter of fiscal 2005:
Impact of Impact of Foreign Comparable Impact of New Closed Exchange Store Hurricane Stores Stores Rate Sales Katrina Other Total ------------- ------------- -------------- ------------- ------------- ----------- ------------- United States $ 10.3 $ (89.8) $ - $ (16.0) $ (16.2) $ 1.3 $ (110.4) Canada 11.3 (37.7) 65.2 4.1 - (254.9) (212.0) ------------- ------------- -------------- ------------- ------------- ------------ ------------- Total $ 21.6 $ (127.5) $ 65.2 $ (11.9) $ (16.2) $ (253.6) $ (322.4) ============= ============= ============== ============= ============= ============ =============
The decrease in U.S. sales was primarily attributable to the closing of 50 stores since the beginning of the second quarter of fiscal 2004, of which 36 were closed in fiscal 2005, decreasing sales by $89.8 million, the decrease in comparable store sales for the second quarter of fiscal 2005 of $16.0 million or - -1.1% as compared with the second quarter of fiscal 2004, and the decrease in sales caused by the overall impact of Hurricane Katrina of $16.2 million. These decreases were partially offset by the opening or re-opening of 8 new stores since the beginning of the second quarter of fiscal 2004, of which 1 was opened or re-opened in fiscal 2005, increasing sales by $10.3 million, and the increase in sales relating to an information technology services agreement with Metro, Inc. of $1.3 million. Included in the 50 stores closed since the beginning of the second quarter of fiscal 2004 were 31 stores closed as part of the asset disposition initiative as discussed in Note 11 of our Consolidated Financial Statements. The decrease in Canadian sales was primarily attributable to the closure of 5 stores since the beginning of the second quarter of fiscal 2004, of which 1 was closed in fiscal 2005, decreasing sales by $37.7 million and the sale of our Canadian operations that resulted in the inclusion of 8 weeks of sales during the second quarter of fiscal 2005 as compared to 12 weeks during the second quarter of fiscal 2004, decreasing sales by $254.9 million. These decreases were partially offset by the opening or re-opening of 7 stores since the beginning of the second quarter of fiscal 2004, of which 1 was opened or re-opened in fiscal 2005, increasing sales by $11.3 million, the favorable effect of the Canadian exchange rate, which increased sales by $65.2 million, and the increase in comparable store sales for the second quarter of fiscal 2005 of $4.1 million or 0.8% for Company-operated stores and franchised stores combined, as compared to the second quarter of fiscal 2004. Average weekly sales per supermarket for the U.S. were approximately $324,800 for the second quarter of fiscal 2005 versus $325,500 for the corresponding period of the prior year, a decrease of 0.2% primarily due to negative comparable store sales partially offset by the impact of closing smaller stores. Average weekly sales per supermarket for Canada were approximately $298,500 for the second quarter of fiscal 2005 versus $277,200 for the corresponding period of the prior year, an increase of 7.7%. This increase was primarily due to the increase in the Canadian exchange rate and higher comparable store sales. 49 GROSS MARGIN The following table presents gross margin dollar results and gross margin as a percentage of sales by operating segment for the second quarter of fiscal 2005 as compared to the second quarter of fiscal 2004. Gross margin as a percentage of sales increased 51 basis points to 28.44% for the second quarter of fiscal 2005 from 27.93% for the second quarter of fiscal 2004. This 51 basis point increase was caused primarily by the closure of stores in our Midwestern U.S. business as discussed in Note 11 - Asset Disposition Initiatives which had a lower gross margin rate. We believe the impact on margin for changes in costs and special reductions was not significant.
12 Weeks Ended 12 Weeks Ended September 10, 2005 September 11, 2004 ---------------------------------------- ----------------------------------------- Gross Margin Rate to Sales% Gross Margin Rate to Sales% -------------- --------------- -------------- ----------------- United States $ 480.2 30.05% $ 506.8 29.66% Canada 136.5 23.94 188.7 24.13 -------------- --------------- -------------- ----------------- Total $ 616.7 28.44% $ 695.5 27.93% ================== =============== ============== =================
The following table details the dollar impact of several items affecting the gross margin dollar increase (decrease) from the second quarter of fiscal 2004 to the second quarter of fiscal 2005:
Sales Volume Gross Margin Rate Exchange Rate Total ------------- ----------------- ------------- ----------- United States $ (32.7) $ 6.1 $ - $ (26.6) Canada (63.4) (1.0) 12.2 (52.2) ------------- --------------- ------------ ----------- Total $ (96.1) $ 5.1 $ 12.2 $ (78.8) ============= =============== ============ ===========
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE The following table presents store operating, general and administrative expense ("SG&A"), by operating segment, in dollars and as a percentage of sales for the second quarter of fiscal 2005 compared with the second quarter of fiscal 2004. SG&A expense was $761.7 million or 35.13% for the second quarter of fiscal 2005 as compared to $734.4 million or 29.49% for the second quarter of fiscal 2004.
12 Weeks Ended 12 Weeks Ended Sept. 10, 2005 Sept. 11, 2004 --------------------------------------- -------------------------------------- SG&A Rate to Sales% SG&A Rate to Sales% -------------- --------------- -------------- -------------- United States $ 642.8 40.22% $ 531.7 31.12% Canada 118.9 20.85 202.7 25.92 -------------- --------------- -------------- -------------- Total $ 761.7 35.13% $ 734.4 29.49% ============== =============== ============== ==============
50 The increase in SG&A for the U.S. of $111.1 million (910 basis points) for the second quarter ended September 10, 2005 as compared to September 11, 2004 primarily related to costs we recorded (i.) in connection with the closing of our owned warehouses in Edison, New Jersey and the Bronx, New York of $17.7 million (111 basis points) that will not be sold as part of the sale of our U.S. distribution operations and some warehouse facilities and related assets to C&S Wholesale Grocers as discussed in Note 6 - Sale of Our U.S. Distribution Operations and Warehouses; (ii.) relating to the divestiture of our Midwestern U.S. business as discussed in Note 11 - Asset Disposition Initiatives of $70.2 million (439 basis points); (iii.) relating to the cash tender offer completed during the second quarter of fiscal 2005, as discussed in Note 5 - Tender Offer and Repurchase of 7.75% Notes Due 2007 and 9.125% Senior Notes Due 2011 of $29.5 million (184 basis points); (iv.) relating to the long-lived assets impairment charge for one of our U.S. asset groups as discussed in Note 9 - Valuation of Long-Lived Assets of $9.6 million (60 basis points) and (v.) relating to the settlement of our net investment hedge as discussed in Note 16 - Hedge of Net Investment in Foreign Operations of $12.5 million (78 basis points). These increases in SG&A were partially offset by higher gains on the sale of certain of our assets of $12.7 million (79 basis points) during the second quarter of fiscal 2005 as compared to the second quarter of fiscal 2004. The decrease in SG&A in Canada of $83.8 million (507 basis points) was primarily due to the inclusion of 8 weeks of costs in the second quarter of fiscal 2005 as compared to 12 weeks in the second quarter of fiscal 2004, in addition to (i.) lower depreciation expense of $11.2 million (196 basis points) as the Canadian assets were sold during the second quarter of fiscal 2005 as discussed in Note 4 - - Divestiture of Our Businesses in Canada and the Midwestern United States, and (ii.) the absence of costs relating to the settlement of the Canadian lawsuit of $24.8 million (317 basis points) which were included in the second quarter of fiscal 2004. These decreases were partially offset by the increase in the Canadian exchange rate of $14.8 million (260 basis points). During the 12 weeks ended September 10, 2005 and September 11, 2004, we recorded impairment losses on long-lived assets as follows:
12 weeks ended Sept. 10, 2005 12 weeks ended Sept. 11, 2004 ------------------------------- ------------------------------ U.S. Canada Total U.S. Canada Total --------- ---------- --------- -------- ---------- -------- Impairments due to closure or conversion in the normal course of business $ 1,024 $ - $ 1,024 $ 1,679 $ - $ 1,679 Impairments due to unrecoverable assets 9,612 - 9,612 - - - Impairments related to the divestiture of the Midwestern U.S. business (1) 6,735 - 6,735 - - - Impairments related to the sale of U.S. distribution operations and warehouses (2) 2,779 - 2,779 - - - --------- ---------- --------- -------- ---------- -------- Total impairments $ 20,150 $ - $ 20,150 $ 1,679 $ - $ 1,679 ========= ========== ========= ======== ========== ========
(1) Refer to Note 11 - Asset Disposition Initiatives (2) Refer to Note 6 - Sale of our U.S. Distribution Operations and Warehouses The effects of changes in estimates of useful lives were not material to ongoing depreciation expense. If current operating levels and trends continue, there may be additional future impairments on long-lived assets, including the potential for impairment of assets that are held and used. GAIN ON SALE OF CANADIAN OPERATIONS As further discussed in Note 4 - Divestiture of Our Businesses in Canada and the Midwestern United States, we sold our Canadian operations to Metro, Inc. at the close of business on August 13, 2005. As a result of this sale, we recorded a pretax gain of $919.1 million ($766.3 million after tax) during the 12 weeks ended September 10, 2005. 51 INTEREST EXPENSE Interest expense of $25.3 million for the second quarter of fiscal 2005 decreased from the prior year amount of $27.7 million primarily due to (i.) lower interest expense of $0.5 million relating to our 7.75% Notes due April 15, 2007 due to the cash tender offer completed during the second quarter of fiscal 2005, (ii.) a decrease in capitalized interest of $0.2 million due to mainly a reduction in new store builds, and (iii.) lower interest expense of $1.0 million relating to our Canadian operations due to the inclusion of its operating results for 8 weeks in the second quarter of fiscal 2005 as compared to 12 weeks in the second quarter of 2004 as a result of its sale. INCOME TAXES The provision for income taxes from continuing operations for the second quarter of fiscal 2005 was $160.1 million (a $154.0 million provision for our U.S. operations and a $6.1 million provision for our Canadian operations) compared to a benefit from income taxes of $1.6 million (a $1.0 million provision for our U.S. operations and a $2.6 million benefit for our Canadian operations). Consistent with prior year, we continue to record a valuation allowance against our U.S. net deferred tax assets. For the second quarter of fiscal 2005, our effective income tax rate of 21.3% changed from the effective income tax rate of 2.4% in the second quarter of fiscal 2004 as follows:
12 Weeks Ended -------------------------------------------------------------------- September 10, 2005 September 11, 2004 --------------------------------- --------------------------------- Tax Effective Tax (Provision) Effective Provision Tax Rate Benefit Tax Rate --------------- ---------------- --------------- ---------------- United States $ (154,045) 20.5% $ (1,035) 1.6% Canada (6,058) 0.8% 2,649 (4.0%) --------------- ---------------- ------------- ---------------- $ (160,103) 21.3% $ 1,614 (2.4%) =============== ================ =============== ================
The change in our effective tax rate was primarily due to the tax provisions we recorded in connection with (i.) our Company's Domestic Reinvestment Plan as discussed above and (ii.) the sale of our Canadian operations that occurred during the second quarter of fiscal 2005, in addition to the impact of the higher mix of Canadian income from continuing operations as a percentage of our Company's income (loss) from continuing operations in the second quarter of fiscal 2005 as compared to the second quarter of fiscal 2004. DISCONTINUED OPERATIONS Beginning in the fourth quarter of fiscal year 2002 and in the early part of the first quarter of fiscal 2003, we decided to sell our operations located in Northern New England and Wisconsin, as well as our Eight O'Clock Coffee business. These asset sales are now complete. Although the Canadian operations have been sold as of September 10, 2005, the criteria necessary to classify the Canadian operations as discontinued have not been satisfied as our Company has retained significant continuing involvement in the operations of this business upon its sale through our equity investment in Metro, Inc. 52 The loss from operations of discontinued businesses, net of tax, for the second quarter of fiscal 2005 was $0.3 million as compared to a loss from operations of discontinued businesses, net of tax, of $0.3 million for the second quarter of fiscal 2004 and is detailed by business as follows:
12 Weeks Ended September 10, 2005 -------------------------------------------------------------------- Eight Northern O'Clock New England Kohl's Coffee Total --------------- ---------------- --------------- ---------------- LOSS FROM OPERATIONS OF DISCONTINUED BUSINESSES Sales $ - $ - $ - $ - Operating expenses (10) (245) (41) (296) --------------- ---------------- --------------- ---------------- Loss from operations of discontinued businesses, before tax (10) (245) (41) (296) Tax provision - - - - --------------- ---------------- --------------- ---------------- Loss from operations of discontinued businesses, net of tax $ (10) $ (245) $ (41) $ (296) =============== ================ =============== ================ Disposal related costs included in operating expenses above: Non-accruable closing costs $ (10) $ (93) $ (41) $ (144) Interest accretion on present value of future occupancy costs - (152) - (152) --------------- ---------------- --------------- ---------------- Total disposal related costs $ (10) $ (245) $ (41) $ (296) --------------- ---------------- --------------- ----------------
53
12 Weeks ended September 11, 2004 ----------------------------------------------------------------- Eight Northern O'Clock New England Kohl's Coffee Total --------------- ---------------- --------------- ------------- INCOME (LOSS) FROM OPERATIONS OF DISCONTINUED BUSINESSES Sales $ - $ - $ - $ - Operating expenses 699 (352) (3) 344 ------------- --------------- --------------- ------------- Income (loss) from operations of discontinued businesses, before tax 699 (352) (3) 344 Tax provision - - - - --------------- ---------------- --------------- ------------- Income (loss) from operations of discontinued businesses, net of tax $ 699 $ (352) $ (3) $ 344 =============== ================ =============== ============= Disposal related costs included in operating expenses above: Non-accruable closing costs $ 702 $ (192) $ (3) $ 507 Interest accretion on present value of future occupancy costs (3) (160) - (163) --------------- ---------------- --------------- ------------- Total disposal related costs $ 699 $ (352) $ (3) $ 344 --------------- ---------------- --------------- -------------
28 WEEKS ENDED SEPTEMBER 10, 2005 COMPARED TO THE 28 WEEKS ENDED SEPTEMBER 11, 2004 OVERALL Sales for the 28 weeks ended September 10, 2005 were $5.6 billion, compared with $5.8 billion for the 28 weeks ended September 11, 2004; comparable store sales, which includes stores that have been in operation for two full fiscal years and replacement stores, decreased -0.5%. This decrease in comparable store sales excludes the impact of sales from the 28 stores that were effected by Hurricane Katrina as those sales are not considered comparable year over year. Loss from continuing operations decreased from $106.0 million for the 28 weeks ended September 11, 2004 to income from continuing operations of $503.2 million for the 28 weeks ended September 10, 2005. Net income per share - basic and diluted for the 28 weeks ended September 10, 2005 was $12.64 and $12.47, respectively, compared to a net loss per share - basic and diluted of $2.78 for the 28 weeks ended September 11, 2004.
28 Weeks 28 Weeks Ended Ended (Unfavorable)/ Sept. 10, 2005 Sept. 11, 2004 Favorable % Change ---------------- ----------------- -------------- --------- Sales $ 5,551.9 $ 5,770.8 $ (218.9) (3.8%) (Decrease) increase in comparable store sales (0.5%) 0.6% NA NA Income (loss) from continuing operations 503.2 (106.0) 609.2 >100.0% Loss from discontinued operations (0.5) (1.0) 0.5 50.0% Net income (loss) 502.7 (107.0) 609.7 >100.0% Net income (loss) per share - basic 12.64 (2.78) 15.42 >100.0% Net income (loss) per share - diluted 12.47 (2.78) 15.25 >100.0%
54 SALES Sales for the 28 weeks ended September 10, 2005 of $5,551.9 million decreased $218.9 million or 3.8% from sales of $5,770.8 million for 28 weeks ended September 11, 2004. The lower sales were due to a decrease in U.S. sales of $110.1 million and a decrease in Canadian sales of $108.8 million. The following table presents sales for each of our operating segments for the 28 weeks ended September 10, 2005 and the 28 weeks ended September 11, 2004:
28 Weeks Ended 28 Weeks Ended Sept. 10, 2005 Sept. 11, 2004 Decrease % Change ----------------- ----------------- -------------- ---------- United States $ 3,828.0 $ 3,938.1 $ (110.1) (2.8%) Canada 1,723.9 1,832.7 (108.8) (5.9) ----------------- ----------------- -------------- ---------- Total $ 5,551.9 $ 5,770.8 $ (218.9) (3.8%) ================= ================= ============== ==========
The following details the dollar impact of several items affecting the decrease in sales by operating segment from the 28 weeks ended September 11, 2004 to the 28 weeks ended September 10, 2005:
Impact of Impact of Foreign Comparable Impact of New Closed Exchange Store Hurricane Stores Stores Rate Sales Katrina Other Total ------------- ------------- -------------- ------------- ------------- ----------- ------------- United States $ 42.4 $ (132.1) $ - $ (24.8) $ 3.1 $ 1.3 $ (110.1) Canada 47.6 (65.1) 162.0 1.6 - (254.9) (108.8) ------------- ------------- -------------- ------------- ------------- ------------ ------------- Total $ 90.0 $ (197.2) $ 162.0 $ (23.2) $3.1 $ (253.6) $ (218.9) ============= ============= ============== ============= ============= ============ =============
The decrease in U.S. sales was primarily attributable to the closing of 54 stores since the beginning of fiscal 2004, of which 36 were closed in fiscal 2005, decreasing sales by $132.1 million, and the decrease in comparable store sales for the 28 weeks ended September 10, 2005 of $24.8 million or -0.7% as compared with the 28 weeks ended September 11, 2004. These decreases were partially offset by the opening or re-opening of 17 new stores since the beginning of fiscal 2004, of which 1 was opened or re-opened in fiscal 2005, increasing sales by $42.4 million, the increase in sales caused by the overall impact of Hurricane Katrina of $3.1 million, and the increase in sales relating to an information technology services agreement with Metro, Inc. of $1.3 million. Included in the 54 stores closed since the beginning of fiscal 2004 were 31 stores closed as part of the asset disposition initiative as discussed in Note 11 of our Consolidated Financial Statements. The decrease in Canadian sales was primarily attributable to the closure of 14 stores since the beginning of fiscal 2004, of which 1 was closed in fiscal 2005, decreasing sales by $65.1 million, and the sale of our Canadian operations that resulted in the inclusion of 24 weeks of sales during the 28 weeks ended September 10, 2005 as compared to 28 weeks during the 28 weeks ended September 11, 2004, decreasing sales by $254.9 million. These decreases were partially offset by the opening or re-opening of 9 stores since the beginning of fiscal 2004, of which 1 was opened or re-opened in fiscal 2005, increasing sales by $47.6 million, the favorable effect of the Canadian exchange rate, which increased sales by $162.0 million, and the increase in comparable store sales for the 28 weeks ended September 10, 2005 of $1.6 million or 0.1% for Company-operated stores and franchised stores combined, as compared to the 28 weeks ended September 11, 2004. Average weekly sales per supermarket for the U.S. were approximately $323,600 for the 28 weeks ended September 10, 2005 versus $323,400 for the corresponding period of the prior year, an increase of 0.1% primarily due to the impact of closing smaller stores partially offset by negative comparable store sales. Average weekly sales per supermarket for Canada were approximately $298,600 for the 28 weeks ended September 10, 2005 versus $274,400 for the corresponding period of the prior year, an increase of 8.8%. This increase was primarily due to the increase in the Canadian exchange rate and higher comparable store sales. 55 GROSS MARGIN The following table presents gross margin dollar results and gross margin as a percentage of sales by operating segment for the 28 weeks ended September 10, 2005 as compared to the 28 weeks ended September 11, 2004. Gross margin as a percentage of sales increased 1 basis point to 28.00% for the 28 weeks ended September 10, 2005 from 27.99% for the 28 weeks ended September 11, 2004. We believe the impact on margin for changes in costs and special reductions was not significant.
28 Weeks Ended 28 Weeks Ended September 10, 2005 September 11, 2004 ---------------------------------------- --------------------------------------- Gross Margin Rate to Sales% Gross Margin Rate to Sales% -------------- --------------- -------------- --------------- United States $ 1,133.9 29.62% $ 1,173.4 29.80% Canada 420.7 24.40 442.1 24.12 -------------- --------------- -------------- --------------- Total $ 1,554.6 28.00% $ 1,615.5 27.99% ============== =============== ============== ===============
The following table details the dollar impact of several items affecting the gross margin dollar increase (decrease) from the 28 weeks ended September 11, 2004 to the 28 weeks ended September 10, 2005:
Sales Volume Gross Margin Rate Exchange Rate Total ---------------- ------------------ -------------- ------------- United States $ (32.8) $ (6.7) $ - $ (39.5) Canada (58.8) 4.5 32.9 (21.4) ---------------- ---------------- -------------- ------------- Total $ (91.6) $ (2.2) $ 32.9 $ (60.9) ================ ================ ============== =============
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE The following table presents store operating, general and administrative expense by operating segment, in dollars and as a percentage of sales for the 28 weeks ended September 10, 2005 compared with the 28 weeks ended September 11, 2004. SG&A expense was $1,737.8 million or 31.30% for the 28 weeks ended September 10, 2005 as compared to $1,655.4 million or 28.69% for the 28 weeks ended September 11, 2004.
28 Weeks Ended 28 Weeks Ended Sept. 10, 2005 Sept. 11, 2004 --------------------------------------- -------------------------------------- SG&A Rate to Sales% SG&A Rate to Sales% -------------- --------------- -------------- -------------- United States $ 1,374.3 35.90% $ 1,216.7 30.90% Canada 363.5 21.09 438.7 23.94 -------------- --------------- -------------- -------------- Total $ 1,737.8 31.30% $ 1,655.4 28.69% ============== =============== ============== ==============
56 The increase in SG&A for the U.S. of $157.6 million (500 basis points) for the 28 weeks ended September 10, 2005 as compared to the 28 weeks ended September 11, 2004 primarily related to costs we recorded (i.) in connection with the closing of our owned warehouses in Edison, New Jersey and the Bronx, New York of $64.7 million (169 basis points) that will not be sold as part of the sale of our U.S. distribution operations and some warehouse facilities and related assets to C&S Wholesale Grocers as discussed in Note 6 - Sale of Our U.S. Distribution Operations and Warehouses; (ii.) relating to the divestiture of our Midwestern U.S. business as discussed in Note 11 - Asset Disposition Initiatives of $85.0 million (222 basis points); (iii.) relating to the cash tender offer completed during the 28 weeks ended September 10, 2005, as discussed in Note 5 - Tender Offer and Repurchase of 7.75% Notes Due 2007 and 9.125% Senior Notes Due 2011 of $29.5 million (77 basis points); (iv.) relating to the long-lived assets impairment charge for one of our U.S. asset groups as discussed in Note 9 - Valuation of Long-Lived Assets of $9.6 million (25 basis points) and (v.) relating to the settlement of our net investment hedge as discussed in Note 16 - Hedge of Net Investment in Foreign Operations of $15.4 million (40 basis points). These increases in SG&A were partially offset by higher gains on the sale of certain of our assets of $28.5 million (75 basis points) during the 28 weeks ended September 10, 2005 as compared to the 28 weeks ended September 11, 2004. The decrease in SG&A in Canada of $75.2 million (285 basis points) is primarily due to the inclusion of 24 weeks of costs during the 28 weeks ended September 10, 2005 as compared to 28 weeks during the 28 weeks ended September 11, 2004, in addition to (i.) lower depreciation expense of $21.6 million (125 basis points) as the Canadian assets were sold during the 28 weeks ended September 10, 2005 as discussed in Note 4 - Divestiture of Our Businesses in Canada and the Midwestern United States, and (ii.) the absence of costs relating to the settlement of the Canadian lawsuit of $24.9 million (136 basis points), which were included in the 28 weeks ended September 10, 2004. These decreases were partially offset by the increase in the Canadian exchange rate of $27.8 million (161 basis points). During the 28 weeks ended September 10, 2005 and September 11, 2004, we recorded impairment losses on long-lived assets as follows:
28 weeks ended Sept. 10, 2005 28 weeks ended Sept. 11, 2004 ------------------------------- ------------------------------ U.S. Canada Total U.S. Canada Total --------- ---------- --------- -------- ---------- -------- Impairments due to closure or conversion in the normal course of business $ 1,024 $ 506 $ 1,530 $ 1,679 $ - $ 1,679 Impairments due to unrecoverable assets 9,612 - 9,612 - - - Impairments related to the divestiture of the Midwestern U.S. business (1) 6,861 - 6,861 - - - Impairments related to the sale of U.S. distribution operations and warehouses (2) 8,590 - 8,590 - - - --------- ---------- --------- -------- ---------- -------- Total impairments $ 26,087 $ 506 $ 26,593 $ 1,679 $ - $ 1,679 ========= ========= ========= ======== ========== ========
(1) Refer to Note 11 - Asset Disposition Initiatives (2) Refer to Note 6 - Sale of our U.S. Distribution Operations and Warehouses The effects of changes in estimates of useful lives were not material to ongoing depreciation expense. If current operating levels and trends continue, there may be additional future impairments on long-lived assets, including the potential for impairment of assets that are held and used. 57 GAIN ON SALE OF CANADIAN OPERATIONS As further discussed in Note 4 - Divestiture of Our Businesses in Canada and the Midwestern United States, we sold our Canadian operations to Metro, Inc. at the close of business on August 13, 2005. As a result of this sale, we recorded a pretax gain of $918.6 million ($765.8 million after tax) during the 28 weeks ended September 10, 2005. INTEREST EXPENSE Interest expense of $61.4 million for the 28 weeks ended September 10, 2005 decreased from the prior year amount of $62.1 million due primarily to (i.) lower interest expense of $0.6 million relating to our 7.75% Notes due April 15, 2007 due to the cash tender offer completed during the 28 weeks ended September 10, 2005, (ii.) a decrease in capitalized interest of $0.7 million due to mainly a reduction in new store builds, and (iii.) lower interest expense of $0.3 million relating to our Canadian operations due to the inclusion of its operating results for 20 weeks for the 28 weeks ended September 10, 2005 as compared to 28 weeks for the 28 weeks ended September 11, 2004 as a result of its sale, partially offset by higher interest expense resulting from our on-balance sheet long-term real estate liabilities, which includes sale leaseback of Company-owned properties entered into in the fourth quarter of fiscal 2003, of approximately $0.8 million and sale leaseback of locations for which we received landlord allowances of $0.4 million. INCOME TAXES The provision for income taxes from continuing operations for the 28 weeks ended September 10, 2005 was $174.0 million (a $155.4 million provision for our U.S. operations and a $18.6 million provision for our Canadian operations) compared to $3.8 million (a $2.4 million provision for our U.S. operations and a $1.4 million provision for our Canadian operations). Consistent with prior year, we continue to record a valuation allowance against our U.S. net deferred tax assets. For the 28 weeks ended September 10, 2005, our effective income tax rate of 25.7% changed from the effective income tax rate of 3.8% for the 28 weeks ended September 11, 2004 as follows:
28 Weeks Ended -------------------------------------------------------------------- September 10, 2005 September 11, 2004 --------------------------------- --------------------------------- Effective Effective Tax Provision Tax Rate Tax Provision Tax Rate --------------- ---------------- --------------- ---------------- United States $ (155,429) 23.0% $ (2,415) 2.4% Canada (18,539) 2.7% (1,429) 1.4% --------------- ---------------- --------------- ---------------- $ (173,968) 25.7% $ (3,844) 3.8% =============== ================ =============== ================
The change in our effective tax rate was primarily due to the tax provisions we recorded in connection with (i.) our Company's Domestic Reinvestment Plan as discussed above and (ii.) the sale of our Canadian operations that occurred during the 28 weeks ended September 10, 2005, in addition to the impact of the higher mix of Canadian income from continuing operations as a percentage of our Company's income (loss) from continuing operations for the 28 weeks ended September 10, 2005 as compared to the 28 weeks ended September 11, 2004. 58 DISCONTINUED OPERATIONS Beginning in the fourth quarter of fiscal year 2002 and in the early part of the first quarter of fiscal 2003, we decided to sell our operations located in Northern New England and Wisconsin, as well as our Eight O'Clock Coffee business. These asset sales are now complete. Although the Canadian operations have been sold as of September 10, 2005, the criteria necessary to classify the Canadian operations as discontinued have not been satisfied as our Company has retained significant continuing involvement in the operations of this business upon its sale. The loss from operations of discontinued businesses, net of tax, for the 28 weeks ended September 10, 2005 was $0.5 million as compared to a loss from operations of discontinued businesses, net of tax, of $1.0 million for the 28 weeks ended September 11, 2004 and is detailed by business as follows:
28 Weeks Ended September 10, 2005 -------------------------------------------------------------------- Eight Northern O'Clock New England Kohl's Coffee Total --------------- ---------------- --------------- ---------------- LOSS FROM OPERATIONS OF DISCONTINUED BUSINESSES Sales $ - $ - $ - $ - Operating expenses (37) (376) (51) (464) --------------- ---------------- --------------- ---------------- Loss from operations of discontinued businesses, before tax (37) (376) (51) (464) Tax provision - - - - --------------- ---------------- --------------- ---------------- Loss from operations of discontinued businesses, net of tax $ (37) $ (376) $ (51) $ (464) =============== ================ =============== ================ Disposal related costs included in operating expenses above: Non-accruable closing costs $ (37) $ (18) $ (51) $ (106) Interest accretion on present value of future occupancy costs - (358) - (358) --------------- ---------------- --------------- ---------------- Total disposal related costs $ (37) $ (376) $ (51) $ (464) --------------- ---------------- --------------- ----------------
59
28 Weeks ended September 11, 2004 ------------------------------------------------------------------ Eight Northern O'Clock New England Kohl's Coffee Total --------------- ---------------- --------------- -------------- INCOME (LOSS) FROM OPERATIONS OF DISCONTINUED BUSINESSES Sales $ - $ - $ - $ - Operating expenses 328 (774) (593) (1,039) ------------- ---------------- --------------- ------------- Income (loss) from operations of discontinued businesses, before tax 328 (774) (593) (1,039) Tax provision - - - - --------------- ---------------- --------------- ------------- Income (loss) from operations of discontinued businesses, net of tax $ 328 $ (774) $ (593) $ (1,039) =============== ================ =============== ============= Disposal related costs included in operating expenses above: Severance and benefits $ (326) $ - $ - $ (326) Non-accruable closing costs 660 (390) (593) (323) Interest accretion on present value of future occupancy costs (6) (384) - (390) --------------- ---------------- --------------- ------------- Total disposal related costs $ 328 $ (774) $ (593) $ (1,039) --------------- ---------------- --------------- -------------
ASSET DISPOSITION INITIATIVES OVERVIEW In fiscal 1998 and fiscal 1999, we announced a plan to close two warehouse facilities and a coffee plant in the U.S., a bakery plant in Canada and 166 stores including the exit of the Richmond, Virginia and Atlanta, Georgia markets (Project Great Renewal). In addition, during the third quarter of fiscal 2001, we announced that certain underperforming operations, including 39 stores (30 in the United States and 9 in Canada) and 3 warehouses (2 in the United States and 1 in Canada) would be closed and/or sold, and certain administrative streamlining would take place (2001 Asset Disposition). During the fourth quarter of fiscal 2003, we announced an initiative to close 6 stores and convert 13 stores to our Food Basics banner in the Detroit, Michigan and Toledo, Ohio markets (Farmer Jack Restructuring). In addition, during the first and second quarters of fiscal 2005, we initiated efforts to divest our businesses in the Midwestern United States and closed 31 of those stores (Divestiture of the Midwestern U.S. Business). Presented below is a reconciliation of the charges recorded on our Consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the 12 and 28 weeks ended September 10, 2005 and September 11, 2004. Present value ("PV") interest represents interest accretion on future occupancy costs which were recorded at present value at the time of the original charge. Non-accruable items represent charges related to the restructuring that are required to be expensed as incurred in accordance with SFAS 146 "Accounting for Costs Associated with Exit or Disposal Activities". 60
12 Weeks Ended September 10, 2005 -------------------------------------------------------------------------------------- Project 2001 Farmer Divestiture Great Asset Jack of Midwest Renewal Disposition Restructuring Operations Total ----------- ----------- --------------- ----------- ----------- BALANCE SHEET ACCRUALS Vacancy $ (2,570) $ - $ 3,360 $ 56,752 $ 57,542 PV interest 375 519 143 136 1,173 Severance - - - 782 782 Total accrued to ----------- ----------- --------------- ----------- ----------- balance sheets (2,195) 519 3,503 57,670 59,497 ----------- ----------- --------------- ----------- ----------- NON-ACCRUABLE ITEMS RECORDED ON STATEMENTS OF OPERATIONS Property writeoffs - - - 6,735 6,735 Inventory markdowns - - - 544 544 Loss on sale of property - - - 3,215 3,215 Gain on sale of pharmacy scripts - - - - - Closing costs - - - 2,525 2,525 ----------- ----------- --------------- ----------- ----------- Total non-accruable items - - - 13,019 13,019 ----------- ----------- --------------- ----------- ----------- Less PV interest (375) (519) (143) (136) (1,173) ----------- ----------- --------------- ----------- ----------- TOTAL AMOUNT RECORDED ON STATEMENTS OF OPERATIONS EXCLUDING PV INTEREST (2,570) - 3,360 70,553 71,343 =========== =========== =============== =========== ===========
12 Weeks Ended September 11, 2004 -------------------------------------------------- Project 2001 Farmer Great Asset Jack Renewal Disposition Restructuring Total -------- ----------- ------------- --------- BALANCE SHEET ACCRUALS PV interest $ 446 $ 568 $ 158 $ 1,172 Total accrued to -------- ----------- ----------- --------- balance sheets 446 568 158 1,172 -------- ----------- ----------- --------- NON-ACCRUABLE ITEMS RECORDED ON STATEMENTS OF OPERATIONS Property writeoffs - - - - Inventory markdowns - - - - Closing costs - - 9 9 -------- ----------- ----------- --------- Total non-accruable items - - 9 9 -------- ----------- ----------- --------- Less PV interest (446) (568) (158) (1,172) -------- ----------- ----------- --------- TOTAL AMOUNT RECORDED ON STATEMENTS OF OPERATIONS EXCLUDING PV INTEREST - - 9 9 ======== =========== =========== =========
61
28 Weeks Ended September 10, 2005 ------------------------------------------------------------------------------------ Project 2001 Farmer Divestiture Great Asset Jack of Midwest Renewal Disposition Restructuring Operations Total ----------- ----------- --------------- ------------- ----------- BALANCE SHEET ACCRUALS Vacancy $ (2,570) $ - $ 3,360 $ 71,518 $ 72,308 PV interest 900 1,232 337 136 2,605 Severance - - - 2,119 2,119 Total accrued to -------- -------- -------- -------- -------- balance sheets (1,670) 1,232 3,697 73,773 77,032 -------- -------- -------- -------- -------- NON-ACCRUABLE ITEMS RECORDED ON STATEMENTS OF OPERATIONS Property writeoffs - - - 6,861 6,861 Inventory markdowns - - - 1,130 1,130 Loss on sale of property - - - 2,263 2,263 Gain on sale of pharmacy scripts - - - (870) (870) Closing costs - - - 2,957 2,957 -------- -------- -------- -------- -------- Total non-accruable items - - - 12,341 12,341 -------- -------- -------- -------- -------- Less PV interest (900) (1,232) (337) (136) (2,605) -------- -------- -------- -------- -------- TOTAL AMOUNT RECORDED ON STATEMENTS OF OPERATIONS EXCLUDING PV INTEREST (2,570) - 3,360 85,978 86,768 -------- -------- -------- -------- -------- Less Gain on sale of pharmacy scripts - - - 870 870 Less closing costs - - - (2,957) (2,957) -------- -------- -------- -------- -------- TOTAL AMOUNT RECORDED ON STATEMENTS OF CASH FLOWS (2,570) - 3,360 83,891 84,681 ======== ======== ======== ======== ========
28 Weeks Ended September 11, 2004 ----------------------------------------------------------------- Project 2001 Farmer Great Asset Jack Renewal Disposition Restructuring Total ------- ----------- ------------- -------- BALANCE SHEET ACCRUALS PV interest $ 1,076 $ 1,349 $ 380 $ 2,805 Total accrued to ------- ------- ------- ------- balance sheets 1,076 1,349 380 2,805 ------- ------- ------- ------- NON-ACCRUABLE ITEMS RECORDED ON STATEMENTS OF OPERATIONS Property writeoffs - - 90 90 Inventory markdowns - - 291 291 Closing costs - - 689 689 ------- ------- ------- ------- Total non-accruable items - - 1,070 1,070 ------- ------- ------- ------- Less PV interest (1,076) (1,349) (380) (2,805) ------- ------- ------- ------- TOTAL AMOUNT RECORDED ON STATEMENTS OF OPERATIONS EXCLUDING PV INTEREST - - 1,070 1,070 ------- ------- ------- ------- Less closing costs - - (689) (689) ------- ------- ------- ------- TOTAL AMOUNT RECORDED ON STATEMENTS OF CASH FLOWS - - 381 381 ======= ======= ======= =======
62 PROJECT GREAT RENEWAL In May 1998, we initiated an assessment of our business operations in order to identify the factors that were impacting our performance. As a result of this assessment, in fiscal 1998 and 1999, we announced a plan to close two warehouse facilities and a coffee plant in the U.S., a bakery plant in Canada and 166 stores (156 in the United States and 10 in Canada) including the exit of the Richmond, Virginia and Atlanta, Georgia markets. As of September 10, 2005, we had closed all stores and facilities related to this phase of the initiative. The following table summarizes the activity related to this phase of the initiative over the last three fiscal years:
Occupancy Severance and Benefits Total ------------------------------ ------------------------------ ------------------------------- U.S. Canada Total U.S. Canada Total U.S. Canada Total -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at February 23, 2002 $ 62,802 $ 575 $ 63,377 2,177 $ - $ 2,177 64,979 575 65,554 Addition (1) 2,861 298 3,159 - - - 2,861 298 3,159 Utilization (2) (13,230) (386) (13,616) (370) - (370) (13,600) (386) (13,986) Adjustments (3) (3,645) - (3,645) 639 - 639 (3,006) - (3,006) --------- -------- --------- -------- -------- -------- --------- --------- --------- Balance at February 22, 2003 $ 48,788 $ 487 $ 49,275 $ 2,446 $ - $ 2,446 $ 51,234 $ 487 $ 51,721 Addition (1) 2,276 372 2,648 - - - 2,276 372 2,648 Utilization (2) (19,592) (407) (19,999) (289) - (289) (19,881) (407) (20,288) -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at February 28, 2004 $ 31,472 $ 452 $ 31,924 $ 2,157 $ - $ 2,157 $ 33,629 $ 452 $ 34,081 Addition (1) 1,902 20 1,922 - - - 1,902 20 1,922 Utilization (2) (5,410) (222) (5,632) (497) - (497) (5,907) (222) (6,129) -------- -------- -------- -------- -------- -------- --------- ---------- --------- Balance at February 26, 2005 $ 27,964 $ 250 $ 28,214 $ 1,660 $ - $ 1,660 $ 29,624 $ 250 $ 29,874 Addition (1) 893 7 900 - - - 893 7 900 Utilization (2) (3,280) (167) (3,447) (152) - (152) (3,432) (167) (3,599) Adjustments (3) (2,570) (90) (2,660) - - - (2,570) (90) (2,660) --------- --------- --------- -------- -------- -------- --------- ---------- --------- Balance at Sept. 10, 2005 $ 23,007 $ - $ 23,007 $ 1,508 $ - $ 1,508 $ 24,515 $ - $ 24,515 ======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $3.2 million, $2.6 million, and $1.9 million during fiscal 2002, 2003 and 2004, respectively, and $0.9 million during the 28 weeks ended September 10, 2005 represent the interest accretion on future occupancy costs which were recorded at present value at the time of the original charge. (2) Occupancy utilization of $13.6 million, $20.0 million, and $5.6 million for fiscal 2002, 2003 and 2004, respectively, and $3.5 million during the 28 weeks ended September 10, 2005 represents payments made during those periods for costs such as rent, common area maintenance, real estate taxes and lease termination costs. Severance utilization of $0.4 million, $0.3 million, and $0.5 million for fiscal 2002, 2003 and 2004, respectively, and $0.2 million during the 28 weeks ended September 10, 2005 represents payments to individuals for severance and benefits, as well as payments to pension funds for early withdrawal from multi-employer union pension plans. (3) At each balance sheet date, we assess the adequacy of the balance to determine if any adjustments are required as a result of changes in circumstances and/or estimates. We have continued to make favorable progress in marketing and subleasing the closed stores. As a result, during fiscal 2002, we recorded a reduction of $3.6 million in occupancy accruals related to this phase of the initiative. Further, we increased our reserve for future minimum pension liabilities by $0.6 million to better reflect expected future payouts under certain collective bargaining agreements. During the 28 weeks ended September 10, 2005, we recorded an additional reduction of $2.6 million in occupancy accruals due to subleasing additional closed stores. As discussed in Note 4 - Divestiture of Our Businesses in Canada and the Midwestern United States, we sold our Canadian business and as a result, the Canadian occupancy accruals of $0.1 million are no longer consolidated in our Consolidated Balance Sheet at September 10, 2005. 63 We paid $101.8 million of the total occupancy charges from the time of the original charges through September 10, 2005 which was primarily for occupancy related costs such as rent, common area maintenance, real estate taxes and lease termination costs. We paid $30.1 million of the total net severance charges from the time of the original charges through September 10, 2005, which resulted from the termination of approximately 3,400 employees. The remaining occupancy liability of $23.0 million relates to expected future payments under long term leases and is expected to be paid in full by 2020. The remaining severance liability of $1.5 million primarily relates to expected future payments for early withdrawals from multi-employer union pension plans and will be fully paid out in 2020. None of these stores were open during either of the first or second quarters of fiscal 2004 or 2005. As such, there was no impact on the Statements of Consolidated Operations from the 166 stores included in this phase of the initiative. At September 10, 2005 and February 26, 2005, approximately $5.7 million and $5.4 million, respectively, of the reserve was included in "Other accruals" and the remaining amount was included in "Other non-current liabilities" on the Company's Consolidated Balance Sheets. Based upon current available information, we evaluated the reserve balances as of September 10, 2005 of $24.5 million for this phase of the asset disposition initiative and have concluded that they are adequate to cover expected future costs. The Company will continue to monitor the status of the vacant properties and adjustments to the reserve balances may be recorded in the future, if necessary. 2001 ASSET DISPOSITION During the third quarter of fiscal 2001, the Company's Board of Directors approved a plan resulting from our review of the performance and potential of each of the Company's businesses and individual stores. At the conclusion of this review, our Company determined that certain underperforming operations, including 39 stores (30 in the United States and 9 in Canada) and 3 warehouses (2 in the United States and 1 in Canada) should be closed and/or sold, and certain administrative streamlining should take place. As of September 10, 2005, we had closed all stores and facilities related to this phase of the initiative. 64 The following table summarizes the activity related to this phase of the initiative recorded on the Consolidated Balance Sheets over the last three fiscal years:
Occupancy Severance and Benefits Total ------------------------------ ------------------------------ ------------------------------- U.S. Canada Total U.S. Canada Total U.S. Canada Total -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at February 23, 2002 $ 78,386 $ 1,937 $ 80,323 13,743 $ 6,217 $ 19,960 $ 92,129 $ 8,154 $ 100,283 Addition (1) 4,041 49 4,090 2,578 966 3,544 6,619 1,015 7,634 Utilization (2) (18,745) (1,642) (20,387) (12,508) (6,952) (19,460) (31,253) (8,594) (39,847) Adjustments (3) (10,180) - (10,180) - 250 250 (10,180) 250 (9,930) --------- -------- --------- -------- -------- -------- --------- --------- --------- Balance at February 22, 2003 $ 53,502 $ 344 $ 53,846 $ 3,813 $ 481 $ 4,294 $ 57,315 $ 825 $ 58,140 Addition (1) 2,847 3 2,850 - - - 2,847 3 2,850 Utilization (2) (9,987) (974) (10,961) (2,457) (1,026) (3,483) (12,444) (2,000) (14,444) Adjustments (3) (6,778) 1,002 (5,776) 955 603 1,558 (5,823) 1,605 (4,218) -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at February 28, 2004 $ 39,584 $ 375 $ 39,959 $ 2,311 $ 58 $ 2,369 $ 41,895 $ 433 $ 42,328 Addition (1) 2,449 - 2,449 - - - 2,449 - 2,449 Utilization (2) (5,646) (375) (6,021) (2,197) (58) (2,255) (7,843) (433) (8,276) Adjustments (3) (4,488) - (4,488) - - - (4,488) - (4,488) -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at February 26, 2005 $ 31,899 $ - $ 31,899 $ 114 $ - $ 114 $ 32,013 $ - $ 32,013 Addition (1) 1,232 - 1,232 - - - 1,232 - 1,232 Utilization (2) (2,593) - (2,593) (52) - (52) (2,645) - (2,645) -------- -------- -------- -------- -------- -------- --------- --------- --------- Balance at Sept. 10, 2005 $ 30,538 $ - $ 30,538 $ 62 $ - $ 62 $ 30,600 $ - $ 30,600 ======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $4.1 million, $2.9 million, and $2.4 million during fiscal 2002, 2003 and 2004, respectively, and $1.2 million during the 28 weeks ended September 10, 2005 represent the interest accretion on future occupancy costs which were recorded at present value at the time of the original charge. The addition to severance of $3.5 million during fiscal 2002 related to retention and productivity incentives that were accrued as earned. (2) Occupancy utilization of $20.4 million, $11.0 million, and $6.0 during fiscal 2002, 2003 and 2004, respectively, and $2.6 million during the 28 weeks ended September 10, 2005 represent payments made during those periods for costs such as rent, common area maintenance, real estate taxes and lease termination costs. Severance utilization of $19.5 million, $3.5 million, and $2.3 million during fiscal 2002, 2003 and 2004, respectively, and $0.1 million during the 28 weeks ended September 10, 2005 represent payments made to terminated employees during the period. (3) At each balance sheet date, we assess the adequacy of the reserve balance to determine if any adjustments are required as a result of changes in circumstances and/or estimates. During fiscal 2002, we recorded adjustments of $10.2 million related to reversals of previously accrued occupancy related costs due to the following: o Favorable results of assigning leases at certain locations of $3.6 million; o The decision to continue to operate one of the stores previously identified for closure due to changes in the competitive environment in the market in which that store is located of $3.3 million; and o The decision to proceed with development at a site that we had chosen to abandon at the time of the original charge due to changes in the competitive environment in the market in which that site is located of $3.3 million. During fiscal 2003, we recorded net adjustments of $5.8 million related to reversals of previously accrued occupancy costs due to favorable results of subleasing, assigning and terminating leases. We also accrued $1.6 million for additional severance and benefit costs that were unforeseen at the time of the original charge. Finally, during fiscal 2004, we recorded adjustments of $4.5 million related to the reversals of previously accrued occupancy costs due to the disposals and subleases of locations at more favorable terms than originally anticipated at the time of the original charge. 65 We paid $41.8 million ($38.8 million in the U.S. and $3.0 million in Canada) of the total occupancy charges from the time of the original charges through September 10, 2005 which was primarily for occupancy related costs such as rent, common area maintenance, real estate taxes and lease termination costs. We paid $28.1 million ($19.1 million in the U.S. and $9.0 million in Canada) of the total net severance charges from the time of the original charges through September 10, 2005, which resulted from the termination of approximately 1,100 employees. The remaining occupancy liability of $30.5 million primarily relates to expected future payments under long term leases through 2017. The remaining severance liability of $0.1 million relates to expected future payments for severance and benefits payments to individual employees and will be fully paid out by 2006. At September 10, 2005 and February 26, 2005, approximately $7.2 million and $7.1 million of the reserve, respectively, was included in "Other accruals" and the remaining amount was included in "Other non-current liabilities" on the Company's Consolidated Balance Sheets. None of these stores were open during either of the first or second quarters of fiscal 2004 or 2005. As such, there was no impact on the Statements of Consolidated Operations from the 39 stores that were identified for closure as part of this asset disposition. Based upon current available information, we evaluated the reserve balances as of September 10, 2005 of $30.6 million for this phase of the asset disposition initiative and have concluded that they are adequate to cover expected future costs. The Company will continue to monitor the status of the vacant properties and adjustments to the reserve balances may be recorded in the future, if necessary. FARMER JACK RESTRUCTURING In the fourth quarter of fiscal 2003, we announced an initiative to close 6 stores and convert 13 stores to our Food Basics banner in the Detroit, Michigan and Toledo, Ohio markets. As of September 10, 2005, we had closed all 6 stores and successfully completed the conversions related to this phase of the initiative. 66 The following table summarizes the activity to date related to the charges recorded for this initiative all of which were in the U.S. The table does not include property writeoffs as they are not part of any reserves maintained on the balance sheet. It also does not include non-accruable closing costs and inventory markdowns since they are expensed as incurred in accordance with generally accepted accounting principles. Severance and Occupancy Benefits Total ------------ ------------- ---------- Original charge (1) $ 20,999 $ 8,930 $ 29,929 Addition (1) 56 - 56 Utilization (2) (1,093) (4,111) (5,204) ------------ ------------- ---------- Balance at February 28, 2004 $ 19,962 $ 4,819 $ 24,781 Addition (1) 687 - 687 Utilization (2) (4,747) (4,813) (9,560) ------------ ------------- ---------- Balance at February 26, 2005 $ 15,902 $ 6 $ 15,908 Addition (1) 337 - 337 Utilization (2) (1,504) (6) (1,510) Adjustment (3) 3,360 - 3,360 ------------ ------------- ---------- Balance at Sept. 10, 2005 $ 18,095 $ - $ 18,095 ============ ============= ========== (1) The original charge to occupancy during fiscal 2003 represents charges related to closures and conversions in the Detroit, Michigan market of $21.0 million. The additions to occupancy during fiscal 2003, fiscal 2004 and the 28 weeks ended September 10, 2005 represent interest accretion on future occupancy costs which were recorded at present value at the time of the original charge. The original charge to severance during fiscal 2003 of $8.9 million related to individual severings as a result of the store closures, as well as a voluntary termination plan initiated in the Detroit, Michigan market. (2) Occupancy utilization of $1.1 million, $4.7 million and $1.5 million during fiscal 2003, fiscal 2004 and the 28 weeks ended September 10, 2005, respectively, represents payments made for costs such as rent, common area maintenance, real estate taxes and lease termination costs. Severance utilization of $4.1 million, $4.8 million and $0.01 million during fiscal 2003, fiscal 2004 and the 28 weeks ended September 10, 2005, respectively, represent payments made to terminated employees during the period. (3) At each balance sheet date, we assess the adequacy of the balance to determine if any adjustments are required as a result of changes in circumstances and/or estimates. During the 28 weeks ended September 10, 2005, we recorded an increase of $3.4 million in occupancy accruals due to changes in our original estimate of when we would terminate certain leases and obtain sublease rental income related to such leases. We paid $7.3 million of the total occupancy charges from the time of the original charge through September 10, 2005 which was primarily for occupancy related costs such as rent, common area maintenance, real estate taxes and lease termination costs. We paid $8.9 million of the total net severance charges from the time of the original charges through September 10, 2005, which resulted from the termination of approximately 300 employees. The remaining occupancy liability of $18.1 million relates to expected future payments under long term leases and is expected to be paid out in full by 2022. The severance liability has been fully utilized as of September 10, 2005 and no additional future payments for severance and benefits to individual employees will be paid out. 67 Included in the Statements of Consolidated Operations for the 12 and 28 weeks ended September 10, 2005 and September 11, 2004 are the sales and operating results of the 6 stores that were identified for closure as part of this phase of the initiative. The results of these operations are as follows:
12 Weeks Ended 28 Weeks Ended ----------------------------------- ----------------------------------- September 10, September 11, September 10, September 11, 2005 2004 2005 2004 --------------- --------------- ---------------- --------------- Sales $ - $ - $ - $ 2,433 ============== ============== =============== ============== Loss from operations $ - $ - $ - $ (43) ============== ============== =============== ==============
At September 10, 2005 and February 26, 2005, approximately $1.6 million and $2.1 million, respectively, of the liability was included in "Other accruals" and the remaining amount was included in "Other non-current liabilities" on our Consolidated Balance Sheets. We have evaluated the liability balance of $18.1 million as of September 10, 2005 based upon current available information and have concluded that it is adequate. We will continue to monitor the status of the vacant properties and adjustments to the reserve balance may be recorded in the future, if necessary. DIVESTITURE OF THE MIDWESTERN U.S. BUSINESS During the first quarter of fiscal 2005, we announced plans for a major strategic restructuring that would focus future effort and investment on our core operations in the Northeastern United States. Thus, we initiated efforts to divest our businesses in the Midwestern United States. Although this planned divestiture includes the closing of a total of 35 stores, we have closed 31 of these stores as of September 10, 2005. During the 12 and 28 weeks ended September 10, 2005, we recorded charges of $70.6 million and $86.0 million, respectively, related to these closures ($0.5 million and $1.1 million in "Cost of merchandise sold," respectively, and $70.1 million and $84.9 million, respectively, in "Store operating, general and administrative expense" in our Consolidated Statement of Operations), excluding PV interest. Included in property writeoffs for the 12 and 28 weeks ended September 10, 2005, is an impairment loss on property, plant and equipment of $2.7 million related to the additional closure of four stores that will close in the third quarter of fiscal 2005.
12 Weeks Ended 28 Weeks Ended September 10, 2005 September 10, 2005 ------------------ ------------------ Occupancy related $ 56,752 $ 71,518 Severance and benefits 782 2,119 Property writeoffs 6,735 6,861 Loss on the sale of fixed assets 3,215 2,263 Sale of pharmacy scripts - (870) Inventory markdowns 544 1,130 Nonaccruable closing costs 2,525 2,957 -------------- --------------- Total charges $ 70,553 $ 85,978 ============== ===============
68 The following table summarizes the activity to date related to the charges recorded for this divestiture. The table does not include property writeoffs as they are not part of any reserves maintained on the balance sheet. It also does not include non-accruable closing costs and inventory markdowns since they are expensed as incurred in accordance with generally accepted accounting principles.
Severance and Occupancy Benefits Total ------------ ------------- ---------- Original charge (1) $ 14,766 $ 1,337 $ 16,103 Additions (2) 56,888 782 57,670 Utilization (3) (2,710) (1,142) (3,852) ------------ ------------- ---------- Balance at Sept. 10, 2005 $ 68,944 $ 977 $ 69,921 ============ ============= ==========
(1) The original charge to occupancy during the first quarter of fiscal 2005 represents charges related to closures of the first 8 stores in conjunction with our decision to divest our Midwestern business of $14.7 million. The original charge to severance during the first quarter of fiscal 2005 of $1.3 million related to individual severings as a result of these store closures. (2) The additions to occupancy during the 28 weeks ended September 10, 2005 represents charges related to the closures of an additional 23 stores in the amount of $56.8 million and interest accretion on future occupancy costs which were recorded at present value at the time of the original charge in the amount of $0.1 million. The additional charge to severance during the 28 weeks ended September 10, 2005 of $0.8 million related to individual severings as a result of these store closures. (3) Occupancy utilization of $2.7 million for 28 weeks ended September 10, 2005, represents payments made for costs such as rent, common area maintenance, real estate taxes and lease termination costs. Severance utilization of $1.1 million for the 28 weeks ended September 10, 2005 represents payments made to terminated employees during the period. We paid $2.7 million of the total occupancy charges from the time of the original charge through September 10, 2005 which was primarily for occupancy related costs such as rent, common area maintenance, real estate taxes and lease termination costs. We paid $1.1 million of the total net severance charges from the time of the original charges through September 10, 2005, which resulted from the termination of approximately 125 employees. The remaining occupancy liability of $68.9 million relates to expected future payments under long term leases and is expected to be paid out in full by 2021. The remaining severance liability of $1.0 million relates to expected future payments for severance and benefits to individual employees and will be fully paid out by February 25, 2006. Included in the Statements of Consolidated Operations for the 12 and 28 weeks ended September 10, 2005 and September 11, 2004 are the sales and operating results of the 31 stores that were closed as part of this divestiture. The results of these operations are as follows:
12 Weeks Ended 28 Weeks Ended ----------------------------------- ----------------------------------- September 10, September 11, September 10, September 11, 2005 2004 2005 2004 --------------- --------------- ---------------- --------------- Sales $ 10,462 $ 71,924 $ 85,906 $ 157,608 ============== ============== =============== ============== Loss from operations $ (10,520) $ (7,843) $ (18,755) $ (18,337) ============== ============== =============== ==============
At September 10, 2005, approximately $15.5 million of the liability was included in "Other accruals" and the remaining amount was included in "Other non-current liabilities" on our Consolidated Balance Sheets. 69 We have evaluated the liability balance of $69.9 million as of September 10, 2005 based upon current available information and have concluded that it is adequate. We will continue to monitor the status of the vacant properties and adjustments to the reserve balance may be recorded in the future, if necessary. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS The following table presents excerpts from our Consolidated Statement of Cash Flows:
Sept. 10, 2005 Sept. 11, 2004 ----------------- ----------------- Net cash (used in) provided by operating activities $ (68,201) $ 55,013 ----------------- ----------------- Net cash provided by (used in) investing activities $ 561,266 $ (97,230) ----------------- ----------------- Net cash (used in) provided by financing activities $ (402,890) $ 18,398 ----------------- -----------------
Net cash flow used in operating activities of $68.2 million for the 28 weeks ended September 10, 2005 primarily reflected our net income of $502.7 million, adjusted for non-cash charges for (i.) depreciation and amortization of $117.8 million, (ii.) our asset disposition initiatives of $84.7 million, (iii.) restructuring charges of $61.0 million, and (iv.) non-current income taxes of $137.2 million, partially offset by the non-cash gain on sale of Canadian operations of $918.6 million, a decrease in inventories of $27.5 million and an increase in other accruals primarily due to timing of $53.1 million partially offset by a decrease in accounts payable of $71.1 million and a decrease in other non-current liabilities of $55.4 million primarily due to the sale of our Canadian operations. Refer to Working Capital below for discussion of changes in working capital items. Net cash flow provided by operating activities of $55.0 million for the 28 weeks ended September 11, 2004 primarily reflected our net loss of $107.0 million, adjusted for a non-cash charge of $143.0 million for depreciation and amortization, a decrease in accounts receivable of $31.4 million, an increase in accounts payable of $47.9 million, and a increase in other accruals of $7.2 million partially offset by an increase in inventories of $28.8 million, an increase in prepaid assets and other current assets of $23.6 million, an increase in other assets of $10.5 million and a decrease in non-current liabilities of $4.8 million due mainly to a decrease in closed store accruals. Net cash flow provided by investing activities of $561.3 million for the 28 weeks ended September 10, 2005 primarily reflected proceeds from the sale of our Canadian operations of $905.8 million, proceeds received from the sale of certain of our assets of $53.9 million partially offset by property expenditures totaling $109.6 million, which included 2 new supermarkets and 30 major remodels, payments for derivatives of $15.4 million, and the net purchases of marketable securities of $275.0 million. For the remainder of fiscal 2005, we have planned capital expenditures of approximately $50 to $75 million, which relate primarily to enlarging or remodeling approximately 20 supermarkets. We currently expect to close approximately 5 - 10 stores during the remainder of fiscal 2005. Net cash flow used in investing activities of $97.2 million for the 28 weeks ended September 11, 2004 primarily reflected property expenditures totaling $107.4 million, which included 9 new supermarkets and 11 major remodels partially offset by cash received from the sale of our certain of our assets of $10.1 million. Net cash flow used in financing activities of $402.9 million for the 28 weeks ended September 10, 2005 primarily reflected principal payments on long term borrowings and other fees of $413.5 million and principal payments on capital leases of $8.0 million partially offset by proceeds from exercise of stock options of $21.2 million. Net cash flow provided by financing activities of $18.4 million for the 28 weeks ended September 11, 2004 primarily reflected an increase in book overdrafts of $11.0 million and proceeds from long term real estate liabilities of $14.7 million partially offset by principal payments on capital leases of $6.4 million and a decrease in deferred financing fees of $1.0 million. 70 We reviewed our Company's strategy during the fourth quarter of fiscal 2004 and into early 2005 to establish and sustain a profitable business with long-range growth potential. That review concluded with the plan that future effort and investment should be focused on our core operations in the Northeastern United States, which accounted for about half of total sales, our strongest market positions, and we believe, the best potential for profitable growth going forward. Therefore, we initiated efforts to divest our businesses in both Canada and the Midwestern U.S. At the close of business on August 13, 2005, our Company completed the sale of our Canadian business to Metro, Inc., a supermarket and pharmacy operator in the Provinces of Quebec and Ontario, Canada, for $1.5 billion in cash, stock and certain debt to be assumed by Metro, Inc. We have closed 31 of the 101 stores in the Midwest at this time and are exploring alternatives for the remaining stores including their sale or continued operations. We operate under an annual operating plan which is reviewed and approved by our Board of Directors and incorporates the specific operating initiatives we expect to pursue and the anticipated financial results of our Company. We are in the process of planning for fiscal 2006 and beyond at this time and we believe that our present cash resources, including invested cash on hand as well as our marketable securities, available borrowings from our revolving credit agreement and other sources, are sufficient to meet our needs. Profitability, cash flow, asset sale proceeds and timing can be impacted by certain external factors such as unfavorable economic conditions, competition, labor relations and fuel and utility costs which could have a significant impact on cash generation. If our profitability and cash flow do not improve in line with our plans or if we are unsuccessful in the selling of the Midwest business or if the taxing authorities do not affirm the adequacy of our Company's Domestic Reinvestment Plan, we anticipate that we will be able to modify the operating plan in order to ensure that we have appropriate resources. WORKING CAPITAL We had working capital of $649.3 million at September 10, 2005 compared to working capital of $86.5 million at February 26, 2005. We had cash and cash equivalents aggregating $363.4 million at September 10, 2005 compared to $257.7 million at February 26, 2005. The increase in working capital was attributable primarily to the following: o An increase in cash and cash equivalents as detailed in the Consolidated Statements of Cash Flows; o An increase in marketable securities as we invested our cash received from the sale of our Canadian operations; o An increase in prepaid expenses and other current assets mainly due to the timing of payments, an increase in our deferred tax assets, partially offset by the sale of our Canadian operations; o A decrease in accounts payable (inclusive of book overdrafts) due to the sale of our Canadian operations, timing and seasonality; and o A decrease in accrued salaries, wages and benefits due primarily to the sale of our Canadian operations and timing. Partially offset by the following: 71 o A decrease in accounts receivable due to the sale of our Canadian operations partially offset by the timing of receipts; o A decrease in inventories mainly due to the sale of our Canadian operations and seasonality; and o An increase in other accruals mainly due to timing partially offset by the sale of our Canadian operations. REVOLVING CREDIT AGREEMENT During the second quarter ended September 10, 2005 and due to the sale of our Canadian operations as discussed in Note 4 - Divestiture of Our Businesses in Canada and the Midwestern United States, our $400 million secured Revolving Credit Agreement was amended, reducing the Canadian portion of the agreement by $65 million. At September 10, 2005, we had a $335 million Credit Agreement (the "Credit Agreement") with a syndicate of lenders enabling us to borrow funds on a revolving basis for short-term borrowings and provide working capital as needed. This agreement expires in December 2007. Under the Credit Agreement, we are permitted to make bond repurchases and may do so from time to time in the future. The Credit Agreement is collateralized by inventory, certain accounts receivable and certain pharmacy scripts. Borrowings under the Credit Agreement bear interest based on LIBOR and Prime interest rate pricing. As of September 10, 2005, there were no borrowings under these credit agreements. As of September 10, 2005, after reducing availability for outstanding letters of credit and borrowing base requirements, we had $101.3 million available under the Credit Agreement. Combined with the cash we held in short-term investments and marketable securities of $532.0 million, we had total cash availability of $633.3 million at September 10, 2005. Under the terms of this agreement, should availability fall below $50 million, a borrowing block will be implemented which provides that no additional borrowings be made unless we are able to maintain a fixed charge coverage ratio of 1.0 to 1.0. Although we do not meet the required ratio at this time, it is not applicable as availability at September 10, 2005 totaled $101.3 million. In the event that availability falls below $50 million and we do not maintain the ratio required, unless otherwise waived or amended, the lenders may, at their discretion, declare, in whole or in part, all outstanding obligations immediately due and payable. On October 14, 2005, the Credit Agreement was terminated. Concurrently, we entered into new, cash collateralized, Letter of Credit Agreement that enables us to issue letters of credit up to $200 million. We are also in the process of negotiating an additional $150 million revolving credit agreement that will be collateralized by inventory, certain accounts receivable and pharmacy scripts. We expect to complete the new revolving credit agreement by early November 2005. PUBLIC DEBT OBLIGATIONS Outstanding notes totaling $245.1 million at September 10, 2005 consisted of $32.3 million of 7.75% Notes due April 15, 2007, $12.8 million of 9.125% Senior Notes due December 15, 2011 and $200 million of 9.375% Notes due August 1, 2039. Interest is payable quarterly on the 9.375% Notes and semi-annually on the 9.125% and 7.75% Notes. The 7.75% Notes are not redeemable prior to their maturity. The 9.375% notes are now callable at par ($25 per bond) and the 9.125% Notes may be called at a premium to par after December 15, 2006. The 9.375% Notes are unsecured obligations and were issued under the terms of our senior debt securities indenture, which contains among other provisions, covenants restricting the incurrence of secured debt. The 9.375% Notes are effectively subordinate to the Credit Agreement and do not contain cross default provisions. All covenants and restrictions for the 7.75% Notes and the 9.125% Senior Notes have been eliminated in connection with the tender offer as discussed in Note 5 - - Tender Offer and Repurchase of 7.75% Notes due 2007 and 9.125% Senior Notes due 2011. Our notes are not guaranteed by any of our subsidiaries. 72 During the first quarter of fiscal 2005, we repurchased in the open market $14.5 million of our 7.75% Notes due April 15, 2007. The cost of this open market repurchase resulted in a pretax loss due to the early extinguishment of debt of $0.5 million. In accordance with SFAS No. 145, "Rescission of FASB Statements 4, 44 and 64, Amendment of FASB 13, and Technical Corrections" ("SFAS 145"), this loss has been classified within loss from operations. During the second quarter of fiscal 2005, we repurchased in the open market $166.7 million of our 7.75% Notes due April 15, 2007 and $203.7 million of our 9.125 Senior Notes due December 15, 2011 through a cash tender offer. The cost of this open market repurchase resulted in a pretax loss due to the early extinguishment of debt of $29.4 million. In accordance with SFAS No. 145, this loss has been classified within loss from operations. OTHER We currently have Registration Statements dated January 23, 1998 and June 23, 1999, allowing us to offer up to $75 million of debt and/or equity securities as of September 10, 2005 at terms contingent upon market conditions at the time of sale. Our Company's policy is to not pay dividends. As such, we have not made dividend payments in the previous three years and do not intend to pay dividends in the normal course of business in fiscal 2005. In addition, our Company is prohibited, under the terms of our Revolving Credit Agreement, to pay cash dividends on common shares. We are the guarantor of a loan of $1.9 million related to a shopping center, which will expire in 2011. In the normal course of business, we have assigned to third parties various leases related to former operating stores (the "Assigned Leases"). When the Assigned Leases were assigned, we generally remained secondarily liable with respect to these lease obligations. As such, if any of the assignees were to become unable to continue making payments under the Assigned Leases, we could be required to assume the lease obligation. As of September 10, 2005, 147 Assigned Leases remain in place. Assuming that each respective assignee became unable to continue to make payments under an Assigned Lease, an event we believe to be remote, we estimate our maximum potential obligation with respect to the Assigned Leases to be approximately $371.8 million, which could be partially or totally offset by reassigning or subletting such leases. Our existing senior debt rating was Caa1 with developing outlook with Moody's Investors Service ("Moody's") and B- with developing outlook with Standard & Poor's Ratings Group ("S&P") as of September 10, 2005. Our liquidity rating was SGL3 with Moody's as of September 10, 2005. Our recovery rating was 1 with S&P as of September 10, 2005 indicating a high expectation of 100% recovery of our senior debt to our lenders. Future rating changes could affect the availability and cost of financing to our Company. 73 CRITICAL ACCOUNTING ESTIMATES Critical accounting estimates are those accounting estimates that we believe are important to the portrayal of our financial condition and results of operations and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires us 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. Self-Insurance Reserves Our Consolidated Balance Sheets include liabilities with respect to self-insured workers' compensation and general liability claims. We estimate the required liability of such claims on a discounted basis, utilizing an actuarial method, which is based upon various assumptions, which include, but are not limited to, our historical loss experience, projected loss development factors, actual payroll and other data. The required liability is also subject to adjustment in the future based upon the changes in claims experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per incident (severity). Long-Lived Assets We review the carrying values of our long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Such review is based upon groups of assets and the undiscounted estimated future cash flows from such assets to determine if the carrying value of such assets is recoverable from their respective cash flows. If such review indicates an impairment exists, we measure such impairment on a discounted basis using a probability weighted approach and a risk free rate. We also review assets in stores planned for closure or conversion for impairment upon determination that such assets will not be used for their intended useful life. During the 12 and 28 weeks ended September 10, 2005, we recorded impairment losses on long-lived assets as follows:
12 weeks ended Sept. 10, 2005 28 weeks ended Sept. 10, 2005 ------------------------------- ------------------------------ U.S. Canada Total U.S. Canada Total --------- ---------- --------- -------- ---------- -------- Impairments due to closure or conversion in the normal course of business $ 1,024 $ - $ 1,024 $ 1,024 $ 506 $ 1,530 Impairments due to unrecoverable assets 9,612 - 9,612 9,612 - 9,612 Impairments related to the divestiture of the Midwestern U.S. business (1) 6,735 - 6,735 6,861 - 6,861 Impairments related to the sale of U.S. distribution operations and warehouses (2) 2,779 - 2,779 8,590 - 8,590 --------- ---------- --------- -------- ---------- -------- Total impairments $ 20,150 $ - $ 20,150 $ 26,087 $ 506 $ 26,593 ========= ========== ========= ======== ========== ========
74 (1) Refer to Note 11 - Asset Disposition Initiatives (2) Refer to Note 6 - Sale of Our U.S. Distribution Operations and Warehouses The effects of changes in estimates of useful lives were not material to ongoing depreciation expense. If current operating levels and trends continue, there may be future impairments on long-lived assets, including the potential for impairment of assets that are held and used. Closed Store Reserves For closed stores that are under long-term leases, we record a discounted liability using a risk free rate for the future minimum lease payments and related costs, such as utilities and taxes, from the date of closure to the end of the remaining lease term, net of estimated probable recoveries from projected sublease rentals. If estimated cost recoveries exceed our liability for future minimum lease payments, the excess is recognized as income over the term of the sublease. We estimate future net cash flows based on our experience in and our knowledge of the market in which the closed store is located. However, these estimates project net cash flow several years into the future and are affected by variable factors such as inflation, real estate markets and economic conditions. While these factors have been relatively stable in recent years, variation in these factors could cause changes to our estimates. As of September 10, 2005, we had recorded liabilities for estimated probable obligations of $172 million. Of this amount, $15 million relates to stores closed in the normal course of business, $141 million relates to stores closed as part of the asset disposition initiatives (see Note 11 of our Consolidated Financial Statements) and $16 million relates to stores closed as part of our exit of the northern New England and Kohl's businesses (see Note 10 of our Consolidated Financial Statements). Employee Benefit Plans The determination of our obligation and expense for pension and other postretirement benefits is dependent, in part, on our selection of certain assumptions used by our actuaries in calculating these amounts. These assumptions include, among other things, the discount rate, the expected long-term rate of return on plan assets and the rates of increase in compensation and health care costs. In accordance with U.S. GAAP, actual results that differ from our Company's assumptions are accumulated and amortized over future periods and, therefore, affect our recognized expense and recorded obligation in such future periods. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension and other post-retirement obligations and our future expense. Inventories We evaluate inventory shrinkage throughout the year based on actual physical counts and record reserves based on the results of these counts to provide for estimated shrinkage between the store's last inventory and the balance sheet date. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK Market risk represents the risk of loss from adverse market changes that may impact our consolidated financial position, results of operations or cash flows. Among other possible market risks, we are exposed to such risk in the areas of interest rates and foreign currency exchange rates. 75 From time to time, we may enter hedging agreements in order to manage risks incurred in the normal course of business including forward exchange contracts to manage our exposure to fluctuations in foreign exchange rates. INTEREST RATES Our exposure to market risk for changes in interest rates relates primarily to our debt obligations. We do not have cash flow exposure due to rate changes on our $247.5 million in total indebtedness as of September 10, 2005 because they are at fixed interest rates. However, we do have cash flow exposure on our committed bank lines of credit due to our variable floating rate pricing. Accordingly, during the 12 and 28 weeks ended September 10, 2005 and September 11, 2004, a presumed 1% change in the variable floating rate would not have impacted interest expense as there were no borrowings on our committed bank lines of credit. FOREIGN EXCHANGE RISK We are exposed to foreign exchange risk to the extent of adverse fluctuations in the Canadian dollar. During the 12 and 28 weeks ended September 10, 2005, a change in the Canadian currency of 10% would have resulted in a fluctuation in net income of $0.9 million and $3.0 million, respectively, as compared to a fluctuation in net loss of $1.5 million and $0.9 million during the 12 and 28 weeks ended September 11, 2004, respectively. We do not believe that a change in the Canadian currency of 10% will have a material effect on our financial position or cash flows. During the first quarter of fiscal 2005, we entered into a six month currency exchange forward contract totaling $900 million Canadian dollar notional value to hedge our net investment in our Canadian foreign operation against adverse movements in exchange rates. In the second quarter of fiscal 2005 and upon completion of the sale of our Canadian operations as discussed in Note 16 - Hedge of Net Investment in Foreign Operations, this forward contract was terminated prior to its expiration. ITEM 4 - CONTROLS AND PROCEDURES We have established and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our Company's management, including our President and Chief Executive Officer and Executive Vice President, Chief Financial Officer and Secretary, as appropriate, to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our Company's management, including our Company's President and Chief Executive Officer along with our Company's Executive Vice President, Chief Financial Officer and Secretary, of the effectiveness of the design and operation of our Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon the foregoing, as of September 10, 2005, our Company's President and Chief Executive Officer along with our Company's Executive Vice President, Chief Financial Officer and Secretary, concluded that our Company's disclosure controls and procedures were effective as of September 10, 2005. In the third quarter of fiscal 2005, our Company will complete the sale of our U.S. distribution operations and the majority of our warehouse facilities and related assets to C&S Wholesale Grocers, Inc. In connection with the sale of these operations, our Company no longer maintains internal controls over financial reporting relating to these warehouse physical inventories and the related reconciliations. We are in the process of establishing controls over the price and quantity of goods purchased from C&S Wholesale Grocers, Inc. 76 There have been no other changes during our Company's fiscal quarter ended September 10, 2005 in our Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our Company's internal control over financial reporting. CAUTIONARY NOTE This presentation may contain forward-looking statements about the future performance of our Company, and is based on our assumptions and beliefs in light of information currently available. We assume no obligation to update this information. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements including but not limited to: competitive practices and pricing in the food industry generally and particularly in our principal markets; our relationships with our employees; the terms of future collective bargaining agreements; the costs and other effects of lawsuits and administrative proceedings; the nature and extent of continued consolidation in the food industry; changes in the financial markets which may affect our cost of capital or the ability to access capital; supply or quality control problems with our vendors; and changes in economic conditions, which may affect the buying patterns of our customers. 77 PART II. OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS None ITEM 2 - CHANGES IN SECURITIES None ITEM 3 - DEFAULTS UPON SENIOR SECURITIES None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At our annual meeting of shareholders, held July 14, 2005, there were 37,396,943 shares or 94.59% of the 39,537,186 shares outstanding and entitled to vote represented either in person or by proxy. The nine (9) directors nominated to serve on the Board of for a one-year term were all elected, with each receiving an affirmative vote of at least 87.51% of the shares present. Seventy-two percent (72%) of the total shares cast voted for the approval of the Amendment to the 1998 Long Term Incentive and Share Award Plan to increase the number of shares that may be issued under the Plan by 3,000,000. ITEM 5 - OTHER INFORMATION TERMINATION OF CREDIT AGREEMENT AND ENTRY INTO LETTER OF CREDIT AGREEMENT On October 14, 2005, the Company terminated its Credit Agreement, and concurrently, therewith, entered into new, cash collateralized, Letter of Credit Agreement with Bank of America, N.A., as issuing bank. The Letter of Credit enables the Company to issue letters of credit up to $200 million. The Company is also negotiating a new $150 million revolving credit agreement that will be collateralized by inventory, certain accounts receivable and pharmacy scripts. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources, for a description of the Credit Agreement and the Letter of Credit Agreement. The foregoing description of the Letter of Credit Agreement is qualified in its entirety by reference to the full text of the Letter of Credit Agreement, filed as Exhibit 10.42 to this Form 10-Q, and incorporated herein by reference. ITEM 6 - EXHIBITS (a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT NO. DESCRIPTION ----------- ----------- 2.1 Stock Purchase Agreement, dated as of July 19, 2005, by and among the Company, A&P Luxembourg S.a.r.l., Metro Inc. and 4296711 Canada Inc. (incorporated herein by reference to Exhibit 2.1 to Form 8-K filed on July 22, 2005)
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3.1 Articles of Incorporation of The Great Atlantic & Pacific Tea Company, Inc., as amended through July 1987 (incorporated herein by reference to Exhibit 3(a) to Form 10-K filed on May 27, 1988) 3.2 By-Laws of The Great Atlantic & Pacific Tea Company, Inc., as amended and restated through October 6, 2005 (incorporated herein by reference to Exhibit 3.1 to Form 8-K filed on October 11, 2005) 4.1 Indenture, dated as of January 1, 1991 between the Company and JPMorgan Chase Bank (formerly The Chase Manhattan Bank as successor by merger to Manufacturers Hanover Trust Company), as trustee (the "Indenture") (incorporated herein by reference to Exhibit 4.1 to Form 8-K) 4.2 First Supplemental Indenture, dated as of December 4, 2001, to the Indenture, dated as of January 1, 1991 between our Company and JPMorgan Chase Bank, relating to the 7.70% Senior Notes due 2004 (incorporated herein by reference to Exhibit 4.1 to Form 8-K filed on December 4, 2001) 4.3 Second Supplemental Indenture, dated as of December 20, 2001, to the Indenture between our Company and JPMorgan Chase Bank, relating to the 9 1/8% Senior Notes due 2011 (incorporated herein by reference to Exhibit 4.1 to Form 8-K filed on December 20, 2001) 4.4 Successor Bond Trustee (incorporated herein by reference to Exhibit 4.4 to Form 10-K filed on May 9, 2003) 4.5 Third Supplemental Indenture, dated as of August 23, 2005, to the Indenture between the Company and Wilmington Trust Company (as successor to JPMorgan Chase Bank) (incorporated herein by reference to Exhibit 4.1 to Form 8-K filed on August 23, 2005) 4.6 Fourth Supplemental Indenture, dated as of August 23, 2005, to the Indenture between the Company and Wilmington Trust Company (as successor to JPMorgan Chase Bank). (incorporated herein by reference to Exhibit 4.2 to Form 8-K filed on August 23, 2005) 10.1 Executive Employment Agreement, made and entered into as of the 15th day of August, 2005, by and between the Company and Mr. Eric Claus (incorporated herein by reference to Exhibit 10.1 to Form 8-K filed on September 9, 2005) 10.2 Employment Agreement, made and entered into as of the 1st day of November, 2000, by and between the Company and William P. Costantini (incorporated herein by reference to Exhibit 10 to Form 10-Q filed on January 16, 2001) ("Costantini Agreement") 10.3 Amendment to Costantini Agreement dated April 30, 2002 (incorporated herein by reference to Exhibit 10.7 to Form 10-K filed on July 5, 2002)
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10.4 Confidential Separation and Release Agreement by and between William P. Costantini and The Great Atlantic & Pacific Tea Company, Inc. dated November 4, 2004 (incorporated herein by reference to Exhibit 10.4 to Form 10-Q filed on January 7, 2005) 10.5 Employment Agreement, made and entered into as of the 16th day of June, 2003, by and between our Company and Brenda Galgano (incorporated herein by reference to Exhibit 10.9 to Form 10-Q filed on October 17, 2003) 10.6 Employment Agreement, made and entered into as of the 24th day of February, 2002, by and between our Company and Mitchell P. Goldstein (incorporated herein by reference to Exhibit 10.8 to Form 10-K filed on July 5, 2002) 10.7 Letter Agreement dated September 6, 2005, between Mitchell P. Goldstein and our Company (incorporated herein by reference to Exhibit 10.2 to Form 8-K filed on September 9, 2005) 10.8 Employment Agreement, made and entered into as of the 2nd day of October, 2002, by and between our Company and Peter Jueptner (incorporated herein by reference to Exhibit 10.26 to Form 10-Q filed on October 22, 2002) ("Jueptner Agreement") 10.9 Amendment to Jueptner Agreement dated November 10, 2004 (incorporated herein by reference to Exhibit 10.8 to Form 10-K filed on May 10, 2005) 10.10 Offer Letter dated the 18th day of September 2002, by and between our Company and Peter Jueptner (incorporated herein by reference to Exhibit 10.10 to Form 10-Q filed on January 10, 2003) 10.11 Employment Agreement, made and entered into as of the 14th day of May, 2001, by and between our Company and John E. Metzger, as amended February 14, 2002 (incorporated herein by reference to Exhibit 10.13 to Form 10-K filed on July 5, 2002) ("Metzger Agreement") 10.12 Amendment to John E. Metzger Agreement dated September 13, 2004 (incorporated herein by reference to Exhibit 10.11 to Form 10-K filed on May 10, 2005) 10.13 Amendment to John E. Metzger Agreement dated October 25, 2004 (incorporated herein by reference to Exhibit 10.12 to Form 10-K filed on May 10, 2005) 10.14 Employment Agreement, made and entered into as of the 1st day of March 2005, by and between our Company and William J. Moss (incorporated herein by reference to Exhibit 10.13 to Form 10-K filed on May 10, 2005) 10.15 Employment Agreement, made and entered into as of the 28th day of October, 2002, by and between our Company and Brian Piwek, and Offer Letter dated the 23rd day of October, 2002 (incorporated herein by reference to Exhibit 10.14 to Form 10-Q filed on January 10, 2003) ("Piwek Agreement")
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10.16 Amendment to Brian Piwek Agreement dated February 4, 2005 (incorporated herein by reference to Exhibit 10.15 to Form 10-K filed on May 10, 2005) 10.17* Employment Agreement, made and entered into as of the 12th of September 2005, by and between our Company and Paul Wiseman, as filed herein 10.18* Employment Agreement, made and entered into as of the 2nd of December 2004, by and between our Company and Allan Richards, as filed herein 10.19* Employment Agreement, made and entered into as of the 2nd of December 2004, by and between our Company and Stephen Slade, as filed herein 10.20 Supplemental Executive Retirement Plan effective as of September 1, 1997 (incorporated herein by reference to Exhibit 10.B to Form 10-K filed on May 27, 1998) 10.21 Supplemental Retirement and Benefit Restoration Plan effective as of January 1, 2001 (incorporated herein by reference to Exhibit 10(j) to Form 10-K filed on May 23, 2001) 10.22 1994 Stock Option Plan (incorporated herein by reference to Exhibit 10(e) to Form 10-K filed on May 24, 1995) 10.23 1998 Long Term Incentive and Share Award Plan (incorporated herein by reference to Exhibit 10(k) to Form 10-K filed on May 19, 1999) 10.24 Form of Stock Option Grant (incorporated herein by reference to Exhibit 10.20 to Form 10-K filed on May 10, 2005) 10.25 Description of 2005 Turnaround Incentive Compensation Program (incorporated herein by reference to Exhibit 10.21 to Form 10-K filed on May 10, 2005) 10.26 Form of Restricted Share Unit Award Agreement (incorporated herein by reference to Exhibit 10.22 to Form 10-K filed on May 10, 2005) 10.27 1994 Stock Option Plan for Non-Employee Directors (incorporated herein by reference to Exhibit 10(f) to Form 10-K filed on May 24, 1995) 10.28 2004 Non-Employee Director Compensation effective as of July 14, 2004 (incorporated herein by reference to Exhibit 10.15 to Form 10-Q filed on July 29, 2004) 10.29 Description of Management Incentive Plan (incorporated herein by reference to Exhibit 10.26 to Form 10-K filed on May 10, 2005)
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10.30 Credit Agreement dated as of February 23, 2001, among our Company, The Great Atlantic & Pacific Company of Canada, Limited and the other Borrowers party hereto and the Lenders party hereto, The Chase Manhattan Bank, as U.S. Administrative Agent, and The Chase Manhattan Bank of Canada, as Canadian Administrative Agent ("Credit Agreement") (incorporated herein by reference to Exhibit 10 to Form 10-K filed on May 23, 2001) 10.31 Amendment No. 1 and Waiver, dated as of November 16, 2001 to Credit Agreement (incorporated herein by reference to Exhibit 10.23 to Form 10-K filed on July 5, 2002) 10.32 Amendment No. 2 dated as of March 21, 2002 to Credit Agreement (incorporated herein by reference to Exhibit 10.24 to Form 10-K filed on July 5, 2002) 10.33 Amendment No. 3 dated as of April 23, 2002 to Credit Agreement (incorporated herein by reference to Exhibit 10.25 to Form 10-K filed on July 5, 2002) 10.34 Waiver dated as of June 14, 2002 to Credit Agreement (incorporated herein by reference to Exhibit 10.26 to Form 10-K filed on July 5, 2002) 10.35 Amendment No. 4 dated as of October 10, 2002 to Credit Agreement (incorporated herein by reference to Exhibit 10.27 to Form 10-Q filed on October 22, 2002) 10.36 Amendment No. 5 dated as of February 21, 2003 to Credit Agreement (incorporated herein by reference to Exhibit 10.1 to Form 8-K filed on March 7, 2003) 10.37 Amendment No. 6 dated as of March 25, 2003 to Credit Agreement (incorporated herein by reference to Exhibit 10.28 to Form 10-K filed on May 9, 2003) 10.38* Asset Purchase Agreement, dated as of June 27, 2005, by and between the Company, Ocean Logistics LLC and C&S Wholesale Grocers, Inc., as filed herein 10.39* Supply Agreement, dated as of June 27, 2005, by and between the Company and C&S Wholesale Grocers, Inc., as filed herein 10.40* Information Technology Transition Services Agreement by and between The Great Atlantic and Pacific Tea Company, Limited ("A&P Canada") and Metro, Inc. entered into on August 15, 2005, as filed herein 10.41* Investor Agreement by and between A&P Luxembourg S.a.r.l., a wholly owned subsidiary of the Company, and Metro, Inc. entered into on August 15, 2005, as filed herein 10.42* Letter of Credit Agreement, dated as of October 14, 2005 between the Company and Bank of America, N.A., as Issuing Bank, as filed herein. 14 Code of Business Conduct and Ethics (incorporated herein by reference to Exhibit 14 to Form 10-K filed on May 21, 2004)
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18 Preferability Letter Issued by PricewaterhouseCoopers LLP (incorporated herein by reference to Exhibit 18 to Form 10-Q filed on July 29, 2004) 23 Consent of Independent Registered Public Accounting Firm (incorporated herein by reference to Exhibit 23 to Form 10-K filed on May 10, 2005) 31.1* Certification of the Chief Executive Officer Pursuant Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of the Chief Financial Officer Pursuant Section 302 of the Sarbanes-Oxley Act of 2002 32* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Filed with this 10-Q
83 THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. SIGNATURES Pursuant to the requirements 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. Dated: October 18, 2005 By: /s/ Brenda M. Galgano ----------------------------------------------- Brenda M.Galgano, Senior Vice President, Corporate Controller (Chief Accounting Officer) 84 Exhibit 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER SECTION 302 CERTIFICATION I, Eric Claus, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Great Atlantic & Pacific Tea Company, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and d) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Eric Claus Date: October 18, 2005 - -------------- Eric Claus President and Chief Executive Officer Exhibit 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER SECTION 302 CERTIFICATION I, Mitchell P. Goldstein, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Great Atlantic & Pacific Tea Company, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and d) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Mitchell P. Goldstein Date: October 18, 2005 - ------------------------- Mitchell P. Goldstein Executive Vice President, Chief Financial Officer & Secretary Exhibit 32 CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SS. 1350) The undersigned, Eric Claus, President and Chief Executive Officer of The Great Atlantic & Pacific Tea Company, Inc. ("Company"), and Mitchell P. Goldstein, Executive Vice President, Chief Financial Officer & Secretary of the Company, each hereby certifies that (1) the Quarterly Report of the Company on Form 10-Q for the period ended September 10, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of the Company. Dated: October 18, 2005 /s/ Eric Claus -------------- Eric Claus President and Chief Executive Officer Dated: October 18, 2005 /s/ Mitchell P. Goldstein ------------------------- Mitchell P. Goldstein Executive Vice President, Chief Financial Officer & Secretary EX-10 2 wisemanemploymentagreement.txt EXHIBIT 10.16 PAUL WISEMAN EMPLOYMENT AGREEMENT Exhibit 10.16 EMPLOYMENT AGREEMENT AGREEMENT, made and entered into as of the 12th day of September, 2005, by and between THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. (the "Company"), and PAUL WISEMAN (the "Employee"). W I T N E S S E T H WHEREAS, the Company and the Employee (the "Parties") have agreed to enter into this agreement (the "Agreement") relating to the employment of the Employee by the Company; and WHEREAS, this Agreement supercedes the agreement made and entered into as of the 1st day of March, 2004 by and between The Great Atlantic & Pacific Company of Canada, Limited and Paul Wiseman, and the Employee shall have no further right to any compensation or benefits under that agreement, NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein and for other good and valuable consideration, the Parties, intending to be legally bound, agree as follows: 1. Term of Employment. (a) The Company agrees to continue to employ the Employee, and the Employee agrees to remain in the employment of the Company, in accordance with the terms and provisions of this Agreement, for the period set forth below (the "Employment Period"). (b) The Employment Period under this Agreement shall commence as of September 12, 2005 and, subject only to the provisions of Sections 7, 8 and 9 below relating to termination of employment, shall continue until (i) the close of business on September 11, 2008 or (ii) such later date as shall result from the operation of subparagraph (c) below (the "Terminal Date"). (c) Commencing on April 1, 2007, and on the first business day of each month thereafter (such date and each such first business day, the "Renewal Date") the Terminal Date set forth in subparagraph (b) above shall be extended so as to occur eighteen months from the Renewal Date unless either the Company or the Employee shall have given written notice to the other Party on or before such Renewal Date that the Terminal Date is not to be extended. 2. Duties. It is the intention of the Parties that during the term of his employment under this Agreement, the Employee will serve as Senior Vice President of Operations of the Company. The Employee will devote his full business time and attention to the affairs of the Company and his duties as Senior Vice President of Operations. The Employee will have such duties as are appropriate to his position, and will have such authority as required to enable him to perform these duties. Consistent with the foregoing, the Employee shall comply with all reasonable instructions of the President and Chief Executive Officer of the Company. The Employee will report directly to the President and Chief Executive Officer of the Company. 3. Salary and Bonus. 3.1 Salary. The Company will pay the Employee a base salary at an initial annual rate of not less than $325,000.00, which base salary as in effect from time to time will not be reduced and will be reviewed periodically (at intervals of not more than twelve (12) months) by the Compensation Committee of the Board of Directors (the "Board") for the purpose of considering increases thereof. In evaluating increases in the Employee's base salary, the Compensation Committee of the Board will take into account such factors as corporate performance, individual merit, and such other considerations as it deems appropriate. The Employee's base salary will be paid in accordance with the standard practices for other corporate executives of the Company. 3.2 Bonuses. The Employee will be eligible to receive annually or otherwise any bonus awards, whether payable in cash, shares of common stock of the Company or otherwise, which the Company, the Compensation Committee of the Board or such other authorized committee of the Board determines to award or grant. 4. Benefit Programs. The Employee will receive such benefits and awards, including without limitation stock options and restricted share awards, as the Compensation Committee of the Board shall determine and will be eligible to participate in all employee benefit plans and programs of the Company from time to time in effect for the benefit of senior executives of the Company, including, but not limited to, pension and other retirement plans, group life insurance, hospitalization and surgical and major medical coverage, sick leave, salary continuation arrangements, vacations and holidays, long-term disability, and such other benefits as are or may be made available from time to time to senior executives of the Company. 5. Business Expenses and Perquisites. The Employee will be reimbursed for all reasonable expenses incurred by him in connection with the conduct of the business of the Company, provided he properly accounts therefor in accordance with the Company's policies. He will also be entitled to such other perquisites as are customary for senior executives of the Company. 6. Office and Services Furnished. The Company shall furnish the Employee with office space, secretarial assistance and such other facilities and services as shall be suitable to the Employee's position and adequate for the performance of his duties hereunder. 7. Termination of Employment by the Company. 7.1 Involuntary Termination by the Company Other Than For Permanent and Total Disability or For Cause. The Company may terminate the Employee's employment at any time and for any reason by giving him a written notice of termination to that effect at least 45 days before the date of termination. In the event the Company terminates the Employee's employment for any reason other than for Permanent and Total Disability, as provided in Section 7.2, below, or for Cause, as provided in Section 7.3, below, the Employee shall be entitled to the benefits described in Section 10 or Section 11, whichever is applicable. 7.2 Termination Due to Permanent and Total Disability. If the Employee incurs a Permanent and Total Disability, as defined below, the Company may terminate the Employee's employment by giving him written notice of termination at least 45 days before the date of such termination. In the event of such termination of the Employee's employment because of Permanent and Total Disability, the Employee shall be entitled to receive (i) his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination of employment at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. For purposes of this Agreement, the Employee shall be considered to have incurred a Permanent and Total Disability if he is unable to substantially carry out his duties under this Agreement by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. The existence of such Permanent and Total Disability shall be determined by the Compensation Committee of the Board of Directors of the Company and shall be evidenced by such medical certification as the Secretary of the Company shall require. 7.3 Termination for Cause. The Company may terminate the Employee's employment for Cause if (i) the Employee willfully, substantially, and continually fails to perform the duties for which he is employed by the Company, (ii) the Employee willfully fails to comply with the reasonable instructions of the President and Chief Executive Officer of the Company, (iii) the Employee willfully engages in conduct which is or would reasonably be expected to be materially and demonstrably injurious to the Company, (iv) the Employee willfully engages in an act or acts of dishonesty resulting in material personal gain to the Employee at the expense of the Company, (v) the Employee is convicted of a felony, (vi) the Employee engages in an act or acts of gross malfeasance in connection with his employment hereunder, (vii) the Employee commits a material breach of the confidentiality provision set forth in Section 15, or (viii) the Employee exhibits demonstrable evidence of alcohol or drug abuse having a substantial adverse effect on his job performance hereunder. The Company shall exercise its right to terminate the Employee's employment for Cause by giving him written notice of termination at least 45 days before the date of such termination specifying in reasonable detail the circumstances constituting such Cause. In the event of such termination of the Employee's employment for Cause, the Employee shall be entitled to receive (i) his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits and (ii) any amounts owed under the reimbursement policy of Section 5. 8. Termination of Employment by the Employee. (a) Good Reason. The Employee may terminate his employment for Good Reason by giving the Company a written notice of termination at least 45 days before the date of such termination specifying in reasonable detail the circumstances constituting such Good Reason. In the event of the Employee's termination of his employment for Good Reason, the Employee shall be entitled to the benefits described in Section 10 or Section 11, whichever is applicable. For purposes of this Agreement, Good Reason shall mean (i) a significant reduction in the scope of the Employee's authority, functions, duties or responsibilities from that which is contemplated by this Agreement, (ii) any reduction in the Employee's base salary, or (iii) a significant reduction in the employee benefits provided to the Employee other than as stated in your offer letter dated September 12, 2005 and other than in connection with an across-the-board reduction similarly affecting substantially all senior executives of the Company. If an event constituting a ground for termination of employment for Good Reason occurs, and the Employee fails to give notice of termination within 3 months after the occurrence of such event, the Employee shall be deemed to have waived his right to terminate employment for Good Reason in connection with such event (but not for any other event for which the 3-month period has not expired). (b) Other. The Employee may terminate his employment at any time and for any reason, other than pursuant to subsection (a) above, by giving the Company a written notice of termination to that effect at least 45 days before the date of termination. In the event of the Employee's termination of his employment pursuant to this subsection (b), the Employee shall be entitled to receive (i) his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. 9. Termination of Employment By Death. In the event of the death of the Employee during the course of his employment hereunder, the Employee's estate shall be entitled to receive (i) his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any other benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. In addition, in the event of such death, the Employee's beneficiaries shall receive any death benefits owed to them under the Company's employee benefit plans. 10. Benefits Upon Termination Without Cause or For Good Reason (No Change of Control). If (a) the Employee's employment with the Company shall terminate (i) because of termination by the Company pursuant to Section 7.1 other than for Cause and other than because of Permanent and Total Disability, or (ii) because of termination by the Employee for Good Reason pursuant to Section 8(a), and (b) such termination of employment does not occur within 13 months following a "Change of Control" of the Company (as defined in Section 12), the Employee, upon execution of a Confidential Separation and Release Agreement, shall be entitled to the following: (a) The Company shall pay to the Employee his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee under this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits. (b) The Company shall pay the Employee any reimbursement amounts owing under Section 5. (c) The Company shall pay to the Employee as a severance benefit for each month during the 18 month period beginning with the month next following the date of termination of the Employee's employment an amount equal to one-twelfth of the sum of (i) his annual rate of base salary immediately preceding his termination of employment, and (ii) the average of his three highest annual bonuses awarded under the Company's annual management incentive bonus plan for any of the five fiscal years immediately preceding the fiscal year of his termination of employment, (or, if he was not eligible for a bonus for at least three fiscal years in such five-year period, then the average of such bonuses for all of the fiscal years in such five-year period for which he was eligible, and if he was not eligible for such a bonus in any previous fiscal year, then 100% of his target annual bonus for the fiscal year in which the termination occurred), with any deferred bonuses counting for the fiscal year in which it was earned rather than the year in which it was paid. Each such monthly benefit shall be paid no later than the last day of the applicable month. In the event that the Employee dies before the end of such 18-month period, the payments for the remainder of such period shall be made to the Employee's estate. (d) The Company shall pay to the Employee as a bonus for the fiscal year in which the termination occurred an amount equal to a portion (determined as provided in the next sentence) of the bonus that the Employee would actually have received under the Company's annual management incentive bonus plan for the fiscal year of termination of the Employee's employment if his employment had not terminated (determined on the basis of his actual bonus opportunity and the actual degree of achievement of the applicable performance goals) or, if no bonus opportunity for that year had been established for the Employee at the time of such termination of employment, such portion of the bonus awarded to him under the Company's annual management incentive bonus plan for the fiscal year immediately preceding the fiscal year of the termination of his employment, with deferred bonuses counting for the fiscal year in which it was earned rather than the year in which it was paid. Such portion shall be determined by dividing the number of days of the Employee's employment during such fiscal year up to his termination of employment by 365 (366 if a leap year). Such payment shall be made on or about the date on which bonuses for the applicable fiscal year are paid to executives of the Company generally under the Company's annual management incentive bonus plan, and the Employee shall have no right to any further bonuses under said plan. (e) During the period of 18 months beginning on the date of the Employee's termination of employment, the Employee shall remain covered by the medical, dental, vision, life insurance, and, if reasonably commercially available through nationally reputable insurance carriers, long-term disability plans of the Company that covered him immediately prior to his termination of employment as if he had remained in employment for such period. In the event that the Employee's participation in any such plan is barred, the Company shall arrange to provide the Employee with substantially similar benefits (but, in the case of long-term disability benefits, only if reasonably commercially available). Any medical insurance coverage for such 18-month period pursuant to this subsection (e) shall become secondary upon the earlier of (i) the date on which the Employee begins to be covered by comparable medical coverage provided by a new employer, or (ii) the earliest date upon which the Employee becomes eligible for Medicare or a comparable Government insurance program. 11. Benefits Upon Termination Without Cause or For Good Reason (Change of Control). If (a) the Employee's employment with the Company shall terminate (i) because of termination by the Company pursuant to Section 7.1 other than for Cause and other than because of Permanent and Total Disability, (ii) because of termination by the Employee for Good Reason pursuant to Section 8(a), or (iii) for any reason during the 30 days beginning on the first anniversary of a Change of Control, and (b) such termination of employment occurs within 13 months following a "Change of Control" of the Company (as defined in Section 12), the Employee, upon execution of a Confidential Separation and Release Agreement, shall be entitled to the following: (a) The Company shall pay to the Employee his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee under this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits. (b) The Company shall pay the Employee any reimbursement amounts owing under Section 5. (c) The Company shall pay to the Employee as a severance benefit an amount equal to three (3) times the sum of (i) his annual rate of base salary immediately preceding his termination of employment, and (ii) the average of his three highest annual bonuses awarded under the Company's annual management incentive bonus plan for any of the five fiscal years immediately preceding the fiscal year of his termination of employment (or, if he was not eligible for a bonus for at least three fiscal years in such five-year period, then the average of such bonuses for all of the fiscal years in such five-year period for which he was eligible, and if he was not eligible for such a bonus in any previous fiscal year, then 100% of his target annual bonus for the fiscal year in which the termination occurred, with any deferred bonuses counting for the fiscal year in which it was earned rather than the year in which it was paid. Such severance benefit shall be paid in a lump sum within 45 days after the date of such termination of employment. (d) The Company shall pay to the Employee as a bonus for the fiscal year in which the termination occurred an amount equal to a portion (determined as provided in the next sentence) of the bonus that the Employee would actually have received under the Company's annual management incentive bonus plan for the fiscal year of termination of the Employee's employment if his employment had not terminated (determined on the basis of his actual bonus opportunity and the actual degree of achievement of the applicable performance goals) or, if no bonus opportunity for that year had been established for the Employee at the time of such termination of employment, such portion of the bonus awarded to him under the Company's annual management incentive bonus plan for the fiscal year immediately preceding the fiscal year of the termination of his employment, with deferred bonuses counting for the fiscal year in which it was earned rather than the year in which it was paid. Such portion shall be determined by dividing the number of days of the Employee's employment during such fiscal year up to his termination of employment by 365 (366 if a leap year). Such payment shall be made on or about the date on which bonuses for the applicable fiscal year are paid to executives of the Company generally under the Company's annual management incentive bonus plan, and the Employee shall have no right to any further bonuses under said plan. (e) During the period of 36 months beginning on the date of the Employee's termination of employment, the Employee shall remain covered by the medical, dental, vision, life insurance, and, if reasonably commercially available through nationally reputable insurance carriers, long-term disability plans of the Company that covered him immediately prior to his termination of employment as if he had remained in employment for such period. In the event that the Employee's participation in any such plan is barred, the Company shall arrange to provide the Employee with substantially similar benefits (but, in the case of long-term disability benefits, only if reasonably commercially available). Any medical insurance coverage for such 36-month period pursuant to this subsection (e) shall become secondary upon the earlier of (i) the date on which the Employee begins to be covered by comparable medical coverage provided by a new employer, or (ii) the earliest date upon which the Employee becomes eligible for Medicare or a comparable Government insurance program. 12. Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if (a) any person or persons acting together which would constitute a "group" for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (other than the Company, any subsidiary of the Company, and Tengelmann Warenhandelsgesellschaft KG (a partnership organized under the laws of the Federal Republic of Germany or any successor to such partnership, hereinafter "Tengelmann")) shall beneficially own (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, at least 30% of the total voting power of all classes of capital stock of the Company entitled to vote generally in the election of the Board and such voting power exceeds the then current voting power of Tengelmann; (b) control of Tengelmann is acquired by any person or persons other than family members or entities controlled by family members of Erivan Haub; (c) Current Directors (as herein defined) shall cease for any reason to constitute at least a majority of the members of the Board (for this purpose, a "Current Director" shall mean any member of the Board as of the date hereof and any successor of a Current Director whose election, or nomination for election by the Company's shareholders, was approved by at least two-thirds of the Current Directors then on the Board); (d) the shareholders of the Company approve (i) a plan of complete liquidation of the Company or (ii) an agreement providing for the merger or consolidation of the Company other than a merger or consolidation in which (x) the holders of the common stock of the Company immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger or (y) the Board immediately prior to the merger or consolidation would, immediately after the merger or consolidation, constitute a majority of the board of directors of the continuing or surviving corporation; or (e) the shareholders of the Company approve an agreement (or agreements) providing for the sale or other disposition (in one transaction or a series of transactions) of all or substantially all of the assets of the Company. 13. Entitlement to Other Benefits. Except as otherwise provided in this Agreement, this Agreement shall not be construed as limiting in any way any rights or benefits that the Employee or his spouse, dependents or beneficiaries may have pursuant to any other plan or program of the Company. 14. Non-Competition. The Employee agrees that during the term of this Agreement and for a period of eighteen months following termination of his employment, the Employee will not, within any of the geographical areas of the United States or Canada in which the Company is then conducting business (either directly or through franchisees), directly or indirectly, own, manage, operate, control, be employed by, participate in, provide consulting services to, or be connected in any manner with the ownership, management, operation or control of any business similar to any of the types of businesses conducted by the Company to any significant extent during his employment or on the date of termination of his employment, except the Employee may own for investment purposes up to 1% of the capital stock of any company whose stock is publicly traded, and during such eighteen month period following termination of his employment the Employee will not contact or solicit employees of the Company for the purpose of inducing such employees to leave the employ of the Company. Notwithstanding any other provision of this Agreement, if the Employee breaches this non-competition provision, then the Company may, in addition to any other rights and remedies available to it at law or under this Agreement, discontinue paying to the Employee any of the severance benefits described in Sections 10 or 11. 15. Confidential Information and Trade Secrets. The Employee hereby acknowledges that he will have access to and become acquainted with various trade secrets and proprietary information of the Company and other confidential information relating to the Company. The Employee covenants that he will not, directly or indirectly, disclose or use such information except as is necessary and appropriate in connection with his employment by the Company and that he will otherwise adhere in all respects to the Company's policies against the use or disclosure of such information. 16. Arbitration; Injunctive Relief. Any controversy or claim arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof, will be settled by arbitration in accordance with the rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The arbitration will be held in New York, New York, or such other place as may be agreed upon at the time by the parties to the arbitration. The parties shall bear their own expenses in connection with any arbitration or proceeding arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof; provided, however, that in the event that the Employee substantially prevails, the Company agrees promptly to reimburse the Employee for all expenses (including costs and fees of witnesses, evidence and attorneys fees and expenses) reasonably incurred by him in investigating, prosecuting, defending, or preparing to prosecute or defend any action, proceeding or claim arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof. The parties acknowledge and agree that a breach of Employee's obligations under Sections 14 or 15 could cause irreparable harm to Company for which Company would have no adequate remedy at law, and further agree that, notwithstanding the agreement of the parties to arbitrate controversies or claims as set forth above, the Company may apply to a court of competent jurisdiction to seek to enjoin preliminarily or permanently any breach or threatened breach of the Employee's obligations under Sections 14 and 15. 17. Indemnification. The Company shall indemnify and hold the Employee harmless to the fullest extent legally permissible under the laws of the State of Maryland, against any and all expenses, liabilities and losses (including attorney's fees, judgments, fines and amounts paid in settlement) reasonably incurred or suffered by him by reason of any claim or cause of action asserted against him because of his service at any time as a director or officer of the Company. The Company shall advance to the Employee the amount of his expenses incurred in connection with any proceeding relating to such service to the fullest extent legally permissible under the laws of the State of Maryland. Notwithstanding the foregoing, the Company's obligations pursuant to this Section 17 shall not apply in the case of any claim or cause of action by or in the right of the Company or any subsidiary thereof. 18. Liability Insurance. To the extent that Company maintains a directors and officers liability insurance policy in effect, the Company will take all steps necessary to ensure that the Employee is covered under such policy for his service as a director or officer of the Company or any subsidiary of the Company with respect to claims made at any time with respect to such service. 19. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution made, or benefit provided (including, without limitation, the acceleration of any payment, distribution or benefit and the accelerated exercisability of any stock option), to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 19) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (or any similar excise tax) or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive from the Company an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes (including any Excise Tax, income tax or employment tax and taking into account any lost or reduced tax deductions on account of such Gross-Up Payment) imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, the Employee retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 19(c), all determinations required to be made under this Section 19, including determination of whether a Gross-Up Payment is required and of the amount of any such Gross-up Payment, shall be made by Price Waterhouse Coopers or the Company's then current accounting firm (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Employee within 15 business days of the date of termination of the Employee's employment, if applicable, or such earlier time as is requested by the Company, provided that any determination that an Excise Tax is payable by the Employee shall be made on the basis of substantial authority. The initial Gross-Up Payment, if any, as determined pursuant to this Section 19(b), shall be paid to the Employee within five business days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Employee, it shall furnish the Employee with a written opinion that she has substantial authority not to report any Excise Tax on her Federal income tax return. Any determination by the Accounting Firm meeting the requirements of this Section 19(b) shall be binding upon the Company and the Employee; subject only to payments pursuant to the following sentence based on a determination that additional Gross-Up Payments should have been made, consistent with the calculations required to be made hereunder (the amount of such additional payments is referred to herein as the "Gross-Up Underpayment"). In the event that the Company exhausts its remedies pursuant to Section 19(c) and the Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Gross-Up Underpayment that has occurred and any such Gross-Up Underpayment shall be promptly paid by the Company to or for the benefit of the Employee. The fees and disbursements of the Accounting Firm shall be paid by the Company. (c) The Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but not later than ten business days after the Employee receives written notice of such claim and shall apprise the Company of the nature of such claim and the date on which such Claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim and that it will bear the costs and provide the indemnification as required by this sentence, the Employee shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax, income tax or employment tax (taking into account any lost or reduced tax deductions on account of such payments), including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 19(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Employee on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax, income tax or employment tax (taking into account any lost or reduced tax deductions on account of such advance), including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to the payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 19(c), the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of Section 19(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 19(c), a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then any obligation of the Employee to repay such advance shall be forgiven and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 20. No Duty to Seek Employment. The Employee shall not be under any duty or obligation to seek or accept other employment following termination of employment, and, except as otherwise provided in paragraph 14, no amount, payment or benefits due to the Employee hereunder shall be reduced or suspended if the Employee accepts subsequent employment. 21. Deductions and Withholding. All amounts payable or which become payable under any provision of this Agreement shall be subject to any deductions authorized by the Employee and any deductions and withholdings required by law. 22. Modifications to Comply with IRC Section 409A. If any payments under this Agreement would not comply with the requirements of Section 409A of Internal Revenue Code of 1986, as amended, and the regulations and Internal Revenue Service guidance thereunder, the Parties hereto agree to use their best efforts to modify the terms of such payments in a manner mutually agreeable to both Parties so that such requirements are satisfied. 23. Governing Law. The validity, interpretation and performance of this Agreement will be governed by the laws of the State of New Jersey without regard to the conflict of law provisions. 24. Severability. If any one or more of the provisions contained in this Agreement is held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect any other provision hereof. 25. Successors and Assigns. This Agreement will be binding upon and inure to the benefit of the Parties hereto and their personal representatives, and, in the case of the Company, its successors and assigns. To the extent the Company's obligations under this Agreement are transferred to any successor or assign, such successor or assign shall be treated as the "Company" for purposes of this Agreement. Other than as contemplated by this Agreement, the Employee may not assign his rights or duties under this Agreement. 26. Continuing Effect. Wherever appropriate to the intention of the Parties hereto, the respective rights and obligations of the Parties, including but not limited to the obligations referred to in Sections 10, 11, 14, 15 and 19, hereof, will survive any termination or expiration of the term of this Agreement. 27. Entire Agreement. This Agreement constitutes the entire agreement between the Parties and supersedes any and all other agreements and understandings between the Parties in respect of the matters addressed in this Agreement. 28. Amendment and Waiver. No amendment or waiver of any provision of this Agreement shall be effective, unless the same shall be in writing and signed by the Parties, and then such amendment, waiver or consent shall be effective only in the specific instance or for the specific purpose for which such amendment, waiver or consent was given. 29. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Employee has hereunto set his hand as of the day and year first above written. THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. BY: /s/Allan Richards ITS: SVP-HR DATE: September 12, 2005 /s/Paul Wiseman September 21, 2005 PAUL WISEMAN DATE EX-10 3 arichardsemploymentagreement.txt EXHIBIT 10.17 ALLAN RICHARDS EMPLOYMENT AGREEMENT Exhibit 10.17 EMPLOYMENT AGREEMENT AGREEMENT, made and entered into as of the 15th day of November, 2004, by and between THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. (the "Company"), and ALLAN RICHARDS (the "Employee"). W I T N E S S E T H WHEREAS, the Company and the Employee (the "Parties") have agreed to enter into this agreement (the "Agreement") relating to the employment of the Employee by the Company; NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein and for other good and valuable consideration, the Parties, intending to be legally bound, agree as follows: 1. Term of Employment. (a) The Company agrees to continue to employ the Employee, and the Employee agrees to remain in the employment of the Company, in accordance with the terms and provisions of this Agreement, for the period set forth below (the "Employment Period"). (b) The Employment Period under this Agreement shall commence as of November 15, 2004 and, subject only to the provisions of Sections 7, 8 and 9 below relating to termination of employment, shall continue until (i) the close of business on November 14, 2007 or (ii) such later date as shall result from the operation of subparagraph (c) below (the "Terminal Date"). (c) Commencing on May 15, 2006, and on the first business day of each month thereafter (such date and each such first business day, the "Renewal Date") the Terminal Date set forth in subparagraph (b) above shall be extended so as to occur eighteen months from the Renewal Date unless either the Company or the Employee shall have given written notice to the other Party on or before such Renewal Date that the Terminal Date is not to be extended. 2. Duties. It is the intention of the Parties that during the term of his employment under this Agreement, the Employee will serve as Senior Vice President of Human Resources and Labor Relations of the Company. The Employee will devote his full business time and attention to the affairs of the Company and his duties as Senior Vice President of Human Resources and Labor Relations. The Employee will have such duties as are appropriate to his position, and will have such authority as required to enable him to perform these duties. Consistent with the foregoing, the Employee shall comply with all reasonable instructions of the President and Chief Operating Officer of the Company. The Employee will report directly to the President and Chief Operating Officer of the Company. 3. Salary and Bonus. 3.1 Salary. The Company will pay the Employee a base salary at an initial annual rate of not less than $300,000.00, which base salary as in effect from time to time will not be reduced and will be reviewed periodically (at intervals of not more than twelve (12) months) by the Compensation Committee of the Board of Directors (the "Board") for the purpose of considering increases thereof. In evaluating increases in the Employee's base salary, the Compensation Committee of the Board will take into account such factors as corporate performance, individual merit, and such other considerations as it deems appropriate. The Employee's base salary will be paid in accordance with the standard practices for other corporate executives of the Company. 3.2 Bonuses. The Employee will be eligible to receive annually or otherwise any bonus awards, whether payable in cash, shares of common stock of the Company or otherwise, which the Company, the Compensation Committee of the Board or such other authorized committee of the Board determines to award or grant. 4. Benefit Programs. The Employee will receive such benefits and awards, including without limitation stock options and restricted share awards, as the Compensation Committee of the Board shall determine and will be eligible to participate in all employee benefit plans and programs of the Company from time to time in effect for the benefit of senior executives of the Company, including, but not limited to, pension and other retirement plans, group life insurance, hospitalization and surgical and major medical coverage, sick leave, salary continuation arrangements, vacations and holidays, long-term disability, and such other benefits as are or may be made available from time to time to senior executives of the Company. 5. Business Expenses and Perquisites. The Employee will be reimbursed for all reasonable expenses incurred by him in connection with the conduct of the business of the Company, provided he properly accounts therefor in accordance with the Company's policies. He will also be entitled to such other perquisites as are customary for senior executives of the Company. 6. Office and Services Furnished. The Company shall furnish the Employee with office space, secretarial assistance and such other facilities and services as shall be suitable to the Employee's position and adequate for the performance of his duties hereunder. 7. Termination of Employment by the Company. 7.1 Involuntary Termination by the Company Other Than For Permanent and Total Disability or For Cause. The Company may terminate the Employee's employment at any time and for any reason by giving him a written notice of termination to that effect at least 45 days before the date of termination. In the event the Company terminates the Employee's employment for any reason other than for Permanent and Total Disability, as provided in Section 7.2, below, or for Cause, as provided in Section 7.3, below, the Employee shall be entitled to the benefits described in Section 10 or Section 11, whichever is applicable. 7.2 Termination Due to Permanent and Total Disability. If the Employee incurs a Permanent and Total Disability, as defined below, the Company may terminate the Employee's employment by giving him written notice of termination at least 45 days before the date of such termination. In the event of such termination of the Employee's employment because of Permanent and Total Disability, the Employee shall be entitled to receive (i) his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination of employment at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. For purposes of this Agreement, the Employee shall be considered to have incurred a Permanent and Total Disability if he is unable to substantially carry out his duties under this Agreement by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. The existence of such Permanent and Total Disability shall be determined by the Compensation Committee of the Board of Directors of the Company and shall be evidenced by such medical certification as the Secretary of the Company shall require. 7.3 Termination for Cause. The Company may terminate the Employee's employment for Cause if (i) the Employee willfully, substantially, and continually fails to perform the duties for which he is employed by the Company, (ii) the Employee willfully fails to comply with the reasonable instructions of the President and Chief Operating Officer of the Company, (iii) the Employee willfully engages in conduct which is or would reasonably be expected to be materially and demonstrably injurious to the Company, (iv) the Employee willfully engages in an act or acts of dishonesty resulting in material personal gain to the Employee at the expense of the Company, (v) the Employee is convicted of a felony, (vi) the Employee engages in an act or acts of gross malfeasance in connection with his employment hereunder, (vii) the Employee commits a material breach of the confidentiality provision set forth in Section 15, or (viii) the Employee exhibits demonstrable evidence of alcohol or drug abuse having a substantial adverse effect on his job performance hereunder. The Company shall exercise its right to terminate the Employee's employment for Cause by giving him written notice of termination at least 45 days before the date of such termination specifying in reasonable detail the circumstances constituting such Cause. In the event of such termination of the Employee's employment for Cause, the Employee shall be entitled to receive (i) his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits and (ii) any amounts owed under the reimbursement policy of Section 5. 8. Termination of Employment by the Employee. (a) Good Reason. The Employee may terminate his employment for Good Reason by giving the Company a written notice of termination at least 45 days before the date of such termination specifying in reasonable detail the circumstances constituting such Good Reason. In the event of the Employee's termination of his employment for Good Reason, the Employee shall be entitled to the benefits described in Section 10 or Section 11, whichever is applicable. For purposes of this Agreement, Good Reason shall mean (i) a significant reduction in the scope of the Employee's authority, functions, duties or responsibilities from that which is contemplated by this Agreement, (ii) the Employee being required to report directly to someone other than the President and Chief Operating Officer of the Company, (iii) any reduction in the Employee's base salary, or (iv) a significant reduction in the employee benefits provided to the Employee other than in connection with an across-the-board reduction similarly affecting substantially all senior executives of the Company. If an event constituting a ground for termination of employment for Good Reason occurs, and the Employee fails to give notice of termination within 3 months after the occurrence of such event, the Employee shall be deemed to have waived his right to terminate employment for Good Reason in connection with such event (but not for any other event for which the 3-month period has not expired). (b) Other. The Employee may terminate his employment at any time and for any reason, other than pursuant to subsection (a) above, by giving the Company a written notice of termination to that effect at least 45 days before the date of termination. In the event of the Employee's termination of his employment pursuant to this subsection (b), the Employee shall be entitled to receive (i) his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. 9. Termination of Employment By Death. In the event of the death of the Employee during the course of his employment hereunder, the Employee's estate shall be entitled to receive (i) his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any other benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. In addition, in the event of such death, the Employee's beneficiaries shall receive any death benefits owed to them under the Company's employee benefit plans. 10. Benefits Upon Termination Without Cause or For Good Reason (No Change of Control). If (a) the Employee's employment with the Company shall terminate (i) because of termination by the Company pursuant to Section 7.1 other than for Cause and other than because of Permanent and Total Disability, or (ii) because of termination by the Employee for Good Reason pursuant to Section 8(a), and (b) such termination of employment does not occur within 13 months following a "Change of Control" of the Company (as defined in Section 12), the Employee, upon execution of a Confidential Separation and Release Agreement, shall be entitled to the following: (a) The Company shall pay to the Employee his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee under this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits. (b) The Company shall pay the Employee any reimbursement amounts owing under Section 5. (c) The Company shall pay to the Employee as a severance benefit for each month during the 18 month period beginning with the month next following the date of termination of the Employee's employment an amount equal to one-twelfth of the sum of (i) his annual rate of base salary immediately preceding his termination of employment, and (ii) the average of his three highest annual bonuses awarded under the Company's annual management incentive bonus plan for any of the five fiscal years immediately preceding the fiscal year of his termination of employment, (or, if he was not eligible for a bonus for at least three fiscal years in such five-year period, then the average of such bonuses for all of the fiscal years in such five-year period for which he was eligible, and if he was not eligible for such a bonus in any previous fiscal year, then 100% of his target annual bonus for the fiscal year in which the termination occurred), with any deferred bonuses counting for the fiscal year in which it was earned rather than the year in which it was paid. Each such monthly benefit shall be paid no later than the last day of the applicable month. In the event that the Employee dies before the end of such 18-month period, the payments for the remainder of such period shall be made to the Employee's estate. (d) The Company shall pay to the Employee as a bonus for the fiscal year in which the termination occurred an amount equal to a portion (determined as provided in the next sentence) of the bonus that the Employee would actually have received under the Company's annual management incentive bonus plan for the fiscal year of termination of the Employee's employment if his employment had not terminated (determined on the basis of his actual bonus opportunity and the actual degree of achievement of the applicable performance goals) or, if no bonus opportunity for that year had been established for the Employee at the time of such termination of employment, such portion of the bonus awarded to him under the Company's annual management incentive bonus plan for the fiscal year immediately preceding the fiscal year of the termination of his employment, with deferred bonuses counting for the fiscal year in which it was earned rather than the year in which it was paid. Such portion shall be determined by dividing the number of days of the Employee's employment during such fiscal year up to his termination of employment by 365 (366 if a leap year). Such payment shall be made on or about the date on which bonuses for the applicable fiscal year are paid to executives of the Company generally under the Company's annual management incentive bonus plan, and the Employee shall have no right to any further bonuses under said plan. (e) During the period of 18 months beginning on the date of the Employee's termination of employment, the Employee shall remain covered by the medical, dental, vision, life insurance, and, if reasonably commercially available through nationally reputable insurance carriers, long-term disability plans of the Company that covered him immediately prior to his termination of employment as if he had remained in employment for such period. In the event that the Employee's participation in any such plan is barred, the Company shall arrange to provide the Employee with substantially similar benefits (but, in the case of long-term disability benefits, only if reasonably commercially available). Any medical insurance coverage for such 18-month period pursuant to this subsection (e) shall become secondary upon the earlier of (i) the date on which the Employee begins to be covered by comparable medical coverage provided by a new employer, or (ii) the earliest date upon which the Employee becomes eligible for Medicare or a comparable Government insurance program. 11. Benefits Upon Termination Without Cause or For Good Reason (Change of Control). If (a) the Employee's employment with the Company shall terminate (i) because of termination by the Company pursuant to Section 7.1 other than for Cause and other than because of Permanent and Total Disability, (ii) because of termination by the Employee for Good Reason pursuant to Section 8(a), or (iii) for any reason during the 30 days beginning on the first anniversary of a Change of Control, and (b) such termination of employment occurs within 13 months following a "Change of Control" of the Company (as defined in Section 12), the Employee, upon execution of a Confidential Separation and Release Agreement, shall be entitled to the following: (a) The Company shall pay to the Employee his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee under this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits. (b) The Company shall pay the Employee any reimbursement amounts owing under Section 5. (c) The Company shall pay to the Employee as a severance benefit an amount equal to three (3) times the sum of (i) his annual rate of base salary immediately preceding his termination of employment, and (ii) the average of his three highest annual bonuses awarded under the Company's annual management incentive bonus plan for any of the five fiscal years immediately preceding the fiscal year of his termination of employment (or, if he was not eligible for a bonus for at least three fiscal years in such five-year period, then the average of such bonuses for all of the fiscal years in such five-year period for which he was eligible, and if he was not eligible for such a bonus in any previous fiscal year, then 100% of his target annual bonus for the fiscal year in which the termination occurred, with any deferred bonuses counting for the fiscal year in which it was earned rather than the year in which it was paid. Such severance benefit shall be paid in a lump sum within 45 days after the date of such termination of employment. (d) The Company shall pay to the Employee as a bonus for the fiscal year in which the termination occurred an amount equal to a portion (determined as provided in the next sentence) of the bonus that the Employee would actually have received under the Company's annual management incentive bonus plan for the fiscal year of termination of the Employee's employment if his employment had not terminated (determined on the basis of his actual bonus opportunity and the actual degree of achievement of the applicable performance goals) or, if no bonus opportunity for that year had been established for the Employee at the time of such termination of employment, such portion of the bonus awarded to him under the Company's annual management incentive bonus plan for the fiscal year immediately preceding the fiscal year of the termination of his employment, with deferred bonuses counting for the fiscal year in which it was earned rather than the year in which it was paid. Such portion shall be determined by dividing the number of days of the Employee's employment during such fiscal year up to his termination of employment by 365 (366 if a leap year). Such payment shall be made on or about the date on which bonuses for the applicable fiscal year are paid to executives of the Company generally under the Company's annual management incentive bonus plan, and the Employee shall have no right to any further bonuses under said plan. (e) During the period of 36 months beginning on the date of the Employee's termination of employment, the Employee shall remain covered by the medical, dental, vision, life insurance, and, if reasonably commercially available through nationally reputable insurance carriers, long-term disability plans of the Company that covered him immediately prior to his termination of employment as if he had remained in employment for such period. In the event that the Employee's participation in any such plan is barred, the Company shall arrange to provide the Employee with substantially similar benefits (but, in the case of long-term disability benefits, only if reasonably commercially available). Any medical insurance coverage for such 36-month period pursuant to this subsection (e) shall become secondary upon the earlier of (i) the date on which the Employee begins to be covered by comparable medical coverage provided by a new employer, or (ii) the earliest date upon which the Employee becomes eligible for Medicare or a comparable Government insurance program. 12. Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if (a) any person or persons acting together which would constitute a "group" for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (other than the Company, any subsidiary of the Company, and Tengelmann Warenhandelsgesellschaft KG (a partnership organized under the laws of the Federal Republic of Germany or any successor to such partnership, hereinafter "Tengelmann")) shall beneficially own (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, at least 30% of the total voting power of all classes of capital stock of the Company entitled to vote generally in the election of the Board and such voting power exceeds the then current voting power of Tengelmann; (b) control of Tengelmann is acquired by any person or persons other than family members or entities controlled by family members of Erivan Haub; (c) Current Directors (as herein defined) shall cease for any reason to constitute at least a majority of the members of the Board (for this purpose, a "Current Director" shall mean any member of the Board as of the date hereof and any successor of a Current Director whose election, or nomination for election by the Company's shareholders, was approved by at least two-thirds of the Current Directors then on the Board); (d) the shareholders of the Company approve (i) a plan of complete liquidation of the Company or (ii) an agreement providing for the merger or consolidation of the Company other than a merger or consolidation in which (x) the holders of the common stock of the Company immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger or (y) the Board immediately prior to the merger or consolidation would, immediately after the merger or consolidation, constitute a majority of the board of directors of the continuing or surviving corporation; or (e) the shareholders of the Company approve an agreement (or agreements) providing for the sale or other disposition (in one transaction or a series of transactions) of all or substantially all of the assets of the Company. 13. Entitlement to Other Benefits. Except as otherwise provided in this Agreement, this Agreement shall not be construed as limiting in any way any rights or benefits that the Employee or his spouse, dependents or beneficiaries may have pursuant to any other plan or program of the Company. 14. Non-Competition. The Employee agrees that during the term of this Agreement and for a period of eighteen months following termination of his employment, the Employee will not, within any of the geographical areas of the United States or Canada in which the Company is then conducting business (either directly or through franchisees), directly or indirectly, own, manage, operate, control, be employed by, participate in, provide consulting services to, or be connected in any manner with the ownership, management, operation or control of any business similar to any of the types of businesses conducted by the Company to any significant extent during his employment or on the date of termination of his employment, except the Employee may own for investment purposes up to 1% of the capital stock of any company whose stock is publicly traded, and during such eighteen month period following termination of his employment the Employee will not contact or solicit employees of the Company for the purpose of inducing such employees to leave the employ of the Company. 15. Confidential Information and Trade Secrets. The Employee hereby acknowledges that he will have access to and become acquainted with various trade secrets and proprietary information of the Company and other confidential information relating to the Company. The Employee covenants that he will not, directly or indirectly, disclose or use such information except as is necessary and appropriate in connection with his employment by the Company and that he will otherwise adhere in all respects to the Company's policies against the use or disclosure of such information. 16. Arbitration; Injunctive Relief. Any controversy or claim arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof, will be settled by arbitration in accordance with the rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The arbitration will be held in New York, New York, or such other place as may be agreed upon at the time by the parties to the arbitration. The parties shall bear their own expenses in connection with any arbitration or proceeding arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof; provided, however, that in the event that the Employee substantially prevails, the Company agrees promptly to reimburse the Employee for all expenses (including costs and fees of witnesses, evidence and attorneys fees and expenses) reasonably incurred by him in investigating, prosecuting, defending, or preparing to prosecute or defend any action, proceeding or claim arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof. The parties acknowledge and agree that a breach of Employee's obligations under Sections 14 or 15 could cause irreparable harm to Company for which Company would have no adequate remedy at law, and further agree that, notwithstanding the agreement of the parties to arbitrate controversies or claims as set forth above, the Company may apply to a court of competent jurisdiction to seek to enjoin preliminarily or permanently any breach or threatened breach of the Employee's obligations under Sections 14 and 15. 17. Indemnification. The Company shall indemnify and hold the Employee harmless to the fullest extent legally permissible under the laws of the State of Maryland, against any and all expenses, liabilities and losses (including attorney's fees, judgments, fines and amounts paid in settlement) reasonably incurred or suffered by him by reason of any claim or cause of action asserted against him because of his service at any time as a director or officer of the Company. The Company shall advance to the Employee the amount of his expenses incurred in connection with any proceeding relating to such service to the fullest extent legally permissible under the laws of the State of Maryland. Notwithstanding the foregoing, the Company's obligations pursuant to this Section 17 shall not apply in the case of any claim or cause of action by or in the right of the Company or any subsidiary thereof. 18. Liability Insurance. To the extent that Company maintains a directors and officers liability insurance policy in effect, the Company will take all steps necessary to ensure that the Employee is covered under such policy for his service as a director or officer of the Company or any subsidiary of the Company with respect to claims made at any time with respect to such service. 19. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution made, or benefit provided (including, without limitation, the acceleration of any payment, distribution or benefit and the accelerated exercisability of any stock option), to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 19) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (or any similar excise tax) or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive from the Company an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes (including any Excise Tax, income tax or employment tax and taking into account any lost or reduced tax deductions on account of such Gross-Up Payment) imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, the Employee retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 19(c), all determinations required to be made under this Section 19, including determination of whether a Gross-Up Payment is required and of the amount of any such Gross-up Payment, shall be made by Price Waterhouse Coopers or the Company's then current accounting firm (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Employee within 15 business days of the date of termination of the Employee's employment, if applicable, or such earlier time as is requested by the Company, provided that any determination that an Excise Tax is payable by the Employee shall be made on the basis of substantial authority. The initial Gross-Up Payment, if any, as determined pursuant to this Section 19(b), shall be paid to the Employee within five business days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Employee, it shall furnish the Employee with a written opinion that she has substantial authority not to report any Excise Tax on her Federal income tax return. Any determination by the Accounting Firm meeting the requirements of this Section 19(b) shall be binding upon the Company and the Employee; subject only to payments pursuant to the following sentence based on a determination that additional Gross-Up Payments should have been made, consistent with the calculations required to be made hereunder (the amount of such additional payments is referred to herein as the "Gross-Up Underpayment"). In the event that the Company exhausts its remedies pursuant to Section 19(c) and the Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Gross-Up Underpayment that has occurred and any such Gross-Up Underpayment shall be promptly paid by the Company to or for the benefit of the Employee. The fees and disbursements of the Accounting Firm shall be paid by the Company. (c) The Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but not later than ten business days after the Employee receives written notice of such claim and shall apprise the Company of the nature of such claim and the date on which such Claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim and that it will bear the costs and provide the indemnification as required by this sentence, the Employee shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax, income tax or employment tax (taking into account any lost or reduced tax deductions on account of such payments), including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 19(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Employee on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax, income tax or employment tax (taking into account any lost or reduced tax deductions on account of such advance), including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to the payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 19(c), the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of Section 19(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 19(c), a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then any obligation of the Employee to repay such advance shall be forgiven and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 20. No Duty to Seek Employment. The Employee shall not be under any duty or obligation to seek or accept other employment following termination of employment, and no amount, payment or benefits due to the Employee hereunder shall be reduced or suspended if the Employee accepts subsequent employment. 21. Deductions and Withholding. All amounts payable or which become payable under any provision of this Agreement shall be subject to any deductions authorized by the Employee and any deductions and withholdings required by law. 22. Governing Law. The validity, interpretation and performance of this Agreement will be governed by the laws of the State of New Jersey without regard to the conflict of law provisions. 23. Severability. If any one or more of the provisions contained in this Agreement is held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect any other provision hereof. 24. Successors and Assigns. This Agreement will be binding upon and inure to the benefit of the Parties hereto and their personal representatives, and, in the case of the Company, its successors and assigns. To the extent the Company's obligations under this Agreement are transferred to any successor or assign, such successor or assign shall be treated as the "Company" for purposes of this Agreement. Other than as contemplated by this Agreement, the Employee may not assign his rights or duties under this Agreement. 25. Continuing Effect. Wherever appropriate to the intention of the Parties hereto, the respective rights and obligations of the Parties, including but not limited to the obligations referred to in Sections 10, 11, 14, 15 and 19, hereof, will survive any termination or expiration of the term of this Agreement. 26. Entire Agreement. This Agreement constitutes the entire agreement between the Parties and supersedes any and all other agreements and understandings between the Parties in respect of the matters addressed in this Agreement. 27. Amendment and Waiver. No amendment or waiver of any provision of this Agreement shall be effective, unless the same shall be in writing and signed by the Parties, and then such amendment, waiver or consent shall be effective only in the specific instance or for the specific purpose for which such amendment, waiver or consent was given. 28. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Employee has hereunto set his hand as of the day and year first above written. THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. BY: /s/Brian Piwek ITS: PRESIDENT DATE: December 2, 2004 /s/Allan Richards November 15, 2004 ALLAN RICHARDS DATE EX-10 4 sladeemploymentagreement.txt EXHIBIT 10.18 STEPHEN SLADE EMPLOYMENT AGREEMENT Exhibit 10.18 EMPLOYMENT AGREEMENT AGREEMENT, made and entered into as of the 15th day of November, 2004, by and between THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. (the "Company"), and STEPHEN SLADE (the "Employee"). W I T N E S S E T H WHEREAS, the Company and the Employee (the "Parties") have agreed to enter into this agreement (the "Agreement") relating to the employment of the Employee by the Company; NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein and for other good and valuable consideration, the Parties, intending to be legally bound, agree as follows: 1. Term of Employment. (a) The Company agrees to continue to employ the Employee, and the Employee agrees to remain in the employment of the Company, in accordance with the terms and provisions of this Agreement, for the period set forth below (the "Employment Period"). (b) The Employment Period under this Agreement shall commence as of November 15, 2004 and, subject only to the provisions of Sections 7, 8 and 9 below relating to termination of employment, shall continue until (i) the close of business on November 14, 2007 or (ii) such later date as shall result from the operation of subparagraph (c) below (the "Terminal Date"). (c) Commencing on May 15, 2006, and on the first business day of each month thereafter (such date and each such first business day, the "Renewal Date") the Terminal Date set forth in subparagraph (b) above shall be extended so as to occur eighteen months from the Renewal Date unless either the Company or the Employee shall have given written notice to the other Party on or before such Renewal Date that the Terminal Date is not to be extended. 2. Duties. It is the intention of the Parties that during the term of his employment under this Agreement, the Employee will serve as Executive Vice President of Fresh Operations of the Company. The Employee will devote his full business time and attention to the affairs of the Company and his duties as Executive Vice President of Fresh Operations. The Employee will have such duties as are appropriate to his position, and will have such authority as required to enable him to perform these duties. Consistent with the foregoing, the Employee shall comply with all reasonable instructions of the President and Chief Operating Officer of the Company. The Employee will report directly to the President and Chief Operating Officer of the Company. 3. Salary and Bonus. 3.1 Salary. The Company will pay the Employee a base salary at an initial annual rate of not less than $325,000.00, which base salary as in effect from time to time will not be reduced and will be reviewed periodically (at intervals of not more than twelve (12) months) by the Compensation Committee of the Board of Directors (the "Board") for the purpose of considering increases thereof. In evaluating increases in the Employee's base salary, the Compensation Committee of the Board will take into account such factors as corporate performance, individual merit, and such other considerations as it deems appropriate. The Employee's base salary will be paid in accordance with the standard practices for other corporate executives of the Company. 3.2 Bonuses. The Employee will be eligible to receive annually or otherwise any bonus awards, whether payable in cash, shares of common stock of the Company or otherwise, which the Company, the Compensation Committee of the Board or such other authorized committee of the Board determines to award or grant. 4. Benefit Programs. The Employee will receive such benefits and awards, including without limitation stock options and restricted share awards, as the Compensation Committee of the Board shall determine and will be eligible to participate in all employee benefit plans and programs of the Company from time to time in effect for the benefit of senior executives of the Company, including, but not limited to, pension and other retirement plans, group life insurance, hospitalization and surgical and major medical coverage, sick leave, salary continuation arrangements, vacations and holidays, long-term disability, and such other benefits as are or may be made available from time to time to senior executives of the Company. 5. Business Expenses and Perquisites. The Employee will be reimbursed for all reasonable expenses incurred by him in connection with the conduct of the business of the Company, provided he properly accounts therefor in accordance with the Company's policies. He will also be entitled to such other perquisites as are customary for senior executives of the Company. 6. Office and Services Furnished. The Company shall furnish the Employee with office space, secretarial assistance and such other facilities and services as shall be suitable to the Employee's position and adequate for the performance of his duties hereunder. 7. Termination of Employment by the Company. 7.1 Involuntary Termination by the Company Other Than For Permanent and Total Disability or For Cause. The Company may terminate the Employee's employment at any time and for any reason by giving him a written notice of termination to that effect at least 45 days before the date of termination. In the event the Company terminates the Employee's employment for any reason other than for Permanent and Total Disability, as provided in Section 7.2, below, or for Cause, as provided in Section 7.3, below, the Employee shall be entitled to the benefits described in Section 10 or Section 11, whichever is applicable. 7.2 Termination Due to Permanent and Total Disability. If the Employee incurs a Permanent and Total Disability, as defined below, the Company may terminate the Employee's employment by giving him written notice of termination at least 45 days before the date of such termination. In the event of such termination of the Employee's employment because of Permanent and Total Disability, the Employee shall be entitled to receive (i) his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination of employment at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. For purposes of this Agreement, the Employee shall be considered to have incurred a Permanent and Total Disability if he is unable to substantially carry out his duties under this Agreement by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. The existence of such Permanent and Total Disability shall be determined by the Compensation Committee of the Board of Directors of the Company and shall be evidenced by such medical certification as the Secretary of the Company shall require. 7.3 Termination for Cause. The Company may terminate the Employee's employment for Cause if (i) the Employee willfully, substantially, and continually fails to perform the duties for which he is employed by the Company, (ii) the Employee willfully fails to comply with the reasonable instructions of the President and Chief Operating Officer of the Company, (iii) the Employee willfully engages in conduct which is or would reasonably be expected to be materially and demonstrably injurious to the Company, (iv) the Employee willfully engages in an act or acts of dishonesty resulting in material personal gain to the Employee at the expense of the Company, (v) the Employee is convicted of a felony, (vi) the Employee engages in an act or acts of gross malfeasance in connection with his employment hereunder, (vii) the Employee commits a material breach of the confidentiality provision set forth in Section 15, or (viii) the Employee exhibits demonstrable evidence of alcohol or drug abuse having a substantial adverse effect on his job performance hereunder. The Company shall exercise its right to terminate the Employee's employment for Cause by giving him written notice of termination at least 45 days before the date of such termination specifying in reasonable detail the circumstances constituting such Cause. In the event of such termination of the Employee's employment for Cause, the Employee shall be entitled to receive (i) his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits and (ii) any amounts owed under the reimbursement policy of Section 5. 8. Termination of Employment by the Employee. (a) Good Reason. The Employee may terminate his employment for Good Reason by giving the Company a written notice of termination at least 45 days before the date of such termination specifying in reasonable detail the circumstances constituting such Good Reason. In the event of the Employee's termination of his employment for Good Reason, the Employee shall be entitled to the benefits described in Section 10 or Section 11, whichever is applicable. For purposes of this Agreement, Good Reason shall mean (i) a significant reduction in the scope of the Employee's authority, functions, duties or responsibilities from that which is contemplated by this Agreement, (ii) the Employee being required to report directly to someone other than the President and Chief Operating Officer of the Company, (iii) any reduction in the Employee's base salary, or (iv) a significant reduction in the employee benefits provided to the Employee other than in connection with an across-the-board reduction similarly affecting substantially all senior executives of the Company. If an event constituting a ground for termination of employment for Good Reason occurs, and the Employee fails to give notice of termination within 3 months after the occurrence of such event, the Employee shall be deemed to have waived his right to terminate employment for Good Reason in connection with such event (but not for any other event for which the 3-month period has not expired). (b) Other. The Employee may terminate his employment at any time and for any reason, other than pursuant to subsection (a) above, by giving the Company a written notice of termination to that effect at least 45 days before the date of termination. In the event of the Employee's termination of his employment pursuant to this subsection (b), the Employee shall be entitled to receive (i) his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. 9. Termination of Employment By Death. In the event of the death of the Employee during the course of his employment hereunder, the Employee's estate shall be entitled to receive (i) his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any other benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits, and (ii) any reimbursement amounts owing under Section 5. In addition, in the event of such death, the Employee's beneficiaries shall receive any death benefits owed to them under the Company's employee benefit plans. 10. Benefits Upon Termination Without Cause or For Good Reason (No Change of Control). If (a) the Employee's employment with the Company shall terminate (i) because of termination by the Company pursuant to Section 7.1 other than for Cause and other than because of Permanent and Total Disability, or (ii) because of termination by the Employee for Good Reason pursuant to Section 8(a), and (b) such termination of employment does not occur within 13 months following a "Change of Control" of the Company (as defined in Section 12), the Employee, upon execution of a Confidential Separation and Release Agreement, shall be entitled to the following: (a) The Company shall pay to the Employee his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee under this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits. (b) The Company shall pay the Employee any reimbursement amounts owing under Section 5. (c) The Company shall pay to the Employee as a severance benefit for each month during the 18 month period beginning with the month next following the date of termination of the Employee's employment an amount equal to one-twelfth of the sum of (i) his annual rate of base salary immediately preceding his termination of employment, and (ii) the average of his three highest annual bonuses awarded under the Company's annual management incentive bonus plan for any of the five fiscal years immediately preceding the fiscal year of his termination of employment, (or, if he was not eligible for a bonus for at least three fiscal years in such five-year period, then the average of such bonuses for all of the fiscal years in such five-year period for which he was eligible, and if he was not eligible for such a bonus in any previous fiscal year, then 100% of his target annual bonus for the fiscal year in which the termination occurred), with any deferred bonuses counting for the fiscal year in which it was earned rather than the year in which it was paid. Each such monthly benefit shall be paid no later than the last day of the applicable month. In the event that the Employee dies before the end of such 18-month period, the payments for the remainder of such period shall be made to the Employee's estate. (d) The Company shall pay to the Employee as a bonus for the fiscal year in which the termination occurred an amount equal to a portion (determined as provided in the next sentence) of the bonus that the Employee would actually have received under the Company's annual management incentive bonus plan for the fiscal year of termination of the Employee's employment if his employment had not terminated (determined on the basis of his actual bonus opportunity and the actual degree of achievement of the applicable performance goals) or, if no bonus opportunity for that year had been established for the Employee at the time of such termination of employment, such portion of the bonus awarded to him under the Company's annual management incentive bonus plan for the fiscal year immediately preceding the fiscal year of the termination of his employment, with deferred bonuses counting for the fiscal year in which it was earned rather than the year in which it was paid. Such portion shall be determined by dividing the number of days of the Employee's employment during such fiscal year up to his termination of employment by 365 (366 if a leap year). Such payment shall be made on or about the date on which bonuses for the applicable fiscal year are paid to executives of the Company generally under the Company's annual management incentive bonus plan, and the Employee shall have no right to any further bonuses under said plan. (e) During the period of 18 months beginning on the date of the Employee's termination of employment, the Employee shall remain covered by the medical, dental, vision, life insurance, and, if reasonably commercially available through nationally reputable insurance carriers, long-term disability plans of the Company that covered him immediately prior to his termination of employment as if he had remained in employment for such period. In the event that the Employee's participation in any such plan is barred, the Company shall arrange to provide the Employee with substantially similar benefits (but, in the case of long-term disability benefits, only if reasonably commercially available). Any medical insurance coverage for such 18-month period pursuant to this subsection (e) shall become secondary upon the earlier of (i) the date on which the Employee begins to be covered by comparable medical coverage provided by a new employer, or (ii) the earliest date upon which the Employee becomes eligible for Medicare or a comparable Government insurance program. 11. Benefits Upon Termination Without Cause or For Good Reason (Change of Control). If (a) the Employee's employment with the Company shall terminate (i) because of termination by the Company pursuant to Section 7.1 other than for Cause and other than because of Permanent and Total Disability, (ii) because of termination by the Employee for Good Reason pursuant to Section 8(a), or (iii) for any reason during the 30 days beginning on the first anniversary of a Change of Control, and (b) such termination of employment occurs within 13 months following a "Change of Control" of the Company (as defined in Section 12), the Employee, upon execution of a Confidential Separation and Release Agreement, shall be entitled to the following: (a) The Company shall pay to the Employee his base salary pursuant to Section 3.1 and any other compensation and benefits to the extent actually earned by the Employee under this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits. (b) The Company shall pay the Employee any reimbursement amounts owing under Section 5. (c) The Company shall pay to the Employee as a severance benefit an amount equal to three (3) times the sum of (i) his annual rate of base salary immediately preceding his termination of employment, and (ii) the average of his three highest annual bonuses awarded under the Company's annual management incentive bonus plan for any of the five fiscal years immediately preceding the fiscal year of his termination of employment (or, if he was not eligible for a bonus for at least three fiscal years in such five-year period, then the average of such bonuses for all of the fiscal years in such five-year period for which he was eligible, and if he was not eligible for such a bonus in any previous fiscal year, then 100% of his target annual bonus for the fiscal year in which the termination occurred, with any deferred bonuses counting for the fiscal year in which it was earned rather than the year in which it was paid. Such severance benefit shall be paid in a lump sum within 45 days after the date of such termination of employment. (d) The Company shall pay to the Employee as a bonus for the fiscal year in which the termination occurred an amount equal to a portion (determined as provided in the next sentence) of the bonus that the Employee would actually have received under the Company's annual management incentive bonus plan for the fiscal year of termination of the Employee's employment if his employment had not terminated (determined on the basis of his actual bonus opportunity and the actual degree of achievement of the applicable performance goals) or, if no bonus opportunity for that year had been established for the Employee at the time of such termination of employment, such portion of the bonus awarded to him under the Company's annual management incentive bonus plan for the fiscal year immediately preceding the fiscal year of the termination of his employment, with deferred bonuses counting for the fiscal year in which it was earned rather than the year in which it was paid. Such portion shall be determined by dividing the number of days of the Employee's employment during such fiscal year up to his termination of employment by 365 (366 if a leap year). Such payment shall be made on or about the date on which bonuses for the applicable fiscal year are paid to executives of the Company generally under the Company's annual management incentive bonus plan, and the Employee shall have no right to any further bonuses under said plan. (e) During the period of 36 months beginning on the date of the Employee's termination of employment, the Employee shall remain covered by the medical, dental, vision, life insurance, and, if reasonably commercially available through nationally reputable insurance carriers, long-term disability plans of the Company that covered him immediately prior to his termination of employment as if he had remained in employment for such period. In the event that the Employee's participation in any such plan is barred, the Company shall arrange to provide the Employee with substantially similar benefits (but, in the case of long-term disability benefits, only if reasonably commercially available). Any medical insurance coverage for such 36-month period pursuant to this subsection (e) shall become secondary upon the earlier of (i) the date on which the Employee begins to be covered by comparable medical coverage provided by a new employer, or (ii) the earliest date upon which the Employee becomes eligible for Medicare or a comparable Government insurance program. 12. Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if (a) any person or persons acting together which would constitute a "group" for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (other than the Company, any subsidiary of the Company, and Tengelmann Warenhandelsgesellschaft KG (a partnership organized under the laws of the Federal Republic of Germany or any successor to such partnership, hereinafter "Tengelmann")) shall beneficially own (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, at least 30% of the total voting power of all classes of capital stock of the Company entitled to vote generally in the election of the Board and such voting power exceeds the then current voting power of Tengelmann; (b) control of Tengelmann is acquired by any person or persons other than family members or entities controlled by family members of Erivan Haub; (c) Current Directors (as herein defined) shall cease for any reason to constitute at least a majority of the members of the Board (for this purpose, a "Current Director" shall mean any member of the Board as of the date hereof and any successor of a Current Director whose election, or nomination for election by the Company's shareholders, was approved by at least two-thirds of the Current Directors then on the Board); (d) the shareholders of the Company approve (i) a plan of complete liquidation of the Company or (ii) an agreement providing for the merger or consolidation of the Company other than a merger or consolidation in which (x) the holders of the common stock of the Company immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger or (y) the Board immediately prior to the merger or consolidation would, immediately after the merger or consolidation, constitute a majority of the board of directors of the continuing or surviving corporation; or (e) the shareholders of the Company approve an agreement (or agreements) providing for the sale or other disposition (in one transaction or a series of transactions) of all or substantially all of the assets of the Company. 13. Entitlement to Other Benefits. Except as otherwise provided in this Agreement, this Agreement shall not be construed as limiting in any way any rights or benefits that the Employee or his spouse, dependents or beneficiaries may have pursuant to any other plan or program of the Company. 14. Non-Competition. The Employee agrees that during the term of this Agreement and for a period of eighteen months following termination of his employment, the Employee will not, within any of the geographical areas of the United States or Canada in which the Company is then conducting business (either directly or through franchisees), directly or indirectly, own, manage, operate, control, be employed by, participate in, provide consulting services to, or be connected in any manner with the ownership, management, operation or control of any business similar to any of the types of businesses conducted by the Company to any significant extent during his employment or on the date of termination of his employment, except the Employee may own for investment purposes up to 1% of the capital stock of any company whose stock is publicly traded, and during such eighteen month period following termination of his employment the Employee will not contact or solicit employees of the Company for the purpose of inducing such employees to leave the employ of the Company. 15. Confidential Information and Trade Secrets. The Employee hereby acknowledges that he will have access to and become acquainted with various trade secrets and proprietary information of the Company and other confidential information relating to the Company. The Employee covenants that he will not, directly or indirectly, disclose or use such information except as is necessary and appropriate in connection with his employment by the Company and that he will otherwise adhere in all respects to the Company's policies against the use or disclosure of such information. 16. Arbitration; Injunctive Relief. Any controversy or claim arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof, will be settled by arbitration in accordance with the rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The arbitration will be held in New York, New York, or such other place as may be agreed upon at the time by the parties to the arbitration. The parties shall bear their own expenses in connection with any arbitration or proceeding arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof; provided, however, that in the event that the Employee substantially prevails, the Company agrees promptly to reimburse the Employee for all expenses (including costs and fees of witnesses, evidence and attorneys fees and expenses) reasonably incurred by him in investigating, prosecuting, defending, or preparing to prosecute or defend any action, proceeding or claim arising out of or relating to this Agreement, directly or indirectly, or the performance or breach thereof. The parties acknowledge and agree that a breach of Employee's obligations under Sections 14 or 15 could cause irreparable harm to Company for which Company would have no adequate remedy at law, and further agree that, notwithstanding the agreement of the parties to arbitrate controversies or claims as set forth above, the Company may apply to a court of competent jurisdiction to seek to enjoin preliminarily or permanently any breach or threatened breach of the Employee's obligations under Sections 14 and 15. 17. Indemnification. The Company shall indemnify and hold the Employee harmless to the fullest extent legally permissible under the laws of the State of Maryland, against any and all expenses, liabilities and losses (including attorney's fees, judgments, fines and amounts paid in settlement) reasonably incurred or suffered by him by reason of any claim or cause of action asserted against him because of his service at any time as a director or officer of the Company. The Company shall advance to the Employee the amount of his expenses incurred in connection with any proceeding relating to such service to the fullest extent legally permissible under the laws of the State of Maryland. Notwithstanding the foregoing, the Company's obligations pursuant to this Section 17 shall not apply in the case of any claim or cause of action by or in the right of the Company or any subsidiary thereof. 18. Liability Insurance. To the extent that Company maintains a directors and officers liability insurance policy in effect, the Company will take all steps necessary to ensure that the Employee is covered under such policy for his service as a director or officer of the Company or any subsidiary of the Company with respect to claims made at any time with respect to such service. 19. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution made, or benefit provided (including, without limitation, the acceleration of any payment, distribution or benefit and the accelerated exercisability of any stock option), to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 19) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (or any similar excise tax) or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive from the Company an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes (including any Excise Tax, income tax or employment tax and taking into account any lost or reduced tax deductions on account of such Gross-Up Payment) imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, the Employee retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 19(c), all determinations required to be made under this Section 19, including determination of whether a Gross-Up Payment is required and of the amount of any such Gross-up Payment, shall be made by Price Waterhouse Coopers or the Company's then current accounting firm (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Employee within 15 business days of the date of termination of the Employee's employment, if applicable, or such earlier time as is requested by the Company, provided that any determination that an Excise Tax is payable by the Employee shall be made on the basis of substantial authority. The initial Gross-Up Payment, if any, as determined pursuant to this Section 19(b), shall be paid to the Employee within five business days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Employee, it shall furnish the Employee with a written opinion that she has substantial authority not to report any Excise Tax on her Federal income tax return. Any determination by the Accounting Firm meeting the requirements of this Section 19(b) shall be binding upon the Company and the Employee; subject only to payments pursuant to the following sentence based on a determination that additional Gross-Up Payments should have been made, consistent with the calculations required to be made hereunder (the amount of such additional payments is referred to herein as the "Gross-Up Underpayment"). In the event that the Company exhausts its remedies pursuant to Section 19(c) and the Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Gross-Up Underpayment that has occurred and any such Gross-Up Underpayment shall be promptly paid by the Company to or for the benefit of the Employee. The fees and disbursements of the Accounting Firm shall be paid by the Company. (c) The Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but not later than ten business days after the Employee receives written notice of such claim and shall apprise the Company of the nature of such claim and the date on which such Claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim and that it will bear the costs and provide the indemnification as required by this sentence, the Employee shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax, income tax or employment tax (taking into account any lost or reduced tax deductions on account of such payments), including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 19(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Employee on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax, income tax or employment tax (taking into account any lost or reduced tax deductions on account of such advance), including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to the payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 19(c), the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of Section 19(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 19(c), a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then any obligation of the Employee to repay such advance shall be forgiven and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 20. No Duty to Seek Employment. The Employee shall not be under any duty or obligation to seek or accept other employment following termination of employment, and no amount, payment or benefits due to the Employee hereunder shall be reduced or suspended if the Employee accepts subsequent employment. 21. Deductions and Withholding. All amounts payable or which become payable under any provision of this Agreement shall be subject to any deductions authorized by the Employee and any deductions and withholdings required by law. 22. Governing Law. The validity, interpretation and performance of this Agreement will be governed by the laws of the State of New Jersey without regard to the conflict of law provisions. 23. Severability. If any one or more of the provisions contained in this Agreement is held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect any other provision hereof. 24. Successors and Assigns. This Agreement will be binding upon and inure to the benefit of the Parties hereto and their personal representatives, and, in the case of the Company, its successors and assigns. To the extent the Company's obligations under this Agreement are transferred to any successor or assign, such successor or assign shall be treated as the "Company" for purposes of this Agreement. Other than as contemplated by this Agreement, the Employee may not assign his rights or duties under this Agreement. 25. Continuing Effect. Wherever appropriate to the intention of the Parties hereto, the respective rights and obligations of the Parties, including but not limited to the obligations referred to in Sections 10, 11, 14, 15 and 19, hereof, will survive any termination or expiration of the term of this Agreement. 26. Entire Agreement. This Agreement constitutes the entire agreement between the Parties and supersedes any and all other agreements and understandings between the Parties in respect of the matters addressed in this Agreement. 27. Amendment and Waiver. No amendment or waiver of any provision of this Agreement shall be effective, unless the same shall be in writing and signed by the Parties, and then such amendment, waiver or consent shall be effective only in the specific instance or for the specific purpose for which such amendment, waiver or consent was given. 28. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Employee has hereunto set his hand as of the day and year first above written. THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. BY: /s/Brian Piwek__________________ ITS: PRESIDENT DATE: December 2, 2004 /s/Stephen Slade November 15, 2004 STEPHEN SLADE DATE EX-10 5 ex1038assetpurchaseagreement.txt EX. 10.38 ASSET PURCHASE AGREEMENT C&S Exhibit 10.38 ASSET PURCHASE AGREEMENT BETWEEN THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC (together with its subsidiaries) and OCEAN LOGISTICS LLC and for the limited purposes set forth herein and as of guarantor C & S WHOLESALE GROCERS, INC. Dated as of June 27, 2005 TABLE OF CONTENTS Page ARTICLE I CONVEYANCE OF THE ACQUIRED ASSETS..................................2 Section 1.1 Acquired Assets.........................................2 ARTICLE II PURCHASE PRICE....................................................3 Section 2.1 Purchase Price; Payment.................................3 ARTICLE III LIABILITIES......................................................4 Section 3.1 Excluded Liabilities....................................4 Section 3.2 Assumed Liabilities.....................................4 Section 3.3 Sale of Assets Under Section 4204 of ERISA..............5 Section 3.4 Baltimore Drivers.......................................7 ARTICLE IV REPRESENTATIONS AND WARRANTIES....................................7 Section 4.1 Representations and Warranties of Seller................7 Section 4.2 Representations and Warranties of Purchaser............12 ARTICLE V EMPLOYEE MATTERS..................................................14 Section 5.1 Responsibility for Employees...........................14 Section 5.2 Offers of Employment...................................14 Section 5.3 Freshtown and Edison...................................14 ARTICLE VI CONDITIONS TO CLOSING............................................15 Section 6.1 Conditions to Obligations of Purchaser.................15 Section 6.2 Conditions to Obligations of Seller....................16 ARTICLE VII CLOSING.........................................................16 Section 7.1 The Closing............................................16 Section 7.2 Seller's Obligations...................................17 Section 7.3 Purchaser's Obligations................................18 ARTICLE VIII CERTAIN ADDITIONAL COVENANTS...................................19 Section 8.1 Further Assurances.....................................19 Section 8.2 Reasonable Access......................................19 Section 8.3 Inventory..............................................20 Section 8.4 Non-Acquired Facilities Inventory......................20 Section 8.5 Inventory Repurchase...................................21 Section 8.6 Inventory Actual Cost Payment..........................21 Section 8.7 Injunctions/Orders.....................................21 Section 8.8 Conveyance Taxes.......................................21 Section 8.9 Apportionments and Prepaid Expenses....................22 Section 8.10 Allocation of Purchase Price...........................23 Section 8.11 Obtaining Permits......................................23 Section 8.12 Waivers................................................24 Section 8.13 Non-Disturbance Agreements.............................24 Section 8.14 Insurance..............................................24 Section 8.15 Transition Fee.........................................25 Section 8.16 Fair Market Price......................................25 Section 8.17 IT Services............................................26 Section 8.18 Exhibits...............................................26 Section 8.19 Repairs................................................26 -i- ARTICLE IX INDEMNIFICATION..................................................26 Section 9.1 Survival...............................................26 Section 9.2 Indemnification Provisions for Benefit of Purchaser....26 Section 9.3 Indemnification Provisions for Benefit of Seller.......28 Section 9.4 Procedures Relating to Indemnification.................29 Section 9.5 Time Limitations.......................................29 Section 9.6 General Indemnification Provisions.....................29 ARTICLE X TERMINATION.......................................................30 Section 10.1 Termination............................................30 Section 10.2 Effect of Termination..................................32 ARTICLE XI OPERATIONS PENDING CLOSING.......................................32 Section 11.1 Pending Operations.....................................32 ARTICLE XII DEFINITIONS.....................................................33 Section 12.1 Certain Defined Terms..................................33 ARTICLE XIII MISCELLANEOUS..................................................38 Section 13.1 Entire Agreement.......................................38 Section 13.2 Expenses...............................................38 Section 13.3 No Recording of Agreement..............................39 Section 13.4 No Brokers.............................................39 Section 13.5 Amendments.............................................39 Section 13.6 Notices................................................39 Section 13.7 Binding Effect; C&S Guaranty...........................40 Section 13.8 Counterparts; Facsimile Signature......................41 Section 13.9 No Third-Party Beneficiaries...........................41 Section 13.10 Severability..........................................41 Section 13.11 Headings..............................................41 Section 13.12 Bulk Sales Indemnity..................................41 Section 13.13 Public Announcement...................................41 Section 13.14 Governing Law.........................................42 Section 13.15 Dispute Resolution....................................42 -ii- EXHIBITS Exhibit A List of Equipment Assets [CONFIDENTIAL] Exhibit A-1 Equipment Assets and Value [CONFIDENTIAL] Exhibit A-2 Tractors and Trailers [CONFIDENTIAL] Exhibits B-1 and B-2 Assumed Contracts with corresponding amount of fixed Assumed Liabilities [CONFIDENTIAL] Exhibit B-3 Material Assumed Contracts [CONFIDENTIAL] Exhibit C Legal Description of the Dunmore Owned Facility Exhibit C-1, C-2 and C-3 Legal Descriptions of the Leased Facilities Exhibit C-4 Legal Description of the New Orleans Owned Facility Exhibit C-5 Legal Description of the Baltimore Owned Facility Exhibit D Form of Assignment Exhibit E New Orleans Sublease Exhibit F Leased Equipment Exhibit G-1, G-2 and G-3 Special Warranty Deeds for the Dunmore Owned, New Orleans and Baltimore Owned Facilities Exhibit H Permits and Licenses Exhibit I Supply Agreement [FILED SEPARATELY] Exhibit J Lease Documents -iii- SCHEDULES Schedule 1.1 Excluded Assets Schedule 4.1(e)(vi) Written Notice of Non-Compliance Schedule 4.1(e)(vii) Written Notice of Repairs Schedule 4.1(h) Necessary Repairs Schedule 4.1(j) Litigation Schedule 4.1(l) Consents, Approvals, etc. [CONFIDENTIAL] Schedule 4.1(n) Violations [CONFIDENTIAL] Schedule 4.1(o) Environmental Issues [CONFIDENTIAL] Schedule 4.1(p)(i)(A) Affected Employees (with department, hiring date and salary) [CONFIDENTIAL] Schedule 4.1(p)(i)(B) Employment agreements, severance agreements and severance plans with respect to Affected Employees Schedule 4.1(p)(ii) Multiemployer Pension Plan List [CONFIDENTIAL] Schedule 4.1(p)(iii) Contributions made to each Multiemployer Pension Plan for the most recent 5 plan years Schedule 5.1 Affected Employee Accrued Liabilities [CONFIDENTIAL] Schedule 8.3 Inventory Procedure [CONFIDENTIAL] Schedule 8.8 Conveyance Taxes Schedule 8.17 IT Services Schedule 12.1(g) Assumed Collective Bargaining Agreements -iv- ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT, dated as of June 27, 2005 (this "Agreement"), is made by and between The Great Atlantic & Pacific Tea Company, Inc., a Maryland corporation ("A&P"), together with any of its subsidiaries holding title or interest in the Acquired Assets (as defined below) or otherwise necessary in order to effectuate the transactions contemplated herein (collectively, "Seller"), and Ocean Logistics LLC, a Delaware limited liability company ("Purchaser" and, together with Seller, the "Parties" and each individually a "Party"), and C&S Wholesale Grocers, Inc. ("C&S"), a Vermont corporation, for the limited purposes as stated in this Agreement, and for all purposes as guarantor of Purchaser. W I T N E S S E T H WHEREAS, Seller has decided to exit the distribution business in the United States; WHEREAS, Purchaser desires to purchase certain of Seller's distribution assets and take over the distribution of merchandise to many of Seller's grocery stores; WHEREAS, at or prior to the applicable Closing herewith, the Parties and C&S will enter into various agreements contemplated herein including but not limited to the following agreements (the "Related Agreements"): (i) a supply agreement, whereby C&S will supply Seller with all of its requirements of groceries, perishables, frozen food and other merchandise in the product categories carried by C&S (the "Supply Agreement"), all as set forth on Exhibit I; (ii) an assignment of lease in the form of Exhibit D for the facility located in Islip, New York, which is leased by Seller, as more fully described on Exhibit C-1 attached hereto (the "Islip Leased Facility"); (iii) an assignment of lease in the form of Exhibit D for the facility located in Baltimore, Maryland, which is leased by Seller, as more fully described on Exhibit C-2 attached hereto (the "Baltimore Leased Facility"); (iv) a sublease in the form of Exhibit E for the facility located in New Orleans, Louisiana, which is leased by Seller, as more fully described on Exhibit C-3 attached hereto (the "New Orleans Leased Facility"); (vi) a special warranty deed in the form of Exhibit G-1 for the facility at Dunmore, Pennsylvania, which is owned by Seller, as more fully described on Exhibit C, attached hereto (the "Dunmore Owned Facility"); (vii) a special warranty deed in the form of Exhibit G-2 for the facility at New Orleans, Louisiana, which is owned by Seller, as more fully described on Exhibit C-4, attached hereto (the "New Orleans Owned Facility") and (viii) a special warranty deed in the form of Exhibit G-3 for the facility at Baltimore, Maryland, which is owned by Seller, as more fully described on Exhibit C-5, attached hereto (the "Baltimore Owned Facility"), all as more fully set forth in Section 1.1 below. The Islip Leased Facility, Baltimore Leased Facility, New Orleans Leased Facility, Dunmore Owned Facility, New Orleans Owned Facility and Baltimore Owned Facility are collectively referred to herein as the "Acquired Facilities." NOW, THEREFORE, in consideration of the promises, warranties, and covenants contained in this Agreement, and intending to be legally bound hereby, the Parties agree as follows: ARTICLE I CONVEYANCE OF THE ACQUIRED ASSETS Section 1.1 Acquired Assets. Upon the terms and subject to the conditions of this Agreement, at the applicable Closing (as set forth in Article VII), Seller shall sell, transfer, assign, convey, and deliver to Purchaser or its designee, and Purchaser or its designee shall purchase, accept, and acquire from Seller, free and clear of any and all Liens, all of the right, title and interest of Seller, as applicable, in and to the following assets (collectively, and including the Acquired Facilities, the "Acquired Assets"), except for the assets listed on Schedule 1.1 hereto (the "Excluded Assets"): (a) Readily Saleable Merchandise existing at the Acquired Facilities on the applicable Closing Date after Seller has reduced the inventory level to a level as low as reasonably practicable while maintaining adequate service levels (collectively, the "Transferred Inventory"); (b) All of Seller's rights and benefits under the Assumed Contracts and the Assumed Collective Bargaining Agreements; (c) (i) All owned machinery, equipment (including, without limitation, all computers located in or at the Acquired Facilities but not licensed computer software that is non-transferable), computer software, computer hardware, office materials, tools, pallets, spare parts, rolling stock, supplies and all other tangible personal property located in and at the Acquired Facilities or otherwise listed on the attached Exhibit A, and the leasehold improvements currently in, on, or attached to the Acquired Facilities including, without limitation, the racks at or attached to each of the Acquired Facilities, and all warranties related to the assets, and (ii) any transportation equipment (tractors, trailers or yard horses) or Material Handling Equipment selected by Purchaser in its sole discretion, in or at the Edison Facility or the Freshtown Facility, specifically set forth on Exhibit A (collectively, the "Equipment Assets"). The Equipment Assets shall also include the leased tractors and trailers set forth on Exhibit A-2 which Seller will purchase. Purchaser shall pay the fair market value for such tractors and trailers as agreed to by the Parties. If the Parties cannot agree on a price for the tractors and trailers listed on Exhibit A-2, the Parties shall appoint a transportation expert to assign a fair market value. A list of the Equipment Assets is attached hereto as Exhibit A; (d) All of Seller's right, title and interest in and to the Dunmore Owned Facility: (i) more particularly described in Exhibit C hereto located in Dunmore, Pennsylvania, including all structures and improvements thereon, all easements, rights-of-way, privileges, zoning and development rights and other rights and benefits, if any, which are appurtenant to such real property, and all right, title and interest of Seller in and to any gaps, strips or gores adjoining or adjacent to such real property and in and to any land lying in the bed of any street, road or avenue, open or proposed, in front of or adjoining such real property; (e) All of Seller's right, title and interest in and to the New Orleans Owned Facility more particularly described in Exhibit C-4 hereto located in New Orleans, Louisiana, including all structures and improvements thereon, all easements, rights-of-way, privileges, zoning and development rights and other rights and benefits, if any, which are appurtenant to such -2- real property, and all right, title and interest of Seller in and to any gaps, strips or gores adjoining or adjacent to such real property and in and to any land lying in the bed of any street, road or avenue, open or proposed, in front of or adjoining such real property; (f) All of Seller's right, title and interest in and to the Baltimore Owned Facility more particularly described in Exhibit C-5 hereto located in Baltimore, Maryland, including all structures and improvements thereon, all easements, rights-of-way, privileges, zoning and development rights and other rights and benefits, if any, which are appurtenant to such real property, and all right, title and interest of Seller in and to any gaps, strips or gores adjoining or adjacent to such real property and in and to any land lying in the bed of any street, road or avenue, open or proposed, in front of or adjoining such real property; (g) All Seller's right, title and interest as tenant in and to the Islip Facility Lease pursuant to an assignment and assumption in the form attached hereto as Exhibit D (the "Islip Facility Lease Assignment"); and (h) All Seller's right, title and interest as tenant in and to the Baltimore Facility Lease pursuant to an assignment and assumption in the form attached hereto as Exhibit D (the "Baltimore Facility Lease Assignment"). (i) Sublease. Upon the terms and subject to the conditions of this Agreement, at the applicable Closing (as set forth in Section VII), Seller shall execute and deliver to Purchaser or its designee, and Purchaser or its designee shall execute and deliver to Seller, the following sublease (the "New Orleans Sublease") for a term through December 30, 2007, with one (1) five (5) year option: a sublease of the New Orleans Leased Facility in the form attached hereto as Exhibit E. ARTICLE II PURCHASE PRICE Section 2.1 Purchase Price; Payment. The aggregate purchase price for the Acquired Assets (the "Purchase Price") shall be the amount of: (a) The aggregate amount of Seller's Actual Cost for the Transferred Inventory as of the Procurement Conversion Dates and the Non-Acquired Facilities Inventory (as defined herein) as calculated in accordance with Sections 8.3 and 8.4; plus (b) the amounts set forth on Exhibit A-1 with respect to the Equipment Assets being transferred at the applicable Closing. The purchase price for the Equipment Assets will be depreciated through the applicable Procurement Conversion Dates; plus -3- (c) (1) of the Fair Market Price of the Dunmore Owned Facility and the New Orleans Owned Facility, and * of the Fair Market Price of the Baltimore Owned Facility as more fully described in Section 8.16. ARTICLE III LIABILITIES Section 3.1 Excluded Liabilities. Purchaser will not assume any liabilities or obligations arising out of or in connection with or otherwise related to the Acquired Assets existing on the date of the applicable Closing or date of transfer of title in the case of a Delayed Closing (as defined herein), or arising after such Closing on such Acquired Asset or date of transfer of title in the case of a Delayed Closing in connection with or as a result of the ownership of any Acquired Assets by Seller prior to the applicable Closing or Delayed Closing, as applicable (whether absolute, accrued, contingent, known or unknown or otherwise, and whether filed or asserted prior to or after the applicable Closing Date or Delayed Closing, as applicable) (the "Excluded Liabilities"), including, without limitation, any liabilities or obligations with respect to employee matters, any Workers' Compensation, disability benefit and medical benefit claims (including loss development and costs associated with claims incurred prior to the applicable Closing), products liability, environmental matters, litigation with respect to the Acquired Assets, vendor paybacks, or any other liabilities, including, without limitation, any liability attributable to or incurred by Seller arising from, or relating to, any collective bargaining agreement, bonus, incentive, deferred compensation, insurance, severance, termination, retention, change of control, employment, stock option, stock appreciation, stock purchase, phantom stock or other equity-based, performance, vacation, accrued but unpaid benefits, retiree benefit plan, program, agreement or arrangement (except to the extent paid for by Seller under Section 5.1) (including, without limitation, any "employee benefit plan" as defined in ERISA Section 3(3), sponsored, maintained, contributed to or required to be contributed to by Seller or any trade or business which together with Seller would be deemed a "single employer" within the meaning of Section 4001 of ERISA (each, an "ERISA Affiliate"), for the benefit of any current or former employee of Seller or any of their Affiliates.) The Excluded Liabilities shall also include any liabilities or obligations of Seller pursuant to the New Orleans Facility Lease, except as expressly set forth in the New Orleans Sublease and any liabilities arising pursuant to contracts that are not Assumed Contracts or that are Assumed Contracts that Seller cannot assign to Purchaser. The Excluded Liabilities shall remain the liability of Seller. If any liability is asserted with respect to any employee matter relating to acts or omissions occurring both before and after the date of the applicable Closing, the Seller and Purchaser agree to meet in good faith to apportion such liability between themselves based on the particular Party's responsibility for the alleged acts or omissions. Section 3.2 Assumed Liabilities. Subject to the assignment of the Assumed Contracts, the Assumed Collective Bargaining Agreements and the execution of the Islip Facility - ---------- * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -4- Lease Assignment and the Baltimore Facility Lease Assignment, and the New Orleans Sublease, effective at the applicable Closing on any Acquired Asset or the Delayed Closing, as applicable, Purchaser will assume all of Seller's obligations arising on or after the applicable Closing Date or the Delayed Closing, as applicable, under the Assumed Contracts listed on Exhibit B-1 and the Assumed Collective Bargaining Agreements (subject to Seller's obligation to pay accrued vacation and any and all other accrued paid time off, pursuant to Section 5.1) (the "Assumed Liabilities"). Purchaser shall also be liable for any and all obligations pursuant to the Islip Facility Lease, the Baltimore Facility Lease, the New Orleans Owned Facility, the Baltimore Owned Facility and the Dunmore Owned Facility arising on or after the applicable Closing Date (except as set forth herein) or for any obligations Purchaser undertakes pursuant to the New Orleans Sublease and all such obligations shall be a part of the Assumed Liabilities. Section 3.3 Sale of Assets Under Section 4204 of ERISA. (a) General. With respect to the Acquired Facilities except the Baltimore Leased Facility and the Baltimore Owned Facility, Seller employs employees who are members of collective bargaining units represented by certain unions and participating in those Multiemployer Pension Plans (the "Multiemployer Pension Plans") identified on Schedule 4.1(p)(ii) and, with respect to the members of such collective bargaining units, has an obligation to contribute to the Multiemployer Pension Plans. Seller and Purchaser intend by the provisions that follow to comply with and utilize the sale of assets rule of section 4204 of the Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of 1980 ("ERISA"). (b) Nature of Transaction. The sale reflected in this Agreement is a bona fide, arm's length sale of assets. Purchaser is unrelated to Seller within the meaning of section 4204 of ERISA. (c) Contribution Base Units. From and after the applicable Closing Date, Purchaser agrees that it shall have an obligation to contribute to the Multiemployer Pension Plans with respect to the Acquired Facilities excluding the Baltimore Leased Facility and the Baltimore Owned Facility for substantially the same number of contribution base units as Seller had immediately prior to the sale. Purchaser agrees that the determination of the number of contribution base units and the duration of the obligation to maintain such contribution base units necessary to satisfy section 4204 shall be made in accordance with section 4204 of ERISA and such rules as the respective Multiemployer Pension Plans may have adopted, or may adopt, except to the extent that Purchaser defeats the application of such rules by waiver or challenge. (d) During the period commencing on the first day of the first plan year beginning after the applicable Closing Date and ending on the expiration of the fifth such plan year (the "Contribution Period"), Purchaser shall provide to each Multiemployer Pension Plan either a bond, letter of credit or an escrow in an amount and manner meeting the requirements of section 4204 of ERISA. Notwithstanding anything contained in this Section 3.3(d) to the contrary, Purchaser shall not be obligated to provide any bond, letter of credit or escrow required herein in the event and to the extent Purchaser obtains from the Pension Benefit Guaranty Corporation (the "PBGC") or the respective Multiemployer Pension Plan a proper variance or exemption under section 4204(c) of ERISA and the applicable regulations thereunder, provided any and all re- -5- quirements of such variance or exemption are met. Seller agrees to cooperate with Purchaser in connection with any application for such a variance or exemption made by Purchaser to the PBGC and/or to the Multiemployer Pension Plans. The cost of any bond, letter of credit or escrow provided under this Section 3.3(d) shall be paid by Seller. (e) From and after the first day of employment as provided in Section 5.2 hereof, until final determination, Seller authorizes Purchaser to initiate arbitration, litigation or to do any other act which Purchaser deems, in its discretion, appropriate in order to reduce or eliminate any withdrawal liability or any escrow or bonding requirement imposed by any of the Multiemployer Pension Plans which Purchaser is required to satisfy under the terms of this Section 3.3. Seller agrees to reasonably assist Purchaser, at the sole cost and expense of Purchaser, in any proceedings commenced in accordance with this Section 3.3(e). (f) Attribution of Contribution History to Purchaser. Purchaser acknowledges that any withdrawal liability of Purchaser to the Multiemployer Pension Plan shall be determined as if Purchaser had been required to contribute to the Multiemployer Pension Plan in the year in which the applicable Closing Date occurs and the four preceding plan years the amount that Seller was required to contribute with respect to the Acquired Facilities excluding the Baltimore Leased Facility and the Baltimore Owned Facility for such five plan years. (g) If Purchaser Withdraws Within Five Years. If Purchaser withdraws from the Multiemployer Pension Plan in a complete withdrawal, or in a partial withdrawal with respect to the Acquired Facilities excluding the Baltimore Leased Facility or the Baltimore Owned Facility, during the first five plan years beginning with the first plan year beginning after the applicable Closing Date, then: (i) Purchaser agrees that Purchaser shall pay the Multiemployer Pension Plan any and all withdrawal liability on account of such withdrawal when due; (ii) if Purchaser fails or refuses to pay the Multiemployer Pension Plan any part of its withdrawal liability on account of such withdrawal when due, Seller shall have the right (but no obligation) to make such payment on behalf of Purchaser; and (iii) Seller agrees that, if Purchaser's withdrawal liability to the Multiemployer Pension Plan (if any) is not paid, then Seller shall be secondarily liable to the Multiemployer Pension Plan for any withdrawal liability that Seller would have had to the Multiemployer Pension Plan with respect to the Acquired Facilities except the Baltimore Leased Facility and the Baltimore Owned Facility but for section 4204 of ERISA. (h) If Seller is Liquidated Within Five Years. If all or substantially all of Seller's assets are distributed, or if Seller is liquidated, during the first five plan years beginning with the first plan year beginning after the plan year in which the applicable Closing Date occurs, then: (i) Seller agrees to provide a bond or amount in escrow equal to the present value of the withdrawal liability that Seller would have had as a result of this sale of assets but for section 4204 of ERISA, unless Seller timely secures a waiver of such requirement by the Pension Benefit Guaranty Corporation, -6- (ii) such bond or escrow shall be paid to the Multiemployer Pension Plan if Seller becomes secondarily liable to the Multiemployer Pension Plan as described in the preceding section and fails or refuses to pay its withdrawal liability, but (iii) such bond shall be cancelled or escrow returned to Seller if (1) Seller becomes secondarily liable to the Multiemployer Pension Plan as described in the preceding section and pays its secondary liability to the Multiemployer Pension Plan in full or (2) such five plan years have elapsed and Seller has not become secondarily liable to the Multiemployer Pension Plan as described in the preceding section. (i) Indemnification. Purchaser agrees to indemnify Seller against any and all withdrawal liability, including interest, penalties and attorney's fees, that is assessed against Seller by reason of Purchaser's failure or refusal to comply with any provision of this Article, including but not limited to failure or refusal to comply with the requirements of section 4204 of ERISA set forth herein and withdrawal within five years coupled with failure or refusal to pay the withdrawal liability attendant thereto. Seller agrees to indemnify Purchaser against any and all withdrawal liability, including interest, penalties and attorney's fees, by reason of Seller's failure or refusal to comply with any provision of this Article, or if, despite the provisions of this Section 3.3, a partial or total withdrawal is triggered by Seller's ceasing to contribute to a Multiemployer Pension Plan. Section 3.4 Baltimore Drivers. If, at any time, any withdrawal liability is triggered with respect to the drivers in Baltimore, A&P shall pay * of any such withdrawal liability. C&S shall use its commercially reasonable efforts to enter into a new agreement with Penske and cause Penske to utilize the present Penske drivers so that no withdrawal event is triggered as a result of the transfer of the Penske services from A&P to C&S. ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.1 Representations and Warranties of Seller. Seller represents and warrants to Purchaser as follows (in each case as of the date of this Agreement and as of the applicable Closing (that such representations and warranties are true and correct in all material respects), unless otherwise stated herein): (a) Organization; Standing. A&P is a corporation duly organized, validly existing, and in good standing under the laws of the State of Maryland. A&P shall provide information and documentation with respect to the type of entity, state of formation and good standing of any other Seller as requested by Seller or required by the Title Company. - ---------- * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -7- (b) Authority; Binding Effect. Seller has the requisite corporate power and corporate authority to execute and deliver this Agreement and the Related Agreements, and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement and the Related Agreements, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action on the part of Seller, and no other corporate action or proceeding on the part of Seller is required to authorize the execution, delivery or performance of, or consummation of the transactions contemplated by, this Agreement or the Related Agreements. This Agreement and the Related Agreements have been duly executed and delivered by Seller, and are the valid and binding obligations of Seller, enforceable against Seller in accordance with their terms. (c) Equipment Leases. None of the equipment leases which form a part of the Assumed Contracts itemized on Exhibit B-1 and Exhibit B-2 annexed hereto are capitalized on the books of Seller. (d) Title to the Acquired Assets. Seller has good title to the Transferred Inventory, Non-Acquired Facilities Inventory and Equipment Assets, free and clear of any and all Liens, except for UCCs that will be released prior to the applicable Closing. (e) Title to the Acquired Facilities. (i) (A) Seller has good, valid and insurable fee simple title to the Dunmore Owned Facility, the Baltimore Owned Facility and the New Orleans Owned Facility, free and clear of all Liens, and subject only to Permitted Encumbrances; (B) Seller owns good and valid leasehold interests in the Leases free and clear of all Liens; (ii) Seller is not a party to, or obligated under any option, right of first refusal or other contractual right to sell, dispose of or lease any of the Acquired Facilities or any portion thereof or interest therein to any person or entity other than Purchaser; (iii) except as may be provided in the documents, instruments and other items referred to in the definition of Permitted Encumbrances, there is no contract or agreement to which Seller is a party, other than the Assumed Contracts and the Leases, affecting any of the Acquired Facilities for which Purchaser will be responsible or liable after the applicable Closing, or if Purchaser would be liable, which are not terminable on thirty (30) days notice without premium or penalty; (iv) there are no leases or other occupancy agreements to which Seller or an Affiliate of Seller is a party, pursuant to which any persons or entities other than Seller or an Affiliate of Seller has a possessory interest in any of the Acquired Facilities; (v) Seller has not received any written notice of any pending, threatened or contemplated condemnation proceeding affecting any of the Acquired Facilities or any part thereof or of any sale or other disposition of any of the Acquired Facilities or any part thereof in lieu of condemnation; -8- (vi) except as set forth on Schedule 4.1(e)(vi), to Seller's Knowledge, Seller has not received any written notices from any Governmental Authority stating or alleging that any Improvements have not been constructed in compliance with law or are being operated in violation of applicable law; (vii) except as set forth on Schedule 4.1(e)(vii), to Seller's Knowledge, no written notice has been received by Seller from any Governmental Authority requiring or advising as to the need for any repair, alteration, restoration or improvement in connection with each Acquired Facility. (viii) as to the Islip Leased Facility, the Baltimore Leased Facility, and the New Orleans Leased Facility: (1) the Islip Facility Lease, the Baltimore Facility Lease and the New Orleans Facility Lease (together, the "Leases") are enforceable and binding obligations and are in full force and effect and Seller has not received any written notice, that any default, or condition which with the passage of time would constitute a default, exists under the Leases, except such notices as to which the alleged defaults have been cured or otherwise resolved. Further, as of the execution of this Agreement, Seller has not received notice from the landlord of the New Orleans Lease that landlord is exercising its early termination right. Seller will notify Purchaser if it receives such notice at any time. To Seller's Knowledge, no notice has been given of and no default under the Leases currently exists, nor to Seller's Knowledge, does any condition which with the passage of time would constitute a default exist. (2) true, correct and complete copies of the Leases set forth on Exhibit J have been delivered to Purchaser by Seller and such Leases have not been amended or modified except as set forth therein; (f) Inventory Statements. Seller will deliver to Purchaser the Inventory List which will accurately and fairly reflect in all material respects the Actual Cost of the Transferred Inventory and the Non-Acquired Facilities Inventory. (g) Inventory Quality. All of the Transferred Inventory shall, as of the applicable Procurement Conversion Date and the Non-Acquired Facilities Inventory shall, as of the applicable Closing Date, be: (i) Readily Saleable Merchandise; (ii) in conformity with warranties given by C&S to Seller under the Supply Agreement; and (iii) not subject to recall by the manufacturer or distributor or any governmental or regulatory agency and not be the subject of any notice by any such governmental or regulatory agency not to distribute such product. (h) Quality of Acquired Assets. The Acquired Assets are in good condition and repair (ordinary wear and tear excepted) for their continued use as they have been used, and in good condition (ordinary wear and tear excepted) for the continued conduct of the business to which they relate, except as set forth in Schedule 4.1(h). If, in the normal course of the operation of the Business, consistent with Section 11.1 and as otherwise set forth in this Agreement, prior to the applicable Closing, certain of the Equipment Assets suffer destruction ("Damaged -9- Equipment"), Seller shall repair or replace any such Damaged Equipment with items of comparable quality and condition; or, provided such Damaged Equipment does not individually or in the aggregate have a material impact on the Business, Seller shall delete such Damaged Equipment from the Equipment Assets and the Purchase Price will be equitably adjusted to reflect such deletion. (i) Acquired Assets. The Acquired Assets and the leased equipment listed on the attached Exhibit F constitute all of the assets materially necessary for Seller's warehousing and transportation operations currently conducted at and from the Acquired Facilities (the "Business"). (j) Litigation. There is no claim, action, suit, proceeding, investigation, or inquiry by or before any court of competent jurisdiction or governmental or regulatory agency, whether at law or in equity ("Litigation"), pending or, to Seller's Knowledge, threatened by or against Seller or any of its Affiliates with respect to, or affecting, the Acquired Assets, or which challenges or otherwise questions this Agreement, or any action taken or to be taken pursuant hereto or in connection with the purchase and sale of the Acquired Assets, and there is no judgment, order or decree of court of competent jurisdiction or governmental or regulatory agency with respect to the Acquired Assets, except as set forth on Schedule 4.1(j), and except as will not interfere with the Business operation or Purchaser's use of the Acquired Assets. Seller shall endeavor to list all of Seller's outstanding workers' compensation, slip and fall and automobile liability cases on Schedule 4.1(j), provided an inadvertent failure to list a case shall not be a default under this Agreement, subject to the following sentence. Seller shall indemnify Purchaser with respect to any Losses relating in any way to the Litigation, whether or not it is stated on Schedule 4.1(j). (k) Absence of Conflicting Agreements. The execution and delivery by Seller of this Agreement does not, and the performance by Seller of this Agreement and the consummation of the transactions contemplated hereby will not, (i) conflict with or violate the articles of organization or operating agreement, in each case as currently in effect, of Seller, (ii) conflict with or violate any law applicable to Seller or by or to which Seller is bound or subject or (iii) result in any breach of, or constitute a default (or an event that with notice or lapse of time or both would constitute a default) under, or give to any person or entity any right of termination, amendment, acceleration or cancellation of, or require payment under, or result in the creation of a Lien on any of the Acquired Assets under, any note, bond, mortgage, indenture, contract, agreement, arrangement, commitment, lease, license, permit, franchise or other instrument or obligation to which Seller is a party or by or to which Seller is bound or subject or which relate to the Acquired Assets, except as expressly set forth herein. (l) No Consents Required. Except as set forth on Schedule 4.1(l), no consent, approval, waiver, license, order, authorization, governmental consent or permit of, or registration, declaration, or filing with, or notice to, any Governmental Authority or any other person or entity, is required in connection with the execution, delivery, and performance by Seller of this Agreement, or the consummation by Seller of the transactions contemplated hereby. (m) Absence of Liabilities. Seller has no material liabilities or obligations arising from or relating to the Acquired Assets and the business and operations conducted in -10- connection therewith (whether absolute, accrued, fixed, contingent, liquidated, unliquidated or otherwise, and whether due or to become due), except for liabilities and obligations incurred in the ordinary course of business consistent with past practice, which ordinary course liabilities (other than Assumed Liabilities) shall be retained by Seller, and except for any mortgages or UCCs which will be released prior to the applicable Closing. (n) Compliance with Law. Seller is in substantial compliance with all applicable laws and regulations of federal, state and local governments (and all agencies thereof) with respect to the operations and activities of the Acquired Facilities and the Acquired Assets, and no action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand, or notice has been threatened, filed or commenced against Seller alleging any such failure to comply, except as set forth on Schedule 4.1(n). (o) Environmental. Seller and its Affiliates have delivered to Purchaser true and correct copies of any environmental studies within its possession, relating to the Acquired Facilities and Acquired Assets. The environmental issues of which Seller has Seller's Knowledge are listed on Schedule 4.1(o). Seller's indemnity obligation shall include but not be limited to the matters set forth on Schedule 4.1(o). (p) Labor Matters. (i) (x) Schedule 4.1(p)(i)(A) is a true, correct and complete list, as of the date shown thereon, of the Affected Employees and each such employee's site of employment, department, hiring date and salary. Except as set forth on Schedule 4.1(p)(i)(B), there are no employment agreements, severance agreements or severance plans and policies with respect to the Affected Employees; and (y) to the knowledge of any director level, vice president or more senior officer of Seller, there are no labor or employment disputes or claims involving any Affected Employees pending or threatened against Seller or its Affiliates. (ii) Schedule 4.1(p)(ii) is a true, correct and complete list of each pension plan, fund or program (within the meaning of section 3(2) of ERISA) which is a "Multiemployer Pension Plan," as defined in section 3(37) of ERISA, maintained or contributed to or required to be contributed to by Seller or any ERISA Affiliate for the benefit of any Affected Employee (the "Multiemployer Pension Plans"). (iii) No event has occurred with respect to any Affected Employees which could result in a "partial withdrawal" under section 4205 of ERISA with respect to any Multiemployer Pension Plan. Attached hereto as Schedule 4.1(p)(iii) is a schedule of contributions made by Seller and its ERISA Affiliates to the respective Multiemployer Pension Plans for the operations of the Business conducted at the Acquired Facilities except the Baltimore Leased Facility and the Baltimore Owned Facility for the most recent five (5) plan years. With respect to the Multiemployer Pension Plans, to the Knowledge of Seller, the withdrawal liability of Seller and their ERISA Affiliates, computed as if a complete withdrawal by Seller and the ERISA Affiliates with respect to the Acquired Facilities only (which does not include Detroit) except the Baltimore Leased Facility and the Baltimore Owned Facility had occurred under the Multiemployer Pension Plans on -11- the date hereof, would not exceed twenty-five million dollars ($25,000,000.00) in the aggregate. (q) Taxes. (i) To Seller's Knowledge, all material Tax Returns required to be filed on or prior to the applicable Closing Date or Delayed Closing by or with respect to the Acquired Assets have, within the time and manner prescribed by law, been duly filed with the appropriate tax authorities. To Seller's Knowledge, all such Tax Returns are true, correct, and complete in all material respects and all Taxes due and payable with respect to such Tax Returns have been paid. To Seller's Knowledge, Seller has timely paid or caused to be paid all Taxes required to be paid for the portion of the taxable year or period through and including the applicable Closing Date in the case of any Straddle Period. To the extent that Seller's Knowledge is not accurate, Seller shall file any necessary Tax Returns and pay any Taxes, and shall indemnify Purchaser from any Losses (as defined herein) on account thereof. (ii) There are no Liens for Taxes upon any of the Acquired Assets except for statutory liens for Taxes not yet due for which Seller shall be responsible. (r) No Reliance. The Seller is sophisticated and knowledgeable with respect to the grocery, perishables, frozen food and merchandise distribution business, regulatory and political matters related to such business and has performed its own independent investigation and analysis, with due diligence, of the sale of the Acquired Assets and has performed its own independent assessment of the risks and potential returns of selling the Acquired Assets. The Seller has extensive financial experience with sales such as the sale contemplated by this Agreement and therefore has the ability to protect its own interests in connection with this Agreement. Nothing in this provision shall diminish any liability, obligation or duty of indemnification or any other undertaking of Purchaser or C&S as set forth in this Agreement. Seller further acknowledges that neither Purchaser nor any representative thereof has given any investment, legal or other advice or rendered any opinion as to whether the sale of the Acquired Assets is prudent. (s) No Knowledge of Breach. Seller has no knowledge of any breach by Purchaser of any representation or warranty made by Purchaser in this Agreement or any condition or circumstance that would excuse Seller from its timely performance of its obligations hereunder. Section 4.2 Representations and Warranties of Purchaser. Purchaser and C&S, as applicable, represent and warrant to Seller as follows (in each case as of the date of this Agreement and as of the applicable Closing (that such representations and warranties are true and correct in all material respects), unless otherwise stated herein): (a) Organization; Standing. Purchaser is an affiliate of C&S and is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware. Purchaser is not a tax-exempt entity (within the meaning of Section 168(h) of the Code) or a debtor or debtor-in-possession in a voluntary or involuntary bankruptcy proceed- -12- ing. C&S is a corporation, validly existing and in good standing under the laws of the State of Vermont. (b) Authority; Binding Effect. Purchaser and C&S each have the requisite corporate or company power and authority to execute and deliver this Agreement and the Related Agreements and to perform their obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement and the Related Agreements, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate or company action on the part of each of Purchaser and C&S, and no other corporate or company action or proceeding on the part of Purchaser or C&S is required to authorize the execution, delivery and performance of, or consummation of the transactions contemplated by, this Agreement and the Related Agreements. This Agreement and the Related Agreements have been duly executed and delivered by each of Purchaser and C&S and are the valid and binding obligation of each Purchaser, enforceable against each Purchaser in accordance with their terms. (c) No Consent Required. Except as set forth on Schedule 4.1(l), no consent, approval, waiver, license, order, authorization, governmental consent or permit of, or registration, declaration, or filing with, or notice to, any Governmental Authority or any other person or entity, is required in connection with the execution, delivery, and performance by Purchaser of this Agreement, or the consummation by Purchaser of the transactions contemplated hereby. (d) Absence of Conflicting Agreements. The execution and delivery by Purchaser and C&S of this Agreement does not, and the performance by Purchaser and C&S of this Agreement and the consummation of the transactions contemplated hereby will not, (i) conflict with or violate the articles of organization or operating agreement or other organizational document, in each case as currently in effect, of Purchaser or C&S, (ii) conflict with or violate any law applicable to Purchaser or C&S or by or to which Purchaser or C&S is bound or subject or (iii) result in any breach of, or constitute a default (or an event that with notice or lapse of time or both would constitute a default) under any note, bond, mortgage, indenture, contract, agreement, arrangement, commitment, lease, license, permit, franchise or other instrument or obligation to which Purchaser or C&S is a party or by or to which Purchaser or C&S is bound or subject. (e) Litigation. There is no injunction or restraining order by any court of competent jurisdiction or Governmental Authority which prohibits the transactions contemplated by this Agreement. (f) No Financing. The Purchaser will have adequate funds at its disposal to finance the Purchase Price on the date of the applicable Closing. The consummation of the purchase described in this Agreement shall not be subject to Purchaser's ability to obtain financing. (g) No Reliance. The Purchaser and C&S, considered as a whole, are sophisticated and knowledgeable with respect to the grocery, perishables, frozen food and merchandise distribution business, regulatory and political matters related to such business and have performed their own independent investigation, with due diligence, of the investment represented by the purchase of the Acquired Assets and have performed their own independent assessment of the risks and potential returns of acquiring the Acquired Assets. The Purchaser and C&S, taken -13- as a whole, have extensive financial experience with investments such as the investment contemplated by this Agreement and therefore have the ability to protect their own interests in connection with this Agreement. Nothing in this provision shall diminish any liability, obligation or duty of indemnification or any other undertaking of Seller as set forth in this Agreement. Purchaser further acknowledges that neither Seller nor any representative thereof has given any investment, legal or other advice or rendered any opinion as to whether the purchase of the Acquired Assets is prudent. (h) No Knowledge of Breach. Neither Purchaser nor C&S has knowledge of any breach by Seller of any representation or warranty made by the Seller in this Agreement or any condition or circumstance that would excuse Purchaser or C&S from its timely performance of its obligations hereunder. ARTICLE V EMPLOYEE MATTERS Section 5.1 Responsibility for Employees. Purchaser shall assume Seller's liability for accrued vacation, any and all other accrued paid time off for the respective Affected Employees hired by Purchaser. Seller will pay to Purchaser at the applicable Closing an amount equal to such accrued vacations and any accrued liability for paid time off. A list of such accrued liabilities with respect to each hired Affected Employee is attached as Schedule 5.1. To the extent that such payment is an estimated amount at the applicable Closing, it shall be paid as estimated at the applicable Closing and adjusted by the Parties within 30 days after the applicable Closing. Following the applicable Closing, Purchaser will provide Seller with reasonable access to the hired Affected Employee files transferred to Purchaser at the applicable Closing. Section 5.2 Offers of Employment. Purchaser will offer employment to all of the Affected Employees who are covered by the Assumed Collective Bargaining Agreements. Such offers of employment will be upon the terms set forth in the applicable Assumed Collective Bargaining Agreement. Purchaser shall interview the non-union Affected Employees and shall have the right but not the obligation to hire any non-union Affected Employees. Purchaser shall provide health benefits commencing July 10, 2005 to any hired non-union Affected Employees. With respect to Affected Employees who have company provided health insurance and who are hired by Purchaser, excluding those having health insurance through a union health & welfare fund, the Parties allocate to Purchaser the responsibility to make COBRA continuation coverage available to such Affected Employees pursuant to 26 C.F.R ss. 54.4980B-9, Q&A 7. Section 5.3 Freshtown and Edison. Purchaser has not agreed, nor is Purchaser obligated to hire any of the employees of Seller, whether union or non-union, employed at the Freshtown Facility or Edison Facility, nor has Purchaser agreed to assume any of the collective bargaining agreements with any labor union representing employees that are employed at the Freshtown Facility or Edison Facility by Seller. Purchaser shall have no obligation (except with respect to the transportation of the Non-Acquired Facilities Inventory as set forth in Section 8.4), for any costs or liabilities associated with closing the Edison Facility or the Freshtown Facility, including, without limitation, due to severance obligations, withdrawal liability and any other such labor-related closing costs. -14- ARTICLE VI CONDITIONS TO CLOSING Section 6.1 Conditions to Obligations of Purchaser. The obligations of Purchaser to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment at or prior to the applicable Closing of the following conditions (any one or more of which may be waived, to the extent permitted by applicable law, in whole or in part by Purchaser): (a) Accuracy of Representations and Warranties. The representations and warranties of Seller set forth in this Agreement shall be true and correct in all material respects as of the date hereof and, except to the extent such representations and warranties relate to an earlier date, at and as of the applicable Closing Date or Delayed Closing as though made on such date, provided Seller shall be given an opportunity to cure such breach prior to the applicable Closing, and if such breach cannot be cured prior to applicable Closing, the parties will cooperate to work out a solution. (b) Performance of Covenants. Seller shall have performed and complied in all material respects with all agreements, obligations, covenants and conditions required by this Agreement to be performed or complied with by it at or prior to the applicable Closing. (c) Consents to Assignment of Certain Contracts. Notwithstanding any provision hereof to the contrary, Seller shall have obtained and delivered to Purchaser all consents necessary to assign the Material Assumed Contracts in form and substance reasonably satisfactory to Purchaser, or the third parties to any Material Assumed Contracts requiring such consent shall have agreed in writing to terminate such Material Assumed Contracts (without penalty to Purchaser) and shall have entered into a substantially similar agreement with Purchaser, each of which shall be in full force and effect and the valid and binding obligation of each party thereto. The Material Assumed Contracts are listed on Exhibit B-3. Seller shall use good faith efforts to obtain consents for all Assumed Contracts set forth on Exhibit B-1. Any breach of the Supply Agreement by Purchaser which is due to Seller's failure to deliver consent to assign an Assumed Contracts shall be excused. (d) Related Agreements. Each of the Related Agreements shall have been executed by the respective parties thereto and the Related Agreements shall be in full force and effect and shall have become effective in accordance with their terms. (e) Title Insurance. Title to the Dunmore Owned Facility, the New Orleans Owned Facility, the Baltimore Owned Facility and the Leased Facilities shall at the applicable Closing be good and insurable as such under A.L.T.A. Owner or Leasehold Title Policies by any nationally recognized title insurance company selected by Purchaser in its sole and absolute discretion (the "Title Company") at regular rates, free and clear of all Liens and without exceptions, disclaimers of liability or objections except Permitted Encumbrances. As a condition to each applicable Closing, the Title Company shall insure each of the Dunmore Owned Facility, the New Orleans Owned Facility, the Baltimore Owned Facility and the Leased Facilities under the terms described above, which title insurance shall be paid for by Purchaser. -15- (f) Estoppels. Purchaser shall have received such estoppel certificates as are required under Section 7.2(h) from the landlords under the Leases or the Seller certificates, dated within thirty (30) days of the applicable Closing. (g) Certificates of Occupancy. Purchaser shall have received from Seller copies of all current certificates of occupancy for each of the Acquired Facilities. To the extent Seller cannot deliver a certificate of occupancy at the applicable Closing, Seller shall proceed with obtaining such certificate of occupancy and shall deliver same to Purchaser as soon as possible. Purchaser shall cooperate with Seller as reasonably requested. Seller shall indemnify Purchaser from any Losses resulting from Purchaser's failure to possess certificates of occupancy, unless such failure is caused by Purchaser. Section 6.2 Conditions to Obligations of Seller. The obligations of Seller to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment at or prior to the applicable Closing of the following conditions (any one or more of which may be waived, to the extent permitted by applicable law, in whole or in part by Seller): (a) Accuracy of Representations and Warranties. The representations and warranties of Purchaser set forth in this Agreement shall be true and correct in all material respects as of the date hereof and, except to the extent such representations and warranties relate to an earlier date, as of the applicable Closing as though made on such date, provided Purchaser shall be given an opportunity to cure such breach prior to the applicable Closing, and if such breach cannot be cured prior to the applicable Closing, the Parties will cooperate to work out a solution. (b) Performance of Covenants. Purchaser shall have performed and complied in all material respects with all agreements, obligations, covenants and conditions required by this Agreement to be performed or complied with by it, at or prior to the applicable Closing. (c) Related Agreements. Each and every one of the Related Agreements shall have been executed by the respective parties thereto and such Related Agreements shall be in full force and effect and shall have become effective in accordance with their terms. (d) Purchase Price. Purchaser shall pay the Purchase Price (excluding the Transferred Inventory and Non-Acquired Facilities Inventory) due at the applicable Closing. Purchaser shall pay for the Equipment Assets on the Procurement Conversion Date for the applicable Acquired Facility. ARTICLE VII CLOSING Section 7.1 The Closing. The closing (the "Closing") of the transactions contemplated hereby shall take place on July 10, 2005 with respect to any labor (including ERISA, COBRA), employee or employment-related matters (including, without limitation, the Assumed Collective Bargaining Agreements) and with respect to the Equipment Assets and the Non-Acquired Facilities Inventory, and on the applicable Procurement Conversion Date (each such date referred to herein as a Closing) with respect to the Transferred Inventory, Assumed Contracts and Acquired Facilities (including deeds, leases or sublease) at Seller's executive offices or other mutually agreed to location, or if the conditions to the applicable Closing set -16- forth in Article VI shall not have been fulfilled or, to the extent permitted by applicable law, waived by such date, as soon as practicable (but in no event less than five (5) business days) after such conditions shall have been fulfilled or satisfied, or on such other date or at such other time as the Parties may agree in writing, subject to Section 10.1(c). Purchaser may elect to assume certain of the Assumed Contracts (for example, the tractor and trailer leases) on July 10, 2005, provided Seller shall be responsible for paying or reimbursing Purchaser for any and all costs, liability and expenses associated with such Assumed Contracts prior to the applicable Procurement Conversion Date. Notwithstanding anything to the contrary stated herein, Purchaser may elect in its sole discretion, but so long as there is a valid business reason for doing so (including but not limited to an issue with respect to the timing of registrations and/or taxes), and which shall be more than Purchaser's unsubstantiated desire, to delay the transfer of title (a "Delayed Closing") with respect to all or some of the Equipment Assets or Assumed Contracts for a period of up to six (6) months, provided that there shall be no reduction in Purchase Price to be paid at the applicable Closing and all other conditions to the applicable Closing shall be met by Seller and Purchaser. In the event of a Delayed Closing, all bills of sale, titles and other documents necessary to transfer, assign, convey and deliver the Equipment Assets or Assumed Contracts subject to the Delayed Closing shall be signed at the applicable Closing and shall be held in escrow with the law firm of Drinker Biddle & Reath LLP ("DBR"), to be released to Purchaser at Purchaser's instructions to DBR. Section 7.2 Seller's Obligations. At the applicable Closing or Delayed Closing, as applicable, Seller shall deliver or cause to be delivered to the Purchaser or its designee the following: (a) All appropriate transfer documents including any bills of sale necessary to sell, transfer, assign, convey and deliver to the Purchaser or its designee the applicable Acquired Assets, free and clear of any and all Liens; (b) A special warranty deed ("Dunmore Deed") in the form of Exhibit G-1 with covenants against grantor's acts sufficient to convey to the Purchaser or a designee title to the Dunmore Owned Facility, with such conveyance made subject only to the Permitted Encumbrances. The Dunmore Deed shall describe the property by metes and bounds using the description contained on Exhibit C hereto (or, if Purchaser obtain an updated survey certified by the surveyor to Seller, using the description contained in the updated survey); (c) A special warranty deed ("New Orleans Deed") in the form of Exhibit G-2 with covenant's against grantor's acts sufficient to convey to the Purchaser or a designee title to the New Orleans Owned Facility, with such conveyance made subject only to the Permitted Encumbrances. The New Orleans Deed shall describe the property by metes and bounds using the description contained on Exhibit C-4 hereto (or, if Purchaser obtains an updated survey certified by the surveyor to Seller, using the description contained in the updated survey); (d) Affidavits of title in such form as may be reasonably required by Purchaser's title insurance company to allow such company to issue leasehold or owner title insurance policies in favor of the Purchaser or its designee with respect to the Acquired Facilities subject only to the Permitted Encumbrances; -17- (e) An affidavit that Seller is not a "foreign person" within the meaning of Section 1445(b)(2) of the Internal Revenue Code; (f) The Related Agreements; (g) Any and all transfer tax returns or withholding certificates required to be filed in connection with the transfer of the Leases or Owned Facilities; (h) Estoppel certificates from the landlords under the Leases or in the alternative, Seller shall provide a certificate regarding the substance of each estoppel not deliverable from certain landlords under the Leases. Such certificate shall certify that: (i) the lease is in full force and effect; (ii) there are no defaults thereunder, or any conditions that with the passage of time would constitute a default thereunder; (iii) the amount of the monthly or annual rent payable thereunder; (iv) the amount of additional rent payable thereunder; and (iv) the beginning and end dates of term of the lease, together with any available extension options. In the event Seller is unable to obtain one or more landlord estoppels, Seller shall indemnify, reimburse, hold harmless and defend Purchaser and its Affiliates, for, from and against any and all actual damages (including, without limitation reasonable attorneys' fees and expenses incurred, but excluding any consequential damages) to the extent arising, directly or indirectly, out of any inaccuracy reflected in such certificate. Seller's obligations hereunder shall survive the applicable Closing; (i) Written consents from third parties under any of the Material Assumed Contracts. Seller shall indemnify Purchaser from any and all liability, direct or indirect, that might ensue from such consent not given, and such indemnification shall not be subject to any minimum threshold as set forth in Section 9.6. (j) A counterpart original of the closing statement, setting forth the Purchase Price, the closing adjustments and application of the Purchase Price as adjusted; (k) All other documents and papers reasonably requested by Purchaser to effect the transactions contemplated hereby, including, without limitation, transfer tax returns, bills of sale, the Assumed Contracts, and any other transfer documents requiring execution by Seller to effect the transactions contemplated herein; (l) an officer's certificate from Seller stating that all representations and warranties set forth in Section 4.1 remain true and correct in all material respects as of the applicable Closing or the Delayed Closing, as applicable; and (m) A special warranty deed ("Baltimore Deed") in the form of Exhibit G-3 with covenants against grantor's acts sufficient to convey to the Purchaser or a designee title to the Baltimore Owned Facility, with such conveyance made subject only to the Permitted Encumbrances. The Baltimore Deed shall describe the property by metes and bounds using the description contained on Exhibit C-5 hereto (or, if Purchaser obtains an updated survey certified by the surveyor to Seller, using the description contained in the updated survey); Section 7.3 Purchaser's Obligations. At the applicable Closing, or the Delayed Closing as applicable, the Purchaser shall deliver to Seller the following: -18- (a) the Purchase Price for the Acquired Assets being transferred at such Closing, except that if such Closing occurs on a Saturday, the funds will be wired to Seller on the following Monday and the deeds and Lease Assignments and other documents to be conveyed at such Closing shall be held in escrow until the applicable amount of the Purchase Price is paid. Further, Purchaser shall not pay for the Equipment Assets until the Procurement Conversion Date for the applicable Acquired Facility and shall pay for the Non-Acquired Facilities Inventory and the Transferred Inventory in accordance with Sections 8.5 and 8.6 of this Agreement; (b) all Related Agreements and all other documents and papers reasonably requested by Seller to effect the transactions contemplated hereby, including, without limitation, transfer tax returns, bills of sale, an assumption agreement with respect to the applicable Assumed Liabilities (that is consistent with the terms of this Agreement) and any other transfer documents requiring execution by Purchaser to effect the transactions contemplated herein; (c) Any and all transfer tax returns or withholding certificates required to be filed in connection with the transfer of the Leases or Owned Facilities. (d) a counterpart original of the closing statement setting forth the Purchase Price, the closing adjustments and application of the Purchase Price as adjusted; and (e) an officer's certificate from Purchaser and C&S stating that all representations and warranties set forth in Section 4.2 remain true and correct in all material respects as of the applicable Closing or Delayed Closing, as applicable. ARTICLE VIII CERTAIN ADDITIONAL COVENANTS Section 8.1 Further Assurances. (a) At any time and from time to time, without further consideration, the Parties shall take all action and do all things as may reasonably be requested and shall each use their commercially reasonable efforts in order to satisfy the conditions to the applicable Closing and to consummate and make effective the transactions contemplated by this Agreement, including, without limitation, obtaining all required consents of third parties and approvals of all requisite Governmental Authorities. (b) If at any time after the applicable Closing any further action is necessary or desirable to carry out the purposes of this Agreement (including, without limitation, the transfer of the Acquired Assets free and clear of any Liens), each of the Parties will take such further action (including the execution and delivery of such further instructions and documents) as the other Party reasonably may request, all at the sole cost and expense of the requesting Party (unless the requesting Party is entitled to indemnification therefore under this Agreement). Section 8.2 Reasonable Access. Until the applicable Closing, Seller will cause its officers and employees to afford Purchaser and its representatives (including, without limitation, environmental consultants and engineers) with access to the Acquired Facilities and its employees thereat, and a full opportunity to conduct due diligence of the Acquired Facilities and to examine and inspect the Acquired Assets, by conducting such studies (including, at Purchaser's -19- option, Phase I studies for one or more Acquired Facility and Phase II studies for any Acquired Facility if the Phase I study indicates that it is appropriate to conduct a Phase II study on such Acquired Facility and the landlord of such Acquired Facility consents to such a study if consent is required under the Leases) and taking such samples from the each of the Acquired Facilities as Purchaser and its representatives deem desirable. Purchaser agrees that it will cause its environmental consultants and engineers to conduct their studies, examinations and inspections of the Acquired Facilities during normal business hours and in a manner designed to cause minimal interference to the operations conducted at the Acquired Facilities and in a manner designed to preserve the confidential nature of this transaction. In addition, Purchaser will use its best efforts to restore the Acquired Facilities to their pre-existing condition as a result of any damage (e.g. drilling of holes for environmental studies) caused by the studies or examinations conducted by Purchaser's environmental consultants and engineers. From and after the applicable Closing, Purchaser will cause its officers and employees to afford Seller and its representatives (including, without limitation, environmental consultants and engineers) with access to the Acquired Facilities and its employees thereat, so that Seller can remedy environmental and maintenance issues, including but not limited to the tanks in Islip Leased Facility and the roof leaks in New Orleans Owned Facility, pursuant to this Agreement and Seller's indemnification and other obligations hereunder. Seller agrees that it will cause its environmental consultants and engineers and others to conduct their repairs and inspections and other work at the Acquired Facilities during normal business hours (or at such other times reasonably agreed to by the Parties) and in a manner designed to cause minimal interference to the operations conducted at the Acquired Facilities. Section 8.3 Inventory. The inventories of the Acquired Facilities shall be taken in accordance with this Agreement and Schedule 8.3. Pursuant to Section 8.6, the Purchaser will pay to Seller a sum equal to Seller's Actual Cost of the Transferred Inventory or the Non-Acquired Facilities Inventory being transferred. The written record of the physical inventories taken pursuant to this Agreement (the "Inventory List") which list shall exclude all inventory that fails to conform to the warranties set forth in Section 4.1(g) and such written record shall value the items included in the applicable Transferred Inventory or the Non-Acquired facilities Inventory at Actual Cost. The Parties shall share equally any costs associated with taking the physical inventories covered by this Section 8.3, including labor costs. Section 8.4 Non-Acquired Facilities Inventory. Purchaser shall purchase all Readily Saleable Merchandise existing at Seller's Edison and Freshtown Facilities ("Non-Acquired Facilities Inventory") after Seller has reduced the inventory level to a level as low as reasonably practicable while maintaining adequate service levels, subject to the following sentence. Purchaser shall only be responsible for Non-Acquired Facilities Inventory to the extent such inventory is actually received by Purchaser at Purchaser's or an Affiliates' facilities, unless certain inventory is not received at Purchaser's facilities due to Purchaser's (or the driver's) negligence or intentional misconduct. Purchaser shall drop trailers at Seller's Edison and Freshtown Facilities, and Seller shall be responsible for loading and sealing the trailers. Purchaser shall arrange for drivers to transport the Non-Acquired Facilities Inventory to its facilities at Purchaser's cost. Seller shall position its employees at Purchaser's or its Affiliate's facilities' receiving docks to confirm the Non-Acquired Facilities Inventory counts. All deliveries in one (1) week will be aggregated and paid pursuant to the payment schedule set forth in Section 8.6. -20- Section 8.5 Inventory Repurchase. Subject to the terms of the Supply Agreement, Seller shall repurchase all of the Transferred Inventory from Purchaser or Purchaser's designee within (3) of the Procurement Conversion Date for the applicable Acquired Facility or within * of the applicable Closing Date or later receipt at Purchaser's or an Affiliate's facilities for the Non-Acquired Facilities Inventory, or if shorter for any product in the Transferred Inventory or Non-Acquired Facilities Inventory, the days remaining on the manufacturer's recommended shelf life for such product as of the applicable Closing Date. Notwithstanding the preceding, GM/HBC product shall be repurchased over a * period rather than the * period set forth above. If at the end of such * (or * for GM/HBC) day period any applicable Transferred Inventory or Non-Acquired Facilities Inventory has not been purchased by Seller, then Purchaser will not be obligated to pay for such remaining Transferred Inventory or Non-Acquired Facilities Inventory until same is purchased by Seller or otherwise disposed of as per agreement of the Parties and C&S. In addition to the repurchase described above, Seller shall work with Purchaser to reduce all remaining excess Transferred Inventory or Non-Acquired Facilities Inventory, as follows: For Transferred Inventory or Non-Acquired Facilities Inventory remaining in the warehouse after * (or * for GM/HBC) following Purchaser's receipt, Seller will offer Purchaser a discounted price on the inventory balance on hand. Seller will also review the possibility of creating specific promotional plans in order to deplete the remaining inventory. For all Transferred Inventory or Non-Acquired Facilities Inventory remaining in the warehouse after * from Purchaser's receipt, Seller will work with Purchaser to dispose of it, which may require additional discounts to Purchaser's purchase price, i.e. if Purchaser must sell the inventory to salvage, etc. Section 8.6 Inventory Actual Cost Payment. Subject to the provisions set forth in Section 8.5 (regarding Purchaser's right to withhold payment if Seller has not re-purchased the Transferred or Non-Acquired Facilities Inventory, as applicable), Purchaser shall pay Seller for the Transferred Inventory or Non-Acquired Facilities Inventory in * commencing on the *. Section 8.7 Injunctions/Orders. In the event that any temporary, interim or other non-final injunction, order or decree is issued by a court of competent jurisdiction which restrains, prohibits or limits consummation of the transactions contemplated hereby each Party and C&S shall use its reasonable best efforts to have such injunction, order or decree lifted, rescinded or revoked as soon as possible. Section 8.8 Conveyance Taxes. Notwithstanding any other provision of this Agreement to the contrary, all excise, transfer (including real property transfer), gross receipts, litter control, documentary, sales, use, gross receipts, stamp, registration, filing, recordation and - ---------- * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -21- other similar taxes, together with any interest, additions or penalties with respect thereto and any interest in respect of such additions or penalties incurred in connection with this Agreement or resulting from the transactions contemplated by this Agreement (collectively, "Conveyance Taxes") shall be borne equally by Seller and Purchaser and shall be paid by the responsible Party on the applicable Closing Date or as soon thereafter as necessary or required. Schedule 8.8 sets forth the Conveyance Taxes payable in connection with the transactions contemplated by this Agreement. The Party responsible shall file all necessary tax returns with respect to all such Conveyance Taxes, and, to the extent required by applicable law, the other Party will, and will cause its Affiliates to join in the execution of any such tax returns. The Parties shall also split equally any other conveyance fees imposed on either Party. Section 8.9 Apportionments and Prepaid Expenses. (a) All Tax assessments and utility charges with respect to the Acquired Facilities shall be apportioned between Seller and Purchaser as set forth below: (i) Seller shall pay all Taxes assessed against each of the Acquired Facilities with respect to taxable periods ending on or before the applicable Closing Date. Purchaser shall pay all Taxes assessed against each of the Acquired Facilities with respect to taxable periods beginning on the day after the applicable Closing Date (including interest and penalties due not caused by Seller), subject to the Leases and the New Orleans Sublease. Seller shall pay to Purchaser at the applicable Closing its prorated share (as determined in this Section 8.9(a)(i)) of any unpaid Taxes pertaining to each of the Dunmore Owned Facility, New Orleans Owned Facility, Baltimore Owned Facility and the Leased Facilities with respect any Straddle Period and shall be responsible for any interest and penalties accrued at the time of applicable Closing with respect to the period prior to the date of the applicable Closing. In the absence of any assessment establishing the tax payments due for a Straddle Period, for purposes of proration under this Section 8.9(a)(i), Taxes shall be calculated as one hundred percent (100%) of the most recent tax assessed valuation figures at the time of the applicable Closing. Upon receipt of an actual assessment for the Taxes due during a Straddle Period, Seller and Purchaser will, if necessary, adjust the apportionment between them within thirty (30) days after Purchaser delivers to Seller the actual assessment. For purposes of this Section 8.9(a)(i), the Seller's prorated share of unpaid Taxes for a Straddle Period shall be deemed to be the amount of such Taxes for the entire period (or, in the case of such determined on an arrears basis, the amount of such Taxes for the immediately preceding period) multiplied by a fraction, the numerator of which is the number of calendar days in the taxable period ending on (and including) the applicable Closing Date, and the denominator of which is the number of calendar days in the entire taxable period. (ii) All utility charges, including, without limitation, sewer and water charges (collectively, "Utility Charges") and all payments under any Assumed Contracts shall be prorated and apportioned as of the applicable Closing Date, the period through and including the applicable Closing Date being Seller's responsibility and the period commencing on the day immediately following the applicable Closing Date being Purchaser's responsibility. Any undetermined or unbilled Utility Charges shall be apportioned as of the applicable Closing Date on the basis of the most recent bill issued prior to -22- the applicable Closing and Purchaser and Seller shall adjust the apportionment, if necessary, within thirty (30) days after Purchaser submits to Seller actual invoices for such charges. (iii) All payments under any Assumed Contracts, Leases and the New Orleans Sublease shall be prorated and apportioned as of the applicable Closing Date, the period through and including the applicable Closing Date being Seller's responsibility and the period commencing on the day immediately following the applicable Closing Date being Purchaser's responsibility. (b) (i) Seller shall pay all base, minimum, fixed and additional rent and other charges ("Rent") due and payable under the Leases with respect to the period through and including the applicable Closing Date. Purchaser shall pay all Rent due and payable under the Leases with respect to the period from and after the day following the applicable Closing Date. Purchaser shall pay to Seller at the applicable Closing its prorated share of any Rent prepaid by Seller relating to the period after the applicable Closing Date. Seller shall give Purchaser a credit for any payments due under the Leases not yet paid and relating in any way to any time prior to the applicable Closing. (ii) To the extent any amounts referred to in this Section 8.9(b) are computed based on estimated amounts subject to adjustment at a later date, Purchaser and Seller agree that in the event such adjustment occurs after the date of the applicable Closing, if any amounts are determined to be owing to either Seller by Purchaser or to Purchaser by Seller, then the Party owing such amounts shall pay the same to the owed Party within ten (10) days of written demand therefore by the Party to which such amounts are owed. (c) Purchaser shall not have any liability with respect to the New Orleans Lease (financial or otherwise) except as set forth in the New Orleans Sublease. (d) Seller covenants and agrees to satisfy any and all Liens secured by or affecting the Acquired Assets which can be satisfied by payment of fixed and ascertainable amounts, or bond against the same (or if acceptable to Title Company such that Title Company does not take exceptions for any such Liens on Purchaser's title insurance policies, Seller may indemnify the Title Company), and shall deliver to Purchaser or the Title Company, at the applicable Closing, instruments in recordable form and sufficient to satisfy such Liens of record, together with the cost of recording or filing said instruments, or a bond therefore or any documents required by the Title Company in conjunction with an indemnity. Section 8.10 Allocation of Purchase Price. Intentionally Omitted. Section 8.11 Obtaining Permits. Purchaser shall be responsible for obtaining all licenses and non-assignable permits necessary to operate the Business after the applicable Closing, as required by law, including tobacco licenses. Seller shall transfer any licenses or permits to Purchaser to the extent feasible under the law and Seller shall cooperate fully with Purchaser in its efforts to obtain or assign permits and provide any information or reasonable assistance, including DEA and state drug enforcement agency powers of attorney, as necessary. Attached -23- hereto as Exhibit H is a list of all material permits and licenses (including environmental) which are required for the use and operation of the Acquired Facilities or the Business. Section 8.12 Waivers. Seller shall use good faith efforts to deliver landlord waivers from any landlords in the chain of title with respect to the Acquired Facilities to the extent required by Purchaser's bank. Section 8.13 Non-Disturbance Agreements. Seller shall use commercially reasonable efforts to obtain Non-Disturbance Agreements from the current landlords and overlandlords if applicable (not including Seller's direct landlords with respect to the Islip Facility Lease and the Baltimore Facility Lease) and lenders set forth on the title commitments received by Purchaser unless an existing Non-Disturbance Agreement is on record (or in recordable form and Seller shall record prior to the applicable Closing) and will inure to the benefit of Purchaser, except Seller is not required to obtain a Non-Disturbance Agreement from the landlord of the New Orleans Lease for the benefit of Purchaser as subtenant. If Seller is unable, despite such commercially reasonable efforts, to obtain the Non-Disturbance Agreements, Seller shall indemnify Purchaser from any and all liability and damages, whether direct or indirect, resulting from such failure, and such indemnification shall not be subject to the minimum threshold set forth in Section 9.6, provided Purchaser or an Affiliate or a third party with permission from Purchaser was using such Acquired Facility. Further, if Purchaser is unable to maintain control of all or a material part of an Acquired Facility due to failure of Sellers to obtain a Non-Disturbance Agreement, due to a title defect arising prior to the applicable Closing Date or due to failure of Sellers to obtain an estoppel certificate or due to a Seller default, act or omission under or with respect to the New Orleans Lease (unless Purchaser's inability to maintain control of all or a material part of an Acquired Facility is due to an act or omission of Purchaser or an Affiliate or a third party with permission from Purchaser to use the Acquired Facility), any resulting breach or service issues related to such loss of control of an Acquired Facility shall not be a breach by C&S of the Supply Agreement. Section 8.14 Insurance. Seller agrees to maintain all insurance as is reasonable and customary in amounts reasonably acceptable to Purchaser with respect to the Acquired Assets and the Acquired Facilities, including, but not limited to, property, general liability, automobile liability and workers' compensation insurance through the applicable Closing. Purchaser shall maintain all insurance as is reasonable and customary in amounts reasonably acceptable to Seller with respect to the Acquired Assets and Acquired Facilities, including, but not limited to, property, general liability, automobile liability and workers' compensation insurance from and after the applicable Closing. The property insurance required shall insure each of the Acquired Facilities at * of replacement cost. Seller and Purchaser shall be deemed to be in compliance with this provision with respect to the Acquired Facilities, if Seller or Purchaser is in compliance with the insurance provisions of the relevant Lease. - ---------- * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -24- Section 8.15 Transition Fee. Purchaser shall pay Seller a transition fee ("Transition Fee") for certain of Seller's costs associated with transitioning the Business from Seller to Purchaser, which fee shall be negotiated by the Parties, but shall not exceed (5), without the prior written consent of Purchaser. Such Transition Fee shall be paid in installments as Seller incurs the actual costs. Seller shall provide detailed backup documentation with respect to the Transition Fee and the Parties will reconcile any amounts as soon as possible. Section 8.16 Fair Market Price. The determination of Fair Market Price for the Dunmore Owned Facility, Baltimore Owned Facility and the New Orleans Owned Facility shall be determined as follows: one (1) MAI Appraiser shall be selected by Seller and one (1) MAI Appraiser shall be selected by Purchaser for each building. Each appraiser shall have a minimum of ten (10) years experience as an MAI Appraiser of commercial rents in the county in which the Dunmore Owned Facility, Baltimore Owned Facility or the New Orleans Owned Facility, as applicable, are located and whose credentials are reasonably acceptable to the other Party. The appraisals shall be performed on a comparable value basis. Each MAI Appraiser shall then make the determination of Fair Market Price upon the terms and conditions as herein provided. The appraisal shall be for the Dunmore Owned Facility, Baltimore Owned Facility or the New Orleans Owned Facility in AS IS, WHERE IS condition, free and clear of all tenancies. Seller shall pay for its MAI Appraiser(s), and Purchaser shall pay for their MAI Appraiser(s). Fair Market Price shall be determined no less than twenty (20) days prior to the applicable Closing Date. If the appraisals, for either building, are within ten (10%) percent of each other, the average value of the two (2) appraisals shall be the Fair Market Price with respect to such property. If the difference between the two (2) appraisals, for either building, is greater than ten (10%) percent, the two (2) MAI Appraisers shall designate a third (3rd) MAI Appraiser and the value given in that appraisal shall be the Fair Market Price for that building. Seller and Purchaser shall each pay fifty (50%) percent of the fee of the third (3rd) MAI Appraiser. Once the Fair Market Price is determined, it will be multiplied by * for the Dunmore Owned Facility and the New Orleans Owned Facility and by * for the Baltimore Owned Facility, and the resulting sum for each building, will be the amount Purchaser shall pay for the Dunmore Owned Facility, the New Orleans Owned Facility and the Baltimore Owned Facility respectively. Purchaser will then charge Seller (through the upcharge as set forth in the Supply Agreement) at a cap rate determined by the MAI Appraisers. For example if the combined purchase price for the Dunmore Owned Facility, the New Orleans Owned Facility and the Baltimore Owned Facility is * and the cap rate is *, then Seller will be charged an upcharge based on an annual figure of *. The MAI Appraisers shall derive the cap rate from comparable sales for properties leased to tenants with credit ratings similar to the Seller. If Purchaser, at any point in time, decides to sell the Dunmore Owned Facility, Baltimore Owned Facility or the New Orleans Owned Facility, * (except for in the case of the Baltimore Owned Facility, where Seller shall be entitled to * of any net profit or * of any net loss), unless Purchaser decides to sell at a loss intentionally as part of its tax strategy. - ---------- * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -25- Section 8.17 IT Services. Purchaser may request, and if so, Seller will provide Purchaser with access to certain information technology systems and services as set forth on Schedule 8.17 after each applicable Closing in order to effectuate a smooth transition of the Business. Section 8.18 Exhibits. The Parties agree that the attached exhibits and schedules ("Exhibits") may not at the time of execution of this Agreement all be final and shall be supplemented and/or revised prior to the applicable Closings or at another time to be mutually agreed to by the Parties. The Parties acknowledge and agree that substantially all of the terms of the Exhibits have been agreed upon and are reflected in the attached Exhibits and accordingly the Exhibits shall be in substantially similar forms as the Exhibits attached to this Agreement on the date hereof. The Parties agree to engage in subsequent good faith negotiation with respect to any outstanding issues or requested supplements or revisions to the Exhibits. Section 8.19 Repairs. Prior to the Procurement Conversion Date for each Acquired Facility, the Parties will in good faith agree on a list (the "List") of repairs ("Repairs") for which Seller will reimburse Purchaser for the cost of such Repairs. The Repairs for which Seller will be responsible for providing reimbursement are: (i) those that are required by law as of the applicable Procurement Conversion Date; and (ii) those that are on the List. The Parties shall place on the List those Repairs that they reasonably agree should be or will become necessary to be repaired within (6) of the applicable Procurement Conversion Date. No Repair shall be done by Purchaser without Seller approving an estimated cost thereof, which approval shall not be unreasonably withheld, conditioned or delayed. If there is a disagreement over the determination of such Repairs or the estimated cost thereof, then the Parties shall submit such dispute to an engineering firm mutually agreed to by the Parties. ARTICLE IX INDEMNIFICATION Section 9.1 Survival. The representations and warranties contained in this Agreement shall survive the applicable Closing and continue in full force and effect for a *, except for the representation and warranties in * which will survive forever, subject to Section 9.5(a)(i). All of the covenants and other indemnities of the Parties set forth in this Agreement shall survive the applicable Closing and continue in full force and effect according to their respective terms. Section 9.2 Indemnification Provisions for Benefit of Purchaser. (a) From and after the applicable Closing Date, Seller shall indemnify, reimburse, hold harmless and defend Purchaser and its Affiliates, and their respective officers, directors, employees, and agents (individually, a "Purchaser Indemnitee" and, collectively, the "Pur- - ---------- * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -26- chaser Indemnitees"), for, from and against all demands, claims, actions or causes of action, assessments, losses, damages, injury, liabilities, reasonable costs and expenses (including interest and penalties and reasonable expenses of investigation, consultation and attorney's fees (including cost of enforcement of indemnity) disbursements and expenses) (collectively, "Losses") arising, directly or indirectly, out of: (i) any breach of any representation or warranty of Seller contained in this Agreement; (ii) any breach of any covenant of Seller set forth in this Agreement; (iii) except for matters relating to any Environmental Condition, which are covered by the indemnification provided for in Section 9.2(b) hereof, any failure of Seller to pay, perform or discharge the Excluded Liabilities or any other liabilities or obligations of Seller (other than the Assumed Liabilities and liabilities expressly assumed by Purchaser in this Agreement), including obligations under the Assumed Contracts or Leases prior to the applicable Closing or the Delayed Closing, as applicable; and obligations under the New Orleans Lease at all times except as expressly set forth in the New Orleans Sublease and obligations related to the Dunmore Owned Facility, Baltimore Owned Facility and the New Orleans Owned Facility occurring or arising from circumstances that occurred prior to the applicable Closing; (iv) except for matters relating to any Environmental Condition, which are covered by the indemnification provided for in Section 9.2(b) hereof, directly or indirectly, the ownership, use or operation of the Acquired Assets, including any Improvement not constructed in compliance with law (unless protected by a grandfather clause, except that if the grandfather clause does not inure to the benefit of Purchaser, Purchaser and Seller will discuss and work together to bring the Improvement in compliance with law at Seller's cost and expense) or operated by Seller, its Affiliate, officer, director, employee or agent in violation of applicable law, and any repair, alteration, restoration or improvement in connection with each Acquired Facility arising or accruing prior to the applicable Closing Date, including those matters set forth on Schedules 4.1(e)(vi), 4.1(e)(vii) and 4.1(h), or the employment of the Affected Employees prior to the applicable Closing or the Delayed Closing, as applicable; (v) Incremental Facility Use Expenses; and (vi) operation of the Business prior to the applicable Closing (unless due to a negligent act or omission of Purchaser or C&S or anyone acting through or on behalf of Purchaser or C&S). (b) Notwithstanding anything to the contrary contained herein and in addition to the indemnification set forth in Section 9.2(a) above, from and after the applicable Closing Date, Seller shall indemnify, reimburse, hold harmless and defend the Purchaser Indemnitees for, from and against all Losses arising, directly or indirectly, out of: (i) any condition, circumstances, activity, practice or incident (on-site or off-site) related to or in connection with the Acquired Facilities (or any off-site location relating to the business conducted at the Acquired Facilities) which forms or is reasonably likely to form the basis of any claim, action or cause of action, suit, expense or liability under any Environmental Law, including but not limited to statutory or common law claims by any Governmental Authority or private party (an "Environmental Condition"), including those items listed on Schedule 4.1(o), whether or not such Environmental Condition was discovered by Purchaser during its due diligence investigation of the Acquired Facilities and whether or not Purchaser delivered written notice to Seller with respect to which discovery prior to the applicable Closing, as long as such Environmental Condition existed, arises out of conditions or circumstances that occurred or existed, or was caused, in whole or in part, on or prior to the applicable Closing Date -27- (provided, however, if only caused in part prior to the applicable Closing Date, Seller shall only be responsible for remediating the Environmental Condition to the extent attributable to the part that existed, occurred, arose out of conditions or circumstances that occurred or existed, or was caused, on or prior to the applicable Closing Date, in accordance with Section 9.3(b)(ii)); and (ii) the breach by Seller of any environmental representation or warranty set forth in Section 4.1(o) of this Agreement. Seller's indemnification obligations in this Section 9.2(b) shall include remediating or otherwise resolving, in compliance with all applicable laws (including all Environmental Law), regulations and good industry practice, at its sole cost and expense, any Environmental Condition for which indemnification is granted under this Section 9.2(b). Section 9.3 Indemnification Provisions for Benefit of Seller. (a) From and after the applicable Closing Date, Purchaser shall indemnify, reimburse, hold harmless and defend Seller and its Affiliates, and their respective officers, directors, employees, and agents (individually, a "Seller Indemnitee" and, collectively, the "Seller Indemnitees") for, from and against all Losses, arising, directly or indirectly, out of : (i) any breach of any representation or warranty of Purchaser contained in this Agreement; (ii) any breach of any covenant of Purchaser set forth in this Agreement; (iii) except for matters relating to any Environmental Condition, which are covered by the indemnification provided for in Section 9.3(b) hereof, any failure of Purchaser to pay, perform or discharge any of its obligations under the Assumed Liabilities or any other obligations or liabilities of Purchaser set forth in this Agreement (excluding the Excluded Liabilities and the New Orleans Lease and any liabilities retained by Seller pursuant to this Agreement), including obligations under the Assumed Contracts or Leases after the applicable Closing or Delayed Closing as applicable and obligations related to the Dunmore Owned Facility, Baltimore Owned Facility and the New Orleans Owned Facility arising from circumstances that occurred after the applicable Closing Date (except as set forth in Section 9.2(a)(iv)), and the New Orleans Sublease; (iv) except for matters relating to any Environmental Condition, which are covered by the indemnification provided for in Section 9.3(b), hereof, directly or indirectly, the ownership, use or operation of the Acquired Assets, including any Improvement constructed after the applicable Closing, but not in compliance with law (unless protected by a grandfather clause), or operated by Purchaser, its Affiliate, officer, director, employee or agent in violation of applicable law, and any repair, alteration, restoration or improvement in connection with each Acquired Facility, arising or accruing after the applicable Closing Date; and (v) operation of the Business after the applicable Closing (unless due to a negligent act or omission of Seller or anyone acting through or on behalf of Seller ). (b) Notwithstanding anything to the contrary contained herein and in addition to the indemnification set forth in Section 9.3(a) above, from and after the applicable Closing Date, Purchaser shall indemnify, reimburse, hold harmless and defend the Seller Indemnitees for, from and against all Losses, arising, directly or indirectly, out of: (i) any Environmental Condition at the Acquired Facilities (or any off-site location related to the business conducted at the Acquired Facilities controlled or owned by Purchaser) which arises after the date of the applicable Closing (unless such Environmental Condition existed, arises out of conditions or circumstances that occurred or existed, or was caused, in whole or in part, on or prior to the applicable Closing Date but then such exclusion shall only be to the extent that Seller is responsible as more particularly set forth in Section 9.2(b)); (ii) for the incremental additional costs of performing remediation with respect to an Environmental Condition but only if and to extent arising directly as a result of the acts or omissions of Purchaser or anyone using the Acquired Facilities after the applicable Closing (except by Seller, its Affiliate, officer, director, employee or agent); or (iii) any Environmental Condition whether arising before, on or after the applicable Closing Date if -28- caused by Purchaser during its due diligence examination of the Acquired Facilities (provided, however, if only caused in part by Purchaser, Purchaser shall only be responsible for the incremental additional costs of performing remediation with respect to the Environmental Condition to the extent arising directly as a result of the acts or omissions of Purchaser or its agents during Purchaser's due diligence examination). Purchaser's indemnification obligations in this Section 9.3(b) shall include remediating, or otherwise resolving, in compliance with all applicable laws (including Environmental Law), regulations and good industry practice, at its sole cost and expense, any Environmental Condition for which indemnification is granted under this Section 9.3(b). Section 9.4 Procedures Relating to Indemnification. In order for an Indemnitee to be entitled to any indemnification provided for under this Agreement in respect of, arising out of or involving a claim made against the Indemnitee, such Indemnitee must notify the party who may become obligated to provide indemnification hereunder (the "Indemnifying Party") in writing, and in reasonable detail, of the claim promptly; provided, however, that failure to give such notification shall not affect the indemnification provided hereunder except to the extent the indemnifying party shall have been prejudiced as a result of such failure. After any required notification (if applicable), the Indemnitee shall deliver to the indemnifying party, promptly after the Indemnitee's receipt thereof, copies of all notices and documents (including court papers) received by the Indemnitee relating to the claim. All indemnity provisions for the benefit of Seller or Purchaser shall survive the applicable Closing forever, unless otherwise set forth herein. Section 9.5 Time Limitations. (a) Seller will have no liability with respect to any representation or warranty unless notice is given to Seller prior to the expiration of the following periods: (i) for the representations and warranties set forth in Sections (7)- at any time after the applicable Closing Date; provided that Purchaser shall, with respect to title claims, look first to the coverage of any title insurance policy; or (ii) for all other representations and warranties - * after the applicable Closing Date. Section 9.6 General Indemnification Provisions. (a) An indemnifying party shall not be obligated to provide indemnification until the aggregate amount of Losses subject to its indemnification obligations exceeds * (the "Basket Amount"), provided that once the Basket Amount is exceeded, the indemnifying party shall provide indemnification from the first dollar of such Losses. - ---------- * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -29- (b) If the indemnifying party agrees to defend an Indemnitee and respond to any Environmental Claim, then the following provisions will apply: (i) If Seller is the indemnifying party, Purchaser will permit Representatives of Seller to enter onto Purchaser's Facilities at all reasonable times for the purpose of inspection or conducting such environmental tests or remediation as Seller may reasonably desire with respect to the Environmental Claim, all at Seller's expense and in accordance with this Section 9.6; (ii) The indemnifying party will provide to the Indemnitee copies of all reports, correspondence and other documents regarding the matter for which an Environmental Claim has been made; (iii) The Indemnitee shall have the right, at its option and at its own expense, to participate in and be present at the defense of the Environmental Claim, but not to control the defense, negotiation or settlement thereof, which control shall remain with the indemnifying party. (c) If the indemnifying party does not elect to control the defense of an Environmental Claim under paragraph (b) of this Section 9.6, then the indemnifying party shall promptly reimburse the Indemnitee for reasonable expenses, including but not limited to reasonable attorney and paralegal and expert fees and disbursements, incurred by the Indemnitee in connection with defense of any Environmental Claim, as and when the same shall be incurred by the Indemnitee. Any person who has not assumed control of the defense of any Environmental Claim shall have the duty to cooperate with the party which assumed such defense and the terms of this Section 9.6(c) will apply. (d) Unless otherwise set forth in the Confidentiality Agreement, dated March 3, 2005 by and between Seller and C&S ("Confidentiality Agreement") (Purchaser agreeing to be bound by its terms as if a signatory), each Party agrees to keep all information received concerning the environmental condition of the Facilities in strict confidence with the same degree of care as it accords to its own confidential information. Except as required by law, neither Party will disclose such information to anyone other than its Representatives, whom each Party agrees to place under the same confidentiality obligation. (e) The indemnifying party shall reimburse an Indemnitee for all reasonable attorney, paralegal and expert fees and disbursements incurred in connection with any effort or action to compel an indemnifying party to honor its indemnification obligation. ARTICLE X TERMINATION Section 10.1 Termination. This Agreement may be terminated by giving written notice to the other Party, subject to the following: (a) by mutual written agreement of the Parties and C & S; -30- (b) by Seller or Purchaser, if there shall be any order that is final and nonappealable preventing the consummation of the transactions contemplated hereby and the Party seeking to terminate the Agreement pursuant to this Section 10.1(b) has complied in all respects with its obligations under Section 8.7. In such event, the Parties and C&S agree to meet and negotiate in good faith as to how to adapt the Supply Agreement to conform with such order; (c) by Seller or Purchaser, on or after October 1, 2005, if the first Closing shall not have occurred by that date, or if all Closings have not occurred by January 1, 2006, provided, in such case, the Parties and C&S agree to negotiate in good faith to work out a solution; (d) by Purchaser, if Seller or any of its Affiliates shall have breached or violated in any material respect any of its covenants set forth in this Agreement, and such breach or violation shall not have been cured within (8) (or such longer period as may be necessary to cure the same with due diligence) after written notice thereof has been given by Purchaser to Seller, or if any of Seller's material representations and warranties made herein are not true in any material respects, provided if such breach cannot be cured prior to the applicable Closing, the Parties and C&S will negotiate in good faith to work out a solution; (e) by Purchaser, as to any Acquired Facility, in the event any condition(s) to the applicable Closing set forth in Article VI hereof has not been met as to such Acquired Facility and Purchaser has not waived such unmet condition as to such Acquired Facility, or any of the Acquired Facilities shall be damaged or destroyed by casualty, or a condemnation proceeding shall have been initiated with respect to an Acquired Facility, provided that if Purchaser terminates this Agreement as to any such affected Acquired Facility, that portion of the Purchase Price allocated to the affected Acquired Facility will be reduced accordingly, and provided in such event, the Parties and C&S will negotiate in good faith to work out a solution . (f) by Seller if Purchaser or any of its Affiliates shall have breached or violated in any material respect any of its covenants set forth in this Agreement, and such breach or violation shall not have been cured within * (or such longer period as may be necessary to cure the same with due diligence) after written notice thereof has been given by Seller to Purchaser or if any of Purchaser's material representations and warranties made herein are not true in any material respects, provided, in such event, the Parties and C&S will negotiate in good faith to work out a solution. (g) by Purchaser, as to any Acquired Facility, if Purchaser's due diligence investigations with respect to title or environmental matters relating to such Acquired Facility disclose to Purchaser a condition that will have a material adverse impact on Purchaser's ability to comply with its performance under or obligations under the Supply Agreement, provided that if Purchaser terminates this Agreement as to any such Acquired Facility, the portion of the Pur- - ---------- * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -31- chase Price allocated to the Acquired Facility as set forth in Schedule 8.10, will be reduced accordingly, provided, in such event, the Parties and C&S will negotiate in good faith to work out a solution. Section 10.2 Effect of Termination. Except as set forth in this Section 10.2, in the event of the termination of this Agreement pursuant to Section 10.1, this Agreement shall forthwith become null and void, there shall be no liability on the part of any Party or any of their respective officers, directors, subsidiaries, Affiliates or associates to any other Party and all rights and obligations of any Party hereto shall cease; provided, however, that the foregoing shall not restrict or otherwise limit the liability of any Party arising out of or relating to such Party's breach of this Agreement. ARTICLE XI OPERATIONS PENDING CLOSING Section 11.1 Pending Operations. From and after the date hereof and continuing until the applicable Closing, Seller, as the case may be, shall (i) continue to operate, maintain and manage the Leased Facilities in accordance with the terms of the Leases, respectively, and, along with the Dunmore Owned Facility, Baltimore Owned Facility and the New Orleans Owned Facility, consistent with past practices, and in accordance with the terms of this Agreement. If Seller receives notice of a code violation prior to the applicable Closing, Seller shall promptly notify Purchaser of the same, and will correct the same prior to the applicable Closing or escrow a reasonable amount with the Title Company at the applicable Closing to cover the cost of such correction; and (ii) operate the Business conducted at the Acquired Facilities in the ordinary course consistent with past practice and shall use all reasonable best efforts to preserve intact its goodwill, keep available the services of its employees and preserve the goodwill and business relationships with its suppliers and others having business relationships with it at the Acquired Facilities. Notwithstanding the preceding sentence, the Parties acknowledge that throughout the transition, Purchaser shall have control over certain aspects of the Business (specifically, the employees) and thus, Seller shall not be in breach of this section if such breach is caused by Purchaser or is otherwise out of the control of Seller. Further, during the aforesaid period, (i) Seller shall not place any liens (unless such lien can be satisfied, bonded over or covered by an indemnity acceptable to the Title Company prior to the applicable Closing) on or encumber the Acquired Facilities or the Acquired Assets or take any action which would cause it to be unable to perform under this Agreement; (ii) Seller shall keep all permits and licenses required for the operations of the Acquired Facilities and the Acquired Assets and which are in Seller's name in full force and effect to the extent required by law; (iii) Seller will not enter into any new service contract with respect to the Acquired Facilities and the Acquired Assets unless same shall be cancelable for any reason or no reason at all and without penalty by Seller upon thirty (30) days notice or less; (iv) Seller shall maintain all insurance policies now affecting the Acquired Facilities and the Acquired Assets (and which are presently maintained by Seller) in full force and effect and pay all premiums and charges required thereunder provided that such policies remain available at commercially reasonable rates and provided further that Seller may substitute the existing insurance policies with a substantially similar policy or policies including through another insurer of comparable rating; (v) Seller shall not sell, lease, sublease, transfer, mortgage or pledge any of the Acquired Facilities and the Acquired Assets (except to reduce inventory levels consistent with this Agreement); (vi) Seller will not amend, modify or terminate (unless required by the lease -32- through no fault or action of Seller) any of the Leases, and shall pay all amounts and perform all obligations under each such Lease; and (vii) Seller shall provide Purchaser with copies of any and all default or other notices from landlords or other parties concerning the Leases or the premises covered by such Leases that will have a material impact on Purchaser's use of the Leases, and Seller shall use good faith efforts to provide all notices concerning the Leases or the premises to Purchaser. ARTICLE XII DEFINITIONS Section 12.1 Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: (a) "Acquired Assets" shall have the meaning specified in Section 1.1. (b) "Acquired Facilities" shall have the meaning specified in the preamble to this Agreement. (c) "Actual Cost" means the amount paid by Seller for any item contained in the Transferred Inventory or Non-Acquired Facilities Inventory as reflected on Seller's books and records, which amount shall not include any earned cash discounts and retail billbacks. (d) "Affected Employees" shall mean all individuals who are employed by Seller or any of its Affiliates at the Acquired Facilities on the date of the applicable Closing. (e) "Affiliate" shall mean, as to any entity, any person or entity that directly or indirectly controls, is controlled by, or is under common control with such first entity. For purposes of the foregoing definition, "control" means the power to direct the business policies and affairs of an entity whether by reason of ownership of voting securities, by control or otherwise. (f) "Applicable Law" shall mean all applicable laws, statutes, orders, rules, regulations, policies or guidelines promulgated, or judgments, decisions or orders entered by any Governmental Authority. (g) "Assumed Collective Bargaining Agreements" shall mean the collective bargaining agreements listed on Schedule 12.1(g) hereto, true and complete copies of which are attached to such schedule. (h) "Assumed Contracts shall mean the equipment leases and other contracts itemized on Exhibit B-1 hereto. (i) "Assumed Liabilities" shall have the meaning specified in Section 3.2. The amount of each Assumed Liability which is a fixed amount shall be set forth with its respective Assumed Contract on Exhibit B-2. (j) "Baltimore Deed" -33- (k) "Baltimore Facility Lease" shall mean the lease for the facility located at Baltimore, Maryland. (l) "Baltimore Facility Lease Assignment" shall have the meaning specified in Section 1.1(g). (m) "Baltimore Owned Facility" (n) "Business" shall mean the warehousing and transportation operations currently conducted at and from the Acquired Facilities. (o) "Closing" shall have the meaning specified in Section 7.1. (p) "Closing Date" shall mean the date on which the applicable Closing occurs. (q) "Contribution Period" shall have the meaning specified in Section 3.3(d). (r) "Conveyance Taxes" shall have the meaning specified in Section 8.8. (s) "Damaged Equipment" shall have the meaning specified in Section 4.1(h). (t) "Delayed Closing" shall have the meaning specified in Section 7.1. (u) "Dunmore Deed" shall have the meaning specified in Section 7.2(b). (v) "Dunmore Owned Facility" shall have the meaning specified in the preamble to this Agreement. (w) "Edison Facility" shall mean the facility located in Edison, New Jersey. (x) "Environmental Claim" shall mean (A) any notice (written or oral) by any person or entity alleging potential liability (including, without limitation, potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, or penalties) arising out of, based on or resulting from (i) the presence, or release into the environments of any Material of Environmental Concern at any location, whether or not owned by Seller or (ii) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law; or (B) any claim pursuant to Section 9.2(b) or Section 9.3(b) of this Agreement. (y) "Environmental Condition" shall have the meaning specified in Section 9.2(b). (z) "Environmental Law" shall mean all federal, state and local laws, regulations, rules and ordinances, as well as all common law theories of liability, relating to contamination, pollution or protection of the environment or human health or safety in relation thereto, including, without limitation, laws relating to Releases or threatened Releases of Materials of Environmental Concern into the indoor or outdoor environment (including, without limitation, am- -34- bient air, surface water, groundwater and surface and subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, Release, transport or handling of Materials of Environmental Concern, and all laws and regulations with regard to record keeping, notification, disclosure and reporting requirements respecting Materials of Environmental Concern, and all laws relating to endangered or threatened species of fish, wildlife and plants. (aa) "Equipment Assets" shall have the meaning specified in Section 1.1(c). (ab) "ERISA" shall have the meaning set forth in Section 3.3(a). (ac) "ERISA Affiliate" shall have the meaning specified in Section 3.1. (ad) "Excluded Assets" shall have the meaning specified in Section 1.1. (ae) "Excluded Liabilities" shall have the meaning specified in Section 3.1. (af) "Fair Market Price" shall have the meaning specified in Section 8.16. (ag) "Freshtown Facility" shall mean the facility located at Freshtown, New York. (ah)"Governmental Authority" shall mean any foreign, federal, state, local or other governmental, administrative or regulatory authority, body, agency, court, tribunal or similar entity. (ai) "Improvements" shall mean all buildings, structures and other improvements included within each Acquired Facility. (aj) "Incremental Facility Use Expenses" shall mean any incremental cost, expense or liability (including, without limitation, any rental payment for temporary facilities or replacement facilities, severance payment, additional labor or transportation cost or similar charge) that C&S reasonably incurs in order to perform its obligations under the Supply Agreement as a result, directly or indirectly, of Seller's failure to deliver at the applicable Closing the full use of the Acquired Facilities (including, without limitation, due to remediation, casualty or destruction of any Acquired Facility) and which incremental cost, expense or liability would not have been incurred had such Acquired Facility been fully and completely available for use by Purchaser. (ak) "Indemnitee" shall mean any of the Purchaser's Indemnitees or Seller's Indemnitees. (al) "Inventory List" shall have the meaning specified in Section 8.3. (am) "Islip Facility Lease" shall mean the lease for the facility located at Islip, New York. (an) "Islip Facility Lease Assignment" shall have the meaning specified in Section 1.1(f). -35- (ao) "Knowledge" shall mean the knowledge of any director level, vice president or more senior officer of Seller or Purchaser, as applicable. (ap) "Leased Facilities" shall mean the Islip Leased Facility, Baltimore Leased Facility and the New Orleans Leased Facility. (aq) "Leases" shall have the meaning specified in Section 4.1(e)(viii)(1). (ar) "Liens" shall mean any lien, charge, claim, pledge, covenant, security interest, conditional sale agreement or other title retention agreement, lease, mortgage, judgment, tax, assessment, restriction, reservation, reversion, license, security agreement, option, right to purchase or other encumbrance, other than the Permitted Encumbrances and exclusive of the lien for any public improvement which may be paid in installments in connection with or as part of bills from public authorities for taxes which are not yet due and payable. (as) "Litigation" shall have the meaning specified in Section 4.1(j). (at) "Losses" shall have the meaning specified in Section 9.2. (au) "Material Assumed Contracts" shall have the meaning specified in Section 6.1(c). (av) "Material Handling Equipment" shall mean equipment used to move product from place to place within a warehouse, including but not limited to fork lifts and pallet jacks. (aw) "Materials of Environmental Concern" shall mean any toxic, hazardous, radioactive, caustic or dangerous substances, wastes, chemicals, pollutants or contaminants or any other substances that are defined as any of the above by, or regulated as such under, any Environmental Law, including, without limitation, petroleum, petroleum products and asbestos; and any fungi, mold, bacteria or other organic or inorganic matter that is injurious to human health. (ax) "Multiemployer Pension Plans" shall have the meaning specified in Section 4.1(p)(ii). (ay) "New Orleans Facility Lease" shall mean the lease for the facility located at New Orleans, Louisiana. (az) "New Orleans Deed" shall have the meaning specified in Section 7.2(c). (ba) "New Orleans Sublease" shall have the meaning specified in Section 1.1(h). (bb) "New Orleans Owned Facility" shall have the meaning set forth in the preamble to this Agreement. (bc) "Non-Acquired Facilities Inventory" shall have the meaning specified in Section 8.4. -36- (bd) "Out-of-Code Merchandise" shall mean merchandise that C&S cannot reasonably sell and deliver to Seller within the code dates set forth in the Supply Agreement. (be) "Owned Facilities" shall mean the Dunmore Owned Facility, Baltimore Owned Facility and the New Orleans Owned Facility. (bf) "PBGC" shall have the meaning specified in Section 3.3(d). (bg) "Permitted Encumbrances" shall mean with respect to the Acquired Facilities, the standard exclusions in the form of owner's policy of title insurance (or leasehold title insurance policy, as the case may be), provided however that the Title Company deletes such exceptions upon receipt of the standard form of Owner's (or Lessee's) Affidavit; (ii) with respect to the Acquired Facilities, such matters of record as would be disclosed by a current and accurate survey and inspection of the Real Property that do not, individually or in the aggregate, materially impair the value or intended use of the Acquired Facilities; (iii) liens for taxes not due and payable on or before the applicable Closing Date; (iv) with respect to the Acquired Facilities, all recorded easements, covenants, restrictions, reservations, rights-of-way and other similar matters of record as of the date of Seller's execution of this Agreement, provided the same do not, individually or in the aggregate, materially impair the value or intended use of the Acquired Facilities; (v) mechanics' liens and other like Liens imposed by law arising or incurred in the ordinary course of business consistent with past practice with respect to amounts not yet due (provided that such amounts arising or accruing prior to the relevant Closing Date shall be Excluded Liabilities), and provided that Title Company deletes such exceptions upon receipt of the standard form of Owner's or Lessee's Affidavit and/or an indemnity. (bh) "Procurement Conversion Date" shall mean August 28, 2005 with respect to the Baltimore Leased Facility and the Baltimore Owned Facility; September 18, 2005 with respect to the Islip Leased Facility; October 2, 2005 with respect to the New Orleans Owned and Leased Facilities; and October 16, 2005 with respect to the Dunmore Owned Facility. (bi) "Purchase Price" shall have the meaning specified in Section 2.1(a). (bj) "Purchaser Indemnitee" and "Purchaser Indemnitees" shall have the meanings specified in Section 9.2. (bk) "Readily Saleable Merchandise" shall mean merchandise that (i) is not Out-Of-Code Merchandise and (ii) in C&S' reasonable judgment based upon C&S' previous experience, C&S can resell promptly without discounts to Seller. (bl) "Related Agreements" shall have the meaning specified in the preamble to this Agreement. (bm) "Release" shall mean any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment (including, without limitation, ambient air, surface water, groundwater, and surface or subsurface strata) or into or out of any property, including the movement of Materials of Environmental Concern through or in the air, soil, surface water or groundwater. -37- (bn) "Rent" shall have the meaning specified in Section 8.9(b)(i). (bo) "Seller Indemnitee" and "Seller Indemnitees" shall have the meanings specified in Section 9.3. (bp) "Straddle Period" shall mean any taxable period beginning before the applicable Closing Date and ending after the applicable Closing Date. (bq) "Supply Agreement" shall have the meaning specified in the preamble to this Agreement. (br) "Tax" shall mean any foreign, federal, state or local income, gross receipts, franchise, license, severance, occupation, premium, environmental (including taxes under Code Section 59A), customs duties, profits, disability, registration, alternative or add-on minimum, estimated, withholding, payroll, employment, unemployment insurance, social security (or similar), excise, sales, use, value-added, occupancy, franchise, real property, personal property, business and occupation, mercantile, windfall profits, capital stock, stamp, transfer, workmen's compensation, litter control, or other tax, fee or imposition of any kind whatsoever, including any interest, penalties, additions, assessments or deferred liability with respect thereto, whether disputed or not. (bs) "Tax Return" shall mean any return, report, declaration, claim for refund, estimate, election, or information statement or return relating to any Tax, including any schedule or attachment thereto, and any amendment thereof. (bt) "Title Company" shall have the meaning specified in Section 6.1(e). (bu) "Transferred Inventory" shall mean the inventory specified in Section 1.1(a). (bv) "Transition Fee" shall have the meaning specified in Section 8.15. (bw) "Utility Charges" shall have the meaning specified in Section 8.9(a)(ii). ARTICLE XIII MISCELLANEOUS Section 13.1 Entire Agreement. This Agreement, together with the exhibits hereto and the documents referred to herein, including, without limitation, the Related Agreements, constitutes the entire agreement of the Parties and C&S with respect to the subject matter hereof and supersedes all prior agreements and undertakings, both written and oral, between C&S and the Parties hereto with respect to the subject matter hereof. The Supply Agreement is incorporated herein by reference and made a part hereof. Section 13.2 Expenses. Except as otherwise specified in this Agreement, all costs and expenses, including, without limitation, fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and the transaction contemplated hereby shall be borne by the Party or such Party's Affiliates incurring the same. -38- Section 13.3 No Recording of Agreement. Neither this Agreement nor any description of any of the transactions contemplated by this Agreement shall be recorded in the public records in any jurisdiction without the prior written consent of all Parties. Notwithstanding the foregoing: (i) the Parties may deliver copies of this Agreement (or descriptions of the transactions contemplated hereby) to any Governmental Authority the consent of which is required to consummate the transactions contemplated by this Agreement; and (ii) within thirty (30) days prior to the applicable Closing, the Parties may file notices of settlement in the real estate records of the location of any of the Acquired Facilities with respect to the contemplated transfer of each of the Acquired Facilities to Purchaser. Section 13.4 No Brokers. Each Party represents and warrants to the other Party that it has not dealt with any person (including any real estate broker) in a way that would entitle such person to any broker's fee, finder's fee, commission or similar payment in connection with the execution and delivery of this Agreement or any Related Agreement or the consummation of the transactions contemplated by this Agreement or any Related Agreement. Each Party hereby agrees to defend, indemnify and hold the other Parties harmless from any liabilities for brokerage commissions or similar payments that are determined to be due as a result of the dealings of the indemnifying Party with such other persons. Section 13.5 Amendments. This Agreement may not be amended or modified except by an instrument in writing signed by, or on behalf of, each of Seller, Purchaser and C&S. Section 13.6 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by courier service, recognized overnight delivery service, or by registered or certified mail (postage prepaid, return receipt requested) to the respective Parties at the following addresses (or at such other address for a Party as shall be specified in a notice given in accordance with this Section 13.6). If to Purchaser: Ocean Logistics LLC 7 Corporate Drive Keene, NH 03431 Attn: Richard B. Cohen, Chief Executive Officer Phone: (603) 354-4600 Fax: (603) 354-4692 With a copy to: Mark Gross President, Chief Financial Officer and General Counsel Phone: (603) 354-4604 Fax: (603) 354-4692 Carl G. Wistreich Senior Vice President, Legal and Human Resources Phone: (603) 354-4616 -39- Fax: (603) 354-4694 If to Seller: The Great Atlantic & Pacific Tea Company, Inc. 2 Paragon Drive Montvale, NJ 07654 Attn: Mitchell P. Goldstein With a copy to: Robert Volosin, Vice President Real Estate 470 Chestnut Ridge Road Woodcliff Lake, NJ 07677 Phone: (201) 571.4802 Fax: (201) 571.4821 and Dina Willner, Group Counsel 470 Chestnut Ridge Road Woodcliff Lake, NJ 07677 Phone: (201) 571-4871 Fax: (201) 571.4879 and The Great Atlantic & Pacific Tea Company, Inc. 90 Delaware Avenue PO Box 2475 Patterson, NJ 07509-2475 Attn: Senior Vice President of Supply and Logistics Section 13.7 Binding Effect; C&S Guaranty. (a) This Agreement shall be binding upon and inure to the benefit of Seller, Purchaser, C&S and their respective successors and assigns, but no rights, interest or obligation of either Party herein may be assigned without the prior written consent of the other except by Purchaser to C&S for any reason or to an Affiliate with respect to real estate matters only, provided Purchaser notifies Seller within five (5) days of the applicable Closing. (b) C&S hereby agrees that it is jointly and severally liable for the performance, obligations and liabilities of Purchaser set forth herein, and C&S further agrees to indemnify, defend and hold Seller harmless from any and all Losses accruing hereunder for a breach or default by Purchaser of an obligation set forth herein or arising hereunder, including Purchaser's obligations consistent with this Agreement, accruing under the Leases from and after the applicable Closing Date and under the New Orleans Sublease or accruing due to a breach or default by Purchaser with regard to the provisions relating to Affected Employees or Assumed Collec- -40- tive Bargaining Agreements set forth in this Agreement. Seller may enforce this guaranty without first proceeding against Purchaser. Notwithstanding the remainder of this provision, C&S shall be entitled to all defenses and benefits of this Agreement of Purchaser. This guaranty shall survive the Closings. Section 13.8 Counterparts; Facsimile Signature. This Agreement may be executed in one or more counterparts, all by the Parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. Any Party may execute this Agreement by facsimile signature and the other Parties shall be entitled to rely on such facsimile signature as conclusive evidence that this Agreement has been duly exercised by such Party. Section 13.9 No Third-Party Beneficiaries. This Agreement shall be binding upon and inure solely to the benefit of the Parties and their permitted assigns, and nothing herein, express or implied, is intended to or shall confer upon an other person any legal or equitable right, benefit or remedy of any nature whatsoever. Section 13.10 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transaction contemplated hereby is not affected in any manner materially adverse to any Party. Upon such determination that any herein or other provision is invalid, illegal or incapable of being enforced, the Parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are implemented as originally contemplated to the greatest extent possible. Section 13.11 Headings. The descriptive headings contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. Section 13.12 Bulk Sales Indemnity. Seller at Seller's election shall either (i) comply with the provisions of the Uniform Commercial Code in effect which relate to the bulk transfer of assets; or (ii) or elect not to comply in which case, Purchaser waives compliance by Seller with the provisions of the Uniform Commercial Code in effect which relate to the bulk transfer of assets and Seller agrees to defend, indemnify and hold harmless Purchaser and its Affiliates from and against any and all losses, damages, costs and expenses, including reasonable attorneys' fees, suffered by Purchaser or its Affiliates by reason of or arising from Seller's failure to comply with the applicable bulk sales law. Nothing stated herein shall diminish Seller's obligations pursuant to Section 8.8 of this Agreement, including paying its share of any bulk sales tax. Section 13.13 Public Announcement. None of Seller, C&S or Purchaser shall make any public announcement with respect to the transactions contemplated by this Agreement without the prior written consent of the other party, except announcements which are required by law or Seller's New York Stock Exchange listing agreement. Notwithstanding the preceding sentence, Seller and Purchaser may have discussions with the unions with respect to the transac- -41- tions contemplated by this Agreement, provided that the Parties continue to notify one another and coordinate with one another with respect to any such discussions. The Parties acknowledge that Seller has notified the unions and Seller's employees of the transactions contemplated by this Agreement. Nothing stated in this Section shall diminish or otherwise alter neither Seller's nor Purchaser's obligations and rights pursuant to the Confidentiality Agreement. Section 13.14 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to the principles of conflicts of laws thereof. Section 13.15 Dispute Resolution. (a) Any controversy, claim, or dispute between the Parties, directly or indirectly, concerning this Agreement or the breach hereof, or the subject matter hereof, including questions concerning the scope and applicability of this arbitration clause, shall be finally settled by arbitration in New York City pursuant to the rules then applying of the American Arbitration Association, with the sole exception as envisioned in Section 9.6(d). The arbitrators shall consist of one party representative selected by Seller, one party representative selected by Purchaser and one neutral representative selected jointly by the first two arbitrators. The party arbitrators shall be selected within 20 days after the commencement of the arbitration proceeding, and the neutral arbitrator shall be selected within 20 days of the appointment of the last party arbitrator. The parties agree that the arbitrators' Award shall be duly made in writing within thirty (30) days after the hearings in the arbitration proceedings are closed, and that an Award agreed upon by any two of the arbitrators shall be binding and conclusive on all of the Parties to this Agreement. The arbitrators shall have the right and authority to assess the cost of the arbitration proceedings and to determine how their decision as to each issue or matter in dispute may be implemented or enforced. (b) Judgment upon the Award may be sought and entered in any competent federal or state court located in the United States of America. An application may be made to such court for confirmation of the Award and for any other equitable or legal remedies that may be necessary to effectuate such Award or otherwise preserve any rights for which no adequate remedy at law exists. (c) The Parties understand and agree that they hereby are giving up and waiving any claim or right to litigate in court or by a jury trial, unless or to the extent that such rights are specially provided for under this Agreement or cannot be waived under applicable law. [Signature Page Follows] -42- IN WITNESS WHEREOF, the Parties and C&S have caused this Agreement to be executed by their duly authorized officers as of the date and year first set forth above. THE GREAT ATLANTIC AND PACIFIC TEA COMPANY, INC. (on behalf of itself and any subsidiaries who are Parties to this Agreement) By: ----------------------------------------------- Name: Title: OCEAN LOGISTICS LLC By: ----------------------------------------------- Name: Title: For the limited purposes and as guarantor: C&S WHOLESALE GROCERS, INC. By: ----------------------------------------------- Name: Title: -43- Exhibit C Legal Description of the Dunmore Owned Facility METES AND BOUNDS DESCRIPTION LOT 1, BLOCK 1, SECTION 136.03 BOROUGH DUNMORE LACKAWANNA COUNTY, COMMONWEALTH OF PENNSYLVANIA The surface or right of soil of that certain lot, piece, parcel, or tract of land situate, lying, and being in the Borough of Dunmore, County of Lackawanna and Commonwealth of Pennsylvania, bounded and described as follows, it wit: BEGINNING at a point in the division line between lands now or formerly of Hudson Coal Company, a Maine Corporation, and lands formerly of the Pennsylvania Coal Company, marking the Southerly corner of lands conveyed by The Hudson Coal Company, a Pennsylvania corporation, to Frank Urso and wife, by deed dated October 21, 1955, and recorded in the office for the recording of deeds in and for Lackawanna County in Deed Book 550 at page 592, said point of beginning being distant seven hundred six and eight tenths (706.8) feet, measured along said division line on a course of South fifty-two degrees twenty minutes East (S 52(degree) 20' E) from its intersection with the Southeasterly line of North Blakely Street, also known as "O'Neill Highway", extension of Legislative Route #168; thence along the Southeasterly line of lands of Frank Urso, and other lands formerly of Hudson Coal Company, a Maine corporation, North thirty-seven degrees forty minutes East (N 37(degree) 40' E) six hundred seventy-two and sixty-nine one hundredths (672.69) feet to a point on line of lands formerly of Pennsylvania Coal Company (now owned by Scranton Lackawanna Industrial Building Company "SLIBCO"); thence along the Southwesterly line of said SLIBCO lands, South fifty-three degrees sixteen minutes East (S 53(degree) 16' E) one thousand four hundred thirty-nine and twenty-one one-hundredths (1439.21) feet to a corner; thence still along lands formerly of Pennsylvania Coal Company, South thirty-seven degrees forty minutes West (S 37(degree) 40' W) six hundred ninety-six and forty-five one-hundredths (696.45) feet to a point on line of lands now or formerly of the Pennsylvania Coal Company; thence along the division line between lands formerly of Hudson Coal Co., a Maine corporation, and lands formerly of the Pennsylvania Coal Company, North fifty-two degrees twenty minutes West (N 52(degree) 20' W) one thousand four hundred thirty-nine and seven one-hundredths (1439.07) feet to the point of beginning. Containing 22.616 acres, more or less, of surface. PREMISES ALSO DESCRIBED according to a survey made by Joseph J. Wright, PLS, of Control Point Associates, Inc., dated February 13, 2001. Beginning at a point being the southernmost corner of the herein described premises, said point being located in the Northeasterly line of lands conveyed to Gould Investors, Inc., as recorded in Deed Book 1096, Page 76, said beginning point being the same beginning point described in a Deed conveying the herein described premises to The Great Atlantic and Pacific Tea Company, Inc. as recorded in Deed Book 827, Page 640, and from said point of beginning running, thence; 1. Along the Southeasterly line of lands now or formerly Dunmore Hospitality Group, Inc. and lands now or formerly Price Chopper Operating Company of PA, North 37 degrees 40 minutes 00 seconds East, a distance of 673.39 feet to a rebar found, thence; 2. Along the Southwesterly line of lands now or formerly Scranton Lackawanna Industrial Building Company, South 53 degrees 37 minutes 25 seconds East, a distance of 1,432.95 feet to a point, thence; 3. Along the Northwesterly line of lands now or formerly Fruehauf Trailer Services, South 37 degrees 12 minutes 56 seconds West, a distance of 696.45 feet to an iron pin found on the Northeasterly line of lands now or formerly John J. Develcio, thence; 4. Along the Northeasterly side of said Develcio and said also lands now or formerly Bell Telephone Company, and lands now or formerly the aforementioned Gould Investors, Inc., North 52 degrees 42 minutes 04 seconds West, a distance of 1,438.10 feet to the point and place of beginning. CONTAINING 983,128 SQUARE FEET OR 22.570 ACRES OF LAND, MORE OR LESS. -2- Exhibit C-1 Legal Description of the Islip Leased Facility Islip Leased Facility Legal Description ALL that certain plot, piece or parcel of land, situate, lying and being in Central Islip, Town of Islip, County of Suffolk, and State of New York, more particularly bounded and described as follows: BEGINNING at the intersection of the Easterly side of Lowell Avenue (Centre Avenue) and the southerly line of land of the Long Island Railroad (Main Line); RUNNING Thence along the southerly line of land and the Long Island Railroad, North 74 degrees 56 minutes 40 seconds East 2630.93 feet to the westerly line of Map of Pinewood Manor No. 3, filed 6/18/26 as Map No. 252; THENCE along said land South 07 degrees 40 minutes 00 seconds East, 780.32 feet to the northerly line of land as shown on Map of Evergreen Park filed 1/26/54 as Map No. 2163; THENCE along said last mentioned land and along the northerly line of Boulevard Avenue (66 feet wide) South 82 degrees 20 minutes 00 seconds West 943.08 feet to a point on the westerly side of Boulevard Avenue; THENCE along the Westerly line of Boulevard Avenue South 07 degrees 40 minutes 00 seconds East 259.03 feet to a point on the northerly line of Map of City lots tract filed 2/1871 as Map No. 35; THENCE along said last mentioned land South 82 degrees 20 minutes 00 seconds West 1666.00 feet to a point on the easterly line of Lowell Avenue; THENCE along the easterly line of Lowell Avenue North 07 degrees 40 minutes 00 seconds West 482.00 feet to a point; THENCE North 82 degrees 20 minutes 00 seconds East 125.00 feet to a point; THENCE North 07 degrees 40 minutes 00 seconds West 216.00 feet to a point; THENCE South 82 degrees 20 minutes 00 seconds West 125.00 feet to a point on the westerly side of Lowell Avenue; THENCE along the westerly side of Lowell Avenue North 07 degrees 40 minutes 00 seconds West 3.00 feet to the point or place of beginning. -2- Exhibit C-2 Legal Description of the Baltimore Leased Facility Baltimore Leased Facility Legal Description PARCEL I BEGINNING at a rebar found at a point being the intersection of the westerly right-of-line of Halethorpe Farms Road (60 foot wide right-of-way), with the southerly right-of-way line of Hollins Ferry Road (f.k.a. Canco Road, 60 foot wide right-of-way), and from said point of beginning running, thence: 1. Along the westerly right-of-way line of Halethorpe Road, South 20 degrees 18 minutes 00 seconds East, a distance of 1,210.00 feet to a point, thence; 2. Along the dividing line between Parcel 275 and Parcel 809, lands now or formerly Schmitt/Barnes, LLC, South 69 degrees 42 minutes 00 seconds West, a distance of 890.69 feet to a point, thence; Running the following courses and distances along the dividing line between Parcel I as described herein and Parcel III as further described below, both parcels having been conveyed to The Great Atlantic & Pacific Tea Company as recorded in Liber 7790 folio 127: 3. Along the arc of a non-tangent curve to the right, having a radius of 271.01 feet, turning a central angle of 41 degrees 54 minutes 21 seconds, an arc length of 198.22 feet, a chord bearing north 41 degrees 15 minutes 10 seconds west and a chord distance of 193.83 feet to a point of tangency, thence; 4. North 20 degrees 18 minutes 00 seconds West, a distance of 994.03 feet to a point on the southerly right-of-way line of a cul de sac located at the westerly terminus of the above mentioned Hollins Ferry Road, thence: The following courses and distances along the southerly right-of-way line of said Hollins Ferry Road: 5. Along the arc of a non-tangent curve to the left, having a radius of 75.00 feet, turning a central angle of 20 degrees 12 minutes 53 seconds, an arc length of 26.45 feet, a chord bearing North 29 degrees 36 minutes 13 seconds East and a chord distance of 26.32 feet to a point of reverse curvature, thence: 6. Along the arc of a curve to the right, having a radius of 50.00 feet, turning a central angle of 50 degrees 12 minutes 29 seconds, an arc length of 43.82 feet, a chord bearing North 44 degrees 35 minutes 45 seconds East and a chord distance of 42.43 feet to a point of tangency, 7. North 69 degrees 42 minutes 00 seconds East, a distance of 901.45 feet to the point and place of BEGINNING. PARCEL III BEGINNING at a point on the southerly right-of-way line of a cul de sac located at the westerly terminus of Hollins Ferry Road (f.k.a. Canco Road, 60 foot wide right-of-way), said point also being the terminus of the fourth course of the above described Parcel I, and from said point of beginning running, thence; the following two (2) courses and distances along the dividing line between the herein described Parcel III and the above described Parcel I: l. South 20 degrees 18 minutes 00 seconds east, a distance of 994.03 feet to a point of curvature, thence; 2. Along the arc of a curve to the left, having a radius of 271.01 feet, turning a central angle of 41 degrees 54 minutes 21 seconds, an arc length of 198.22 feet, a chord bearing South 41 degrees 15 minutes 10 seconds East and a chord distance of 193.83 feet to a point, thence: 3. Along the dividing line between Parcel 275 and Parcel 809, lands now or formerly Schmitt/Barnes, LLC, South 69 degrees 42 minutes 00 seconds West, a distance of 882.48 feet to a rebar found, thence; The following courses and distances along the dividing line between Parcel 275 and Parcel 306 lands now or formerly CSX Transportation, Inc.: 4. North 81 degrees 30 minutes 40 seconds West, a distance of 126.92 feet to a rebar found, thence; 5. North 69 degrees 35 minutes 15 seconds West, a distance of 251.30 feet to a rebar found, thence; 6. North 13 degrees 27 minutes 00 seconds West, a distance of 338.45 feet to a point, thence; 7. North 19 degrees 43 minutes 15 seconds East, a distance of 124.38 feet to a point, thence; 8. North 61 degrees 57 minutes 45 seconds East, a distance of 342.55 feet to a rebar found, thence; 9. North 37 degrees 53 minutes 45 seconds East, a distance of 405.92 feet to a point, thence; 10. North 09 degrees 53 minutes 30 seconds East, a distance of 339.71 feet to a point, thence; 11. North 69 degrees 42 minutes 00 seconds East, a distance of 33.06 feet to a point on the -2- right-of-way line of the above mentioned cul de sac located at the westerly terminus of Hollins Ferry Road, thence; 12. Along said cul de sac, on the arc of a non-tangent curve to the left, having a radius of 75.00 feet, turning a central angle of 96 degrees 24 minutes 43 seconds, an arc length of 126.22 feet, a chord bearing North 87 degrees 54 minutes 35 seconds East, a distance of 111.84 feet to the point and place of BEGINNING. -3- Exhibit C-3 Legal Description of the New Orleans Leased Facility NEW ORLEANS WAREHOUSE LEGAL DESCRIPTION That certain leasehold estate created by the Lease affecting the following described property: Tract 1 A certain piece or portion of ground situated in the Parish of Jefferson, State of Louisiana, in Section 47, Township 12 South, Range 10 East, Southeast Land District, East of the Mississippi River, being portions of Lots 10, 11 and 12 of the subdivision of LaBarre Plantation, as shown on plan of A. D'Hemecourt, dated May 9, 1836, which said piece or portion of ground is more particularly delineated on survey of F.G. Stewart, Civil Engineer and Surveyor, dated March 24, 1966, according to which said piece or portion of ground measures as follows, to-wit: Beginning at the point at which the Easterly line of Lot 10 intersects the Northerly line of Jefferson Highway, Louisiana State Highway #1; thence in a Westerly direction along said Northerly line of Jefferson Highway for a distance of 29.44 feet to point A, the point of beginning; thence in a Northerly direction along a line parallel to and lying 29 feet westerly from the Easterly line of said Lot 10 for a distance of 1044.42 feet to point D; thence at an interior angle of 90 degrees for a distance of 373 feet in a Westerly direction to point C; thence at an interior angle of 90 degrees for a distance of 1109.48 feet along a line parallel to and lying 18 feet Westerly from the Westerly line of Lot 11 to point B on the Northerly line of Jefferson Highway; thence in an Easterly direction for a distance of 378.67 feet along the Northerly line of said Jefferson Highway to point A, the point of beginning. Tract 2 - Right of Way and Passage A certain piece or portion of ground, situated in Jefferson Parish, State of Louisiana, in Section 47, Township 12 South, Range 10 East, Southeast Land District of Louisiana, East of the Mississippi River, being a portion of a certain lot designated by the Number 10 of the Sub-division of LaBarre Plantation, as shown on plan of A. D'Hemecourt, dated May 9, 1836, which said piece or portion of ground is for the free and unobstructed use of a right of way and passage, whether by motor vehicle, carriage, wagon or otherwise on, over and across the property more particularly described as follows: Beginning at a point of intersection of the Easterly line of aforesaid Lot 10 with the Northerly line of Jefferson Highway (State Highway No. 1); thence North 20(degree)00' 40" East for a distance of 1039.35 feet along the Easterly line of Lot 10; thence North 69(degree) 59' 20" West for a distance of 29 feet; thence South 20(degree) 00' 40" West a distance of 1044.42 feet to the Northerly line of Jefferson Highway; thence South 79(degree) 53' 00" East a distance of 29.44 feet to the point of beginning. The portion of ground hereinabove described is more fully shown on plan prepared by R.P. Rordam, Civil Engineer, dated New Orleans, Louisiana, July 22, 1949, revised December 18, 1949 and October 9, 1950, and on plan prepared by F.G. Stewart, Civil Engineer and Surveyor, dated New Orleans, Louisiana, March 24, 1966. -2- Exhibit C-4 Legal Description of the New Orleans Owned Facility PROPERTY DESCRIPTION A certain piece or portion of ground situated in the Parish of Jefferson, State of Louisiana, being a portion of a larger tract of land known as Elmwood Plantation in Section 43, Township 13 South, Range 10 East of the St. Helena Meridian, east of the City of Harahan and north of Jefferson Highway: Which said portion of ground is designated as Lot "AP-2" on plan of subdivision made by J. J. Krebs & Sons, C.E. & S., dated March 16, 1977 approved by the Jefferson Parish Council on April 14, 1977, being a resubdivision of Lot "AP-1", under Ordinance No. 12815, duly registered in COB 890, folio 810, on April 25, 1977 and according to which the said lot "AP-2" is described and measures as follows: Commencing at the intersection of the boundary line between Section 43 and Section 44 and the original northwesterly line of the Jefferson Highway; thence along the original northwesterly line of the Jefferson Highway South 30 degrees 7 minutes 4 seconds West, a distance of 628.33 feet to a Point of Beginning; thence continuing along the northwesterly line of the Jefferson Highway South 30 degrees 7 minutes 4 seconds West a distance of 412.58 feet to a point; thence North 47 degrees 26 minutes 11 seconds West a distance of 586.77 feet to a point; thence along the arc of a curve to the left having a radius of 309.62 feet a distance of 455.25 feet; thence North 48 degrees 50 minutes 6 seconds West a distance of 4.45 feet to the intersection of the southeasterly line of a right-of-way to the Illinois Central Railroad Co.; thence along said southeasterly right-of-way line North 41 degrees 9 minutes 54 seconds East a distance of 322.58 feet to a point; thence continuing along said southeasterly right-of-way line measuring along the arc of a curve to the right having a radius of 580.37 feet a distance of 114.91 feet to a point of compound curve; thence continuing along said right-of-way measuring along the arc of a second curve to the right having a radius of 373.06 feet a distance of 206.72 feet to a point; thence continuing along said right-of-way line North 84 degrees 15 minutes 30 seconds East a distance of 58.47 feet to a point on the southwesterly property line of the property now or formerly belonging to Max Tobins and Morris E. Burke; thence along said southwesterly property line South 48 degrees 53 minutes 00 seconds East a distance of 682.66 feet to the Point of Beginning. Being a part of the same property acquired by the Great Atlantic & Pacific Tea Company, Inc. from the Illinois Central Railroad Company by act before Frederick A. Kullman, Notary Public, dated February 28, 1967 and duly registered in COB 653, folio 162 under Entry #386868 on March 8, 1967, Parish of Jefferson, State of Louisiana. Exhibit C-5 Legal Description of Baltimore Owned Facility BEGINNING FOR THE SAME, AT A POINT, IN THE WESTERLY RIGHT OF WAY LINE OF HALETHORPE FARMS ROAD, SAID POINT BEING LOCATED SOUTH 20 DEGREES 18 MINUTES EAST 148.00 FEET FROM THE CENTER LINE OF FOUR TRACKS OF THE BALTIMORE AND OHIO RAILROAD COMPANY'S MAIN LINE AT VALUATION STATION 686 + 90; SAID POINT BEING THE SAME POINT OF BEGINNING MENTIONED IN A DESCRIPTION OF PARCEL 2, IN A DEED FROM HALETHORPE WAREHOUSE CORPORATION TO THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, RECORDED AMONG THE LAND RECORDS OF BALTIMORE COUNTY IN LIBER 5361, FOLIO 694; THENCE, RUNNING WITH AND BINDING ON SAID RIGHT OF WAY AND ALSO RUNNING WITH AND BINDING ON THE 1ST AND PART OF THE SECOND LINE OF SAID DEED; 1) SOUTH 20 DEGREES 18 FEET EAST 192.0 FEET TO A POINT IN THE NORTHERLY RIGHT OF WAY LINE OF HOLLINS FERRY ROAD (FORMERLY CANCO ROAD); THENCE, RUNNING WITH AND BINDING ON SAID RIGHT OF WAY 2) SOUTH 69 DEGREES 42 MINUTES WEST 901.45 FEET TO A POINT; THENCE, LEAVING SAID RIGHT OF WAY AND RUNNING WITH THE NEW RIGHT OF WAY LINE OF HOLLINS FERRY ROAD AS PER A DEED FROM HALETHORPE WAREHOUSE CORPORATION TO BALTIMORE COUNTY IN LIBER 4845, FOLIO 084, THE 2 (TWO) FOLLOWING COURSES AND DISTANCES; BY A CURVE TO THE RIGHT HAVING A RADIUS OF 50.0 FEET AND AN ARC LENGTH OF 43.82 FEET, SUBTENDED BY A CHORD HAVING A BEARING AND DISTANCE OF 3) NORTH 83 DEGREES 11 MINUTES 45 SECONDS WEST 42.43 FEET TO A POINT; THENCE, BY A CURVE TO THE LEFT HAVING A RADIUS OF 75.0 FEET AND AN ARC LENGTH OF 26.45 FEET, SUBTENDED BY A CHORD HAVING A BEARING AND DISTANCE OF 4) NORTH 70 DEGREES 12 MINUTES 13 SECONDS WEST 26.32 FEET TO A POINT; THENCE, LEAVING SAID RIGHT OF WAY AND RUNNING WITH AND BINDING ON PART OF THE 3RD LINE SAID DEED FROM HALETHORPE WAREHOUSE CORPORATION TO THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, 5) NORTH 20 DEGREES 18 MINUTES WEST 157.05 FEET TO A POINT; THENCE, WITH THE 4TH LINE OF THE FIRST MENTIONED DEED 6) NORTH 69 DEGREES 42 MINUTES EAST 960.0 FEET TO THE BEGINNING. Exhibit D Form of Assignment FORM OF LEASE ASSIGNMENT AND ASSUMPTION AGREEMENT [May need to add name and address of preparer, state specific notary or other stylistic changes based on requirements of title company and/or recording office.] THIS LEASE ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Agreement") is made as of ______ __, 2005, by and between ___________________ ("Assignor") and Ocean Logistics LLC ("Assignee"). W I T N E S S E T H WHEREAS, Assignor is the tenant under that certain lease (the "Lease") described on Schedule A attached hereto and made a part hereof; WHEREAS, the Lease affects certain premises more particularly described therein (the premises which is the subject of the Lease is hereinafter called the "Premises"); the real estate of which the Premises is a part is hereinafter called the "Property"), which Property is more particularly described on Schedule B attached hereto; WHEREAS, Assignor, Assignee and certain other parties are parties to a certain Asset Purchase Agreement, dated as of ____ __, 2005 (the "Asset Purchase Agreement"), pursuant to which, among other things, Assignor agreed to sell, and Assignee has agreed to acquire certain assets, including, without limitation, the Lease. WHEREAS, in connection with the transactions contemplated by the Asset Purchase Agreement, Assignor desires to sell, assign, transfer and convey to Assignee, and Assignee desires to accept an assignment from Assignor, of Assignor's right, title and interest in and to the Lease, the Premises and the Property upon and subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements set forth herein and in the Asset Purchase Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Assignment. Effective as of date hereof (the "Effective Date"), Assignor assigns, transfers, sets over and conveys to Assignee, its successors and assigns, all of Assignor's right, title and interest in and to (i) the Lease, including all renewal options granted therein, and (ii) the Premises, together with all of the appurtenant rights and easements thereby demised. 2. Acceptance of Assignment and Assumption of Obligations and Liabilities. Assignee hereby fully and completely accepts the assignment pursuant to Section 1 above, and assumes each and every obligation which is to be performed by the tenant under the Lease from and after the Effective Date. Assignee hereby covenants and agrees to indemnify, save and hold harmless Assignor and its affiliates, successors and assigns, from and against any and all liabilities, claims or causes of action existing in favor of or asserted by the landlord under the Lease or by any third party, arising out of or related to the Lease or Premises, Assignee's use or occupancy of the Premises or Assignee's failure to perform any of its obligations arising under the Lease on or after the Effective Date of this Assignment. Assignor hereby covenants and agrees to indemnify, save and hold harmless Assignee and its affiliates, successors and assigns, from and against any and all liabilities, claims or causes of action existing in favor of or asserted by the landlord under the Lease or by any third party, arising out of or related to the Lease or Premises, Assignor's use or occupancy of the Premises or Assignor's failure to perform any of its obligations arising under the Lease prior to the Effective Date of this Agreement, or which may incur as a result of a breach of Assignor's warranties as set forth herein. 3. Representations and Warranties. Assignor warrants that it is the owner and holder of a good leasehold estate in the Premises pursuant to the Lease, and Assignor has full authority to assign same as aforesaid. Assignor hereby reaffirms its representations and warranties relating to the Lease, the Premises and the Property as set forth in the Asset Purchase Agreement. 4. No Third Party Beneficiaries. This Agreement is for the sole and exclusive benefit of Assignor and Assignee and their respective successors and permitted assigns, and nothing herein is intended or shall be construed to confer upon any person other than Assignor, Assignee and their respective successors and permitted assigns, any right, remedy or claim under or by reason of this Agreement or any term, covenant or condition hereof. 5. Miscellaneous. This Agreement shall be governed by the laws of the State of __________. This Agreement may not be amended except by a document signed by all parties hereto. 6. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which when taken together shall constitute but one and the same instrument. 7. Notice. Any notices to be given hereunder shall be in writing and delivered personally or mailed by certified mail, postage prepaid, return receipt requested, as follows: If to Assignor, addressed to: ____________________________ _____________________________ ______________________________ Attn: __________________________ If to Assignee, addressed to: ____________________________ ________________________________ __________________________________ Attn:_______________________________ 8. Capitalized Terms. Capitalized terms used herein but not defined shall have the meanings assigned to such terms in the Asset Purchase Agreement. 9. Tax Status. Purchaser is not a tax-exempt entity (within the meaning of Section 168(h) of the Code) or a debtor or debtor-in-possession in a voluntary or involuntary bankruptcy proceeding. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. ASSIGNOR: _____________________________, a _______ _______________________ By: __________________________ Name: Title: ASSIGNEE: ___________________________, a ______ ________________________ By: __________________________ Name: Title: STATE OF _________________ , ss. On this ____ day of ______, 2005 before me, the undersigned notary public, personally appeared _______________________________, proved to me through satisfactory evidence of identification, which were _________________________, to be the person whose name is signed on the preceding or attached document, and acknowledged to me that he/she signed it voluntarily for its stated purpose as ____________________________ for ________, a _______ _________________. ________________________________ Notary Public My commission expires: STATE OF _____________________ , ss. On this ____ day of ______, 2005 before me, the undersigned notary public, personally appeared _______________________________, proved to me through satisfactory evidence of identification, which were personal knowledge, to be the person whose name is signed on the preceding or attached document, and acknowledged to me that he/she signed it voluntarily for its stated purpose as the _______________________ for ___________________, a ______ ___________________________. ________________________________ Notary Public My commission expires: SCHEDULE A LEASE DESCRIPTION SCHEDULE B LEGAL DESCRIPTION Exhibit E New Orleans Sublease Key Number [location] [location] [date] AGREEMENT OF SUBLEASE THIS AGREEMENT, made this _______ day of ________, 2005, by and between THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., a Maryland corporation, with offices at 2 Paragon Drive, Montvale, New Jersey 07645 (hereinafter called the "Sublandlord"), and OCEAN LOGISTICS LLC, a Delaware limited liability company, with offices at 7 Corporate Drive, Keene, New Hampshire 03431 (hereinafter called the "Subtenant"). W I T N E S S E T H : WHEREAS, Sublandlord is presently the tenant of a certain warehouse premises containing approximately 276,000 square feet of space located at Jefferson Highway in Southport, Parish of Jefferson, State of Louisiana, which premises (hereinafter called the "Premises") are more particularly described in Exhibit A attached hereto and made a part hereof; and WHEREAS, said occupancy is pursuant to a lease dated October 14, 1950 by and between Jones-Brown Realty Company, Inc., as landlord, and Sublandlord, as tenant, which lease has been amended as listed on Exhibit B attached hereto and made a part hereof and the landlord's interest in the Premises is currently vested in Alton Ochsner Medical Foundation (said landlord is hereinafter referred to as the "Overlandlord" and said lease and amendments are hereinafter collectively called the "Overlease"). A true and correct copy of the Overlease has previously been provided by Sublandlord to Subtenant and Subtenant hereby acknowledges receipt of the Overlease; and WHEREAS, Sublandlord is desirous of subletting the Premises to Subtenant and Subtenant is desirous of subletting same from Sublandlord. NOW, THEREFORE, in consideration of the mutual promises, covenants and condi- tions hereinafter set forth, it is mutually agreed as follows: 1. PREMISES. Sublandlord hereby sublets the Premises to Subtenant and Subtenant hereby sublets the Premises from Sublandlord for use as a warehouse and any other lawful purpose permitted under the Overlease, upon the terms and conditions set forth herein. 2. TERM. The term of this Sublease shall commence on the 25th day of September, 2005, and shall continue up to and including 12:00 midnight on December 30, 2007. Subtenant shall have the option to extend the term of this Sublease to midnight on December 30, 2012 by giving Sublandlord written notice thereof not later than June 1, 2007. If Subtenant shall give such notice to extend the term of this Sublease, Sublandlord shall promptly exercise its renewal option under Section 2 of the Seventh Lease Amendment referenced on Exhibit B hereto to extend the term of the Overlease through December 31, 2012. 3. RENTAL. Subtenant hereby agrees to pay to Sublandlord fixed annual rental in the amounts set forth below, payable in equal monthly installments in advance on the first day of each month during the term of this Sublease in the amounts set forth below: - ------------------------------------------------------------------------- Period Fixed Annual Rent Fixed Monthly Rent - ------------------------------------------------------------------------- 9/25/05 - 12/31/05 $829,980.72 $69,165.06 - ------------------------------------------------------------------------- 1/1/06 - 12/31/06 $854,880.12 $71,240.01 - ------------------------------------------------------------------------- 1/1/07 - 12/30/07 $880,526.52 $73,377.21 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Renewal Term Fixed Annual Rent Fixed Monthly Rent - ------------------------------------------------------------------------- 1/1/08 - 12/31/08 $906,942.24 $75,578.52 - ------------------------------------------------------------------------- 1/1/09 - 12/31/09 $934,150.56 $77,845.88 - ------------------------------------------------------------------------- 1/1/10 - 12/31/10 $962,175.12 $80,181.26 - ------------------------------------------------------------------------- 1/1/11 - 12/31/11 $991,040.28 $82,586.69 - ------------------------------------------------------------------------- 1/1/12 - 12/30/12 $1,020,771.48 $85,064.29 - ------------------------------------------------------------------------- Fixed rent shall be paid to Sublandlord at 6430 Payshere Circle, Chicago, IL 60674 or such other address as Sublandlord may designate by notice to Subtenant. All rental and other payments to be made by Subtenant to Sublandlord shall be made by check. At Subtenant's option, rental or other payments may be made by wire transfer to an account designated by Sublandlord. Subtenant shall identify its rental and other payments as being on account of the New Orleans Warehouse or by such other designation as Sublandlord may request in writing. Rental payments shall commence upon the commencement of the term, as hereinabove provided. All rental and other payments to be made by Subtenant to Sublandlord shall be made without setoff, deduction or reductions of any kind in any amount for any reason whatsoever. This clause shall not be construed to prohibit rent abatement in the event of casualty or a taking by means of eminent domain only if and to the extent provided for in the Overlease. 4. REPRESENTATIONS. To induce Subtenant to enter into this Sublease, Sublandlord hereby warrants and represents to Subtenant that: A. The Overlease is presently in full force and effect and no default exists thereunder. B. A true, correct and complete copy of the Overlease, including all amendments thereto, has been delivered by Sublandlord to Subtenant, Exhibit B sets forth an accurate schedule of the Overlease, including all amendments and modifications thereto and the Overlease has not been further amended or modified in any respect. C. Sublandlord has full corporate authority to enter into this Sublease, this Sublease has been duly authorized, executed and delivered by Sublandlord, this Sublease is legally binding on Sublandlord and is enforceable against Sublandlord in accordance with its terms. D. Sublandlord has not previously assigned, sublet, mortgaged or otherwise encumbered its interest in the Overlease. 5. OVERLEASE. A. All the obligations contained in the Overlease conferred and imposed upon Sublandlord (as tenant therein) except as modified and amended by this Sublease, are hereby conferred and imposed upon Subtenant, but only those obligations which accrue during the term of this Sublease, and all rights and benefits granted to Sublandlord (as tenant under the Overlease), except as modified and amended by this Sublease, are conferred upon Subtenant, but only to the extent they apply during the term of this Sublease. Subtenant covenants and agrees to fully and faithfully perform the terms and conditions of the Overlease and the Sublease on its part to be performed during the term of the Sublease. Subtenant shall not do or cause to be done or suffer or permit any act to be done which would or might cause the Overlease, or the rights of Sublandlord, as tenant, under the Overlease, to be endangered, cancelled, terminated, forfeited or surrendered, or which would or might cause Sublandlord to be in default thereunder or liable for any damage, claim or penalty. Subtenant agrees, as an express inducement for Sublandlord's executing this Sublease, that if there is any conflict between the provisions of this Sublease and the provisions of the Overlease which would permit Subtenant to do or cause to be done or suffer or permit any act or thing to be done which is prohibited by the Overlease then the provisions of the Overlease shall prevail. If the Overlease terminates or is terminated for any reason whatsoever, then this Sublease shall terminate simultaneously therewith. Sublandlord covenants and agrees: (i) to comply with the covenants and agreements of Sublandlord as lessee under the Overlease except to the extent assumed by Subtenant hereunder, including the payment of rent and additional rent; and (ii) not to terminate, modify or otherwise amend the Overlease without the prior written consent of Subtenant, which consent shall not be unreasonably withheld, conditioned or delayed. B. During the term of this Sublease, Subtenant shall pay to Sublandlord, as additional rent, any and all sums (except fixed annual rent payable under the Overlease) due pursuant to the Overlease and accruing during the term of this Sublease. Subtenant shall pay the aforesaid sums on or before such sums are due and payable under the Overlease. C. Sublandlord shall have no duty to perform any obligations of the Overlandlord under the Overlease and shall under no circumstances be responsible for or liable to Subtenant for any default, failure or delay on the part of the Overlandlord in the performance of any obligations under the Overlease, nor shall such default of the Overlandlord affect this Sublease or waive or defer the performance of any of Subtenant's obligations hereunder; provided, nevertheless, that in the event of any such default or failure of performance by Overlandlord, Sublandlord agrees, upon notice from Subtenant, to make written demand upon Overlandlord to perform its obligations under the Overlease and to use reasonable business efforts to cause Overlandlord to perform its obligations under the Overlease. Subtenant shall have the right in the name of Sublandlord to bring an action against Overlandlord to compel Overlandlord to perform its obligations under the Overlease. At the request of Subtenant but without expense to Sublandlord, Sublandlord shall execute such documents and otherwise cooperate with Subtenant in any action to compel Overlandlord to perform its obligations under the Overlease. Subtenant agrees to defend, indemnify and hold Sublandlord harmless from and against any and all expense, loss, claims or liability, including reasonable attorneys' fees, arising out any such suit against Overlandlord or other action by Subtenant to compel Overlandlord to perform its obligations under the Overlease. D. During the term of this Sublease, Sublandlord shall use good faith efforts to send to Subtenant copies of all notices which Sublandlord shall receive from Overlandlord, and, within three (3) business days after Sublandlord receives the same, shall send copies of all default and other notices from Overlandlord or other parties concerning the Overlease or the Premises that will or could have a material impact on Subtenant's use and occupancy of the Premises. 6. DEFAULT. A. If Subtenant defaults in the performance of any of its obligations hereunder, and such default continues for five (5) days after the giving of notice of such default with respect to the failure to pay any monies, or twenty (20) days after the giving of notice of default with respect to the failure to perform or comply with any non-monetary obligations of Subtenant hereunder, or if Subtenant fails to perform or observe any of the provisions required by it to be performed or observed by Subtenant under any other agreement relating to the Premises or under any equipment agreement, promissory note, conditional sales contract or other instrument executed by Subtenant in connection with obtaining equipment for use in the Premises after any applicable notice and cure period, then Sublandlord may at its option terminate this Sublease upon giving ten (10) days notice of termination to Subtenant, in which event neither Subtenant nor the guarantor nor any person claiming through or under Subtenant or the guarantor by virtue of any statute or an order of any court shall be entitled to possession or to remain in possession of the Premises but shall forthwith quit and surrender the Premises. Subtenant shall have reasonable additional time beyond twenty (20) days to cure a non-monetary default if Subtenant has commenced to cure same within said twenty (20) days and thereafter proceeds with due diligence to cure same. B. In the event that Subtenant shall default under this Sublease and such default shall entitle Sublandlord to possession of the Premises as hereinabove provided, Sublandlord shall have the right to enter the Premises, remove Subtenant's property and effects, take and hold possession thereof, without terminating this Sublease or releasing Subtenant in whole or in part, from Subtenant's obligations to pay rent and additional rent and all its other obligations hereunder for the full term, relet the Premises or any part thereof, either in the name or for the account of Subtenant or Sublandlord, for such rent and for such term or terms as Sublandlord may see fit, which term may, at Sublandlord's option, extend beyond the balance of the term of this Sublease; provided, however, that Sublandlord shall not be obligated to relet the Premises nor shall Sublandlord be required to accept any tenant offered by Subtenant, or to observe any instructions given by Subtenant about such reletting. In any such case, Sublandlord may make such repairs, alterations and additions in and to the Premises and redecorate the same as it sees fit. Subtenant shall pay Sublandlord any deficiency between the rent hereby reserved and covenanted to be paid and the net amount of the rents collected on such reletting, for the balance of the term of this Sublease, as well as any reasonable expenses incurred by Sublandlord in such reletting including, but not limited to broker's fees, attorney's fees, the expense of repairing, altering and redecorating the Premises and otherwise preparing the same for rerental, all of such expenses shall be prorated if such reletting extends beyond the term of the Sublease and shall be paid by Subtenant as additional rent upon demand by Sublandlord. Any deficiency in rental shall be paid in monthly installments, upon statements rendered by Sublandlord to Subtenant. For the purpose of determining the deficiency in rent, whether payable in installments or the entire rental for the balance of the term, the rent reserved shall be deemed to be the guaranteed minimum rental herein provided for, as reduced by any rent collected by reletting. Any suit brought to collect the amount of the deficiency for any one or more months shall not preclude any subsequent suit to collect the deficiency for any subsequent months. C. In addition to the rights granted to Sublandlord pursuant to Paragraph 6.B., Sublandlord may require that, upon any termination of this Sublease, whether by lapse of time, the exercise of any option by Sublandlord to terminate the same, or in any other manner whatsoever, or upon any termination of Subtenant's right to possession without termination of this Sublease, Subtenant shall at once surrender possession of the Premises to Sublandlord and immediately vacate the same, and shall remove all its effects therefrom except any fixtures and equipment leased from Sublandlord or in which Sublandlord has a security interest. If Subtenant fails to do so, Sublandlord may, upon three (3) days' notice, reenter the Premises, by process of law, and repossess itself thereof as in its former estate and expel and remove Subtenant and any other person and properties therefrom, and without thereby waiving Sublandlord's rights to rent or any other rights given Sublandlord under this Sublease or at law or in equity. D. If Subtenant is in default of its obligations under this Sublease, Sublandlord can cure the default after giving Subtenant two (2) business days written notice of its intention to do so, and Subtenant shall forthwith pay to Sublandlord, as additional rent, a sum of money equal to all amounts reasonably expended by Sublandlord in curing such default. If suit is brought by Sublandlord on account of any such default and if such default is established, Subtenant shall pay to Sublandlord all reasonable expenses of such suit, including without limitation, reasonable attorneys' fees; alternatively, if such default is not established, Sublandlord shall pay Subtenant all reasonable expenses incurred by Subtenant, including without limitation, reasonable attorney fees. Any payment by Subtenant of a sum of money less than the entire amount due Sublandlord at the time of such payment shall be applied to the obligations of Subtenant then furthest in arrears. No endorsement or statement on any check or accompanying any payment shall be deemed an accord and satisfaction and any payment accepted by Sublandlord shall be without prejudice to Sublandlord's right to obtain the balance due or pursue any other remedy available to Sublandlord both in law and in equity. E. If Subtenant defaults in any payment of rent or additional rent, interest shall accrue thereon from the due date until paid at interest at the Prime Rate (as hereinafter defined) per annum plus two percent (2%) per annum, or if such rate is illegal, at the highest rate permitted by law (hereinafter called the "Lease Interest Rate"). Prime Rate shall mean the rate per annum publicly announced from time to time by Morgan Guaranty Trust Company of New York as its Prime Rate in effect at its principal office in New York City and each change in the Prime Rate shall be effective on the date such change is publicly announced. F. If, at any time during the term of this Sublease, there shall be filed by or against Subtenant or any guarantor of this Sublease, in any court pursuant to any statute either of the United States or any state, a petition in bankruptcy or insolvency or for the reorganization or for the appointment of a receiver, trustee or liquidator of all or any portion of Subtenant's or guarantor's property or if Subtenant or guarantor makes an assignment for the benefit of creditors, or if Subtenant or guarantor admits in writing its inability to pay its debts, and if, within thirty (30) days thereafter, Subtenant or guarantor fails to secure a discharge thereof, this Sublease, at the option of Sublandlord may be cancelled and terminated, in which event neither Subtenant nor guarantor nor any person claiming through or under Subtenant or guarantor by virtue of any statute or an order of any court shall be entitled to possession or to remain in possession of the Premises but shall forthwith quit and surrender the Premises. G. In addition to any and all remedies set forth herein, Sublandlord shall have all remedies available at law or in equity and any and all remedies shall be cumulative and nonexclusive. 7. NO REPRESENTATIONS OR WARRANTIES. Sublandlord makes no representations or warranties with respect to this transaction or the Premises, except as specifically set forth herein or in the Asset Purchase Agreement (the "Asset Purchase Agreement") dated ____, 2005 by and among, inter alia, Sublandlord, as Seller, Subtenant, as Purchaser. 8. MECHANICS LIENS. Subtenant shall permit no mechanics liens to be placed against the Premises or any portion thereof and shall cause any contracts entered into by it for work to be done at the Premises in excess of $1 million to contain a waiver of the contractors' right to file a mechanics lien. 9. INDEMNITY. Subtenant hereby agrees to assume responsibility for the condition of the Premises from and after the Commencement Date and agrees to defend, indemnify and hold Sublandlord harmless from and against any and all expense, loss, claims or liability including reasonable attorneys' fees (including those arising out of enforcement of this indemnity provision) arising out of or in connection with any act or omission of Subtenant, its agents, contractors or employees during the term of this Sublease, including, but not limited to, claims as a result of injury to or death of any person, property damage, claims of employees of Subtenant or arising out of or in connection with Subtenant's use and possession of the Premises, or its breach of the Sublease (including the terms of the Overlease) except, in each case, expense, loss, claims or liability arising out of the negligence or willful misconduct of Sublandlord, its agents or employees. Sublandlord agrees to defend, indemnify and hold Subtenant harmless from and against any and all expense, loss, claims or liability including reasonable attorneys' fees (including those arising out of enforcement of this indemnity provision) arising out of or in connection with (x) any act or omission of Sublandlord, its agents, contractors or employees during the term of this Sublease, (y) Sublandlord's use and occupancy of the Premises prior to the term of this Sublease, and (z) Sublandlord's breach of this Sublease, such indemnity to include, without limitation, claims as a result of injury to or death of any person, property damage, and claims of employees of Subtenant, except, in each case, expense, loss claims or liability arising out of the negligence or willful misconduct of Subtenant, its agents or employees or if Subtenant's breach of this Sublease directly causes Sublandlord's breach of the Overlease. 10. RESTORATION. Subtenant shall remove alterations to the Premises made by Subtenant which are required to be removed by the Overlease or by Overlandlord as well as all of Subtenant's trade fixtures and equipment prior to the expiration or sooner termination of the term hereof and shall repair all damage caused by such removal. Otherwise, Subtenant shall surrender the Premises in the same condition as the Premises are on the Commencement Date, ordinary wear and tear and damage by casualty which Subtenant is not required to restore hereunder excepted. 11. NOTICES. All notices, demands, submissions and consents required hereunder shall be in writing and shall be deemed given if sent by certified mail, return receipt requested, postage prepaid, (a) to Subtenant, at the address of Subtenant as hereinabove set forth, attention to Chief Executive Officer, or such other address as Subtenant may designate by notice to Sublandlord, then in duplicate under separate cover, to the attention to the Chief Financial Officer and General Counsel, at the same address, or (b) to Sublandlord, then in duplicate under separate cover, one copy to the attention of the Vice President of A&P Properties and one copy to the attention of the Office of the General Counsel of Sublandlord, both at the address of Sublandlord as hereinabove set forth, or such other addresses as Sublandlord may designate by notice to Subtenant. 12. INSURANCE. A. Property Insurance. If Sublandlord is required under the Overlease to provide insurance covering the Premises against loss by fire or other casualty, then the Subtenant shall be responsible for obtaining same at Subtenant's sole cost and expense and Subtenant shall name Sublandlord as an additional insured, and shall also name such other additional parties as may be required under the Overlease. Subtenant and Sublandlord each hereby waive all rights or recovery against the other and its agents and employees for damage or destruction to any and all of the improvements in or on the Premises, including but not limited to fixtures, equipment and inventory, arising out of fire or other casualty whether or not caused by acts or negligence of Subtenant or Sublandlord and/or their respective agents and employees. B. Public Liability. Subtenant will deliver to Sublandlord evidence of general liability, bodily injury, and property damage in amounts not less than that required under the Overlease: Subtenant will name Sublandlord as an additional insured under the policy and will show evidence that the hold-harmless agreement set forth in Article 9 is covered and recognized by the insurance company. Such policy or policies shall include a provision that at least ten (10) days prior written notice of cancellation be given to Sublandlord. C. Sublandlord shall not be required to maintain any insurance hereunder. 13. ALTERATIONS. Subtenant may make such alterations or additions to the Premises as are permitted to be made by the Overlease, and such other alterations or additions as may be approved by Overlandlord. If any alterations or additions made by Subtenant are required to be removed by the Overlease or by Overlandlord, Subtenant shall remove the same and repair any damage caused by such removal. Subtenant shall have no obligation to remove any alterations made to the Premises by Sublandlord prior to the term of this Sublease. 14. CONDEMNATION AND CASUALTY; CONDEMNATION PROCEEDS. A. Subject to the last sentence of this Paragraph 14 A, if any portion of the Premises is taken by condemnation or similar proceeding, or if the warehouse building on the Premises is damaged or destroyed by fire or other casualty in whole or in part during the term of this Sublease, Subtenant shall have the option to terminate this Sublease by giving written notice thereof to Sublandlord within thirty (30) days after Subtenant receives notice of such condemna- tion, or within thirty (30) days following such damage or destruction, as the case may be, in which case, this Sublease shall terminate as of the date of such condemnation or casualty, as the case may be, and Sublandlord shall refund to Subtenant any prepaid Rent. If Subtenant does not elect to terminate this Sublease as provided above, this Sublease shall continue and Sublandlord shall not exercise any right it may have under the Overlease to terminate the Overlease. Notwithstanding anything herein to the contrary, Subtenant cannot terminate this Sublease upon the occurrence of a condemnation or casualty unless Sublandlord has a right to terminate the Overlease upon the occurrence of such condemnation or casualty. B. All compensation awarded or paid upon a total or partial taking of the Premises shall belong to and be the property of Sublandlord without any participation by Subtenant; provided, however, Subtenant shall receive out of any such award, the unamortized book value of any alterations and/or improvements made by Subtenant to the Premises, but not more than Subtenant's proportionate share of the sum of the unamortized book value of all alterations and/or improvements made by Sublandlord and Subtenant to the Premises; and provided further that nothing contained herein shall be construed to preclude Subtenant from prosecuting any claim directly against the condemning authority in such condemnation proceedings for loss of business, and/or depreciation to, damage to, and/or cost of removal of, and/or for the value of stock and/or trade fixtures, furniture and other personal property belonging to Subtenant; provided, however, that no such claim shall diminish or otherwise adversely affect Sublandlord's and/or Overlandlord's award or the award(s) of any and all ground and underlying landlord(s) and Mortgagee(s). 15. ASSIGNMENT. As between Sublandlord and Subtenant, Subtenant may assign this Sublease or sublet the Premises in whole or in part with the consent of Sublandlord which consent shall not be unreasonably withheld, conditioned or delayed. Notwithstanding the preceding sentence, the merger or sale of all or substantially all of the assets of Subtenant, or the assignment of this Sublease to an entity controlling, controlled by or under common control with Subtenant, shall not require the consent of Sublandlord. Notwithstanding the foregoing, Subtenant shall not assign this Sublease or sublet the Premises in whole or in part without the consent of Overlandlord if such consent is required under the Overlease. If this Sublease is assigned, Sublandlord may, and is hereby empowered to, collect rent from the assignee; if the Premises or any part thereof be underlet or occupied by any person other than Subtenant, Sublandlord, in the event of Subtenant's default, may, and is hereby empowered to, collect rent from the undertenant or occupant; in either of such events, Sublandlord may apply the net amount collected by it to the rent herein reserved, and no such collection shall be deemed a waiver of the covenant herein against assignment and underletting, or the acceptance of the assignee, undertenant or occupant as Subtenant, or a release of Subtenant from the further performance of the covenants herein contained on the part of Subtenant. 16. BROKER. Each party represents and warrants to the other party that it dealt with no broker or other person entitled to claim fees for such services in connection with the negotiation, execution and delivery of this Sublease. Each party agrees to defend, indemnify and hold the other party harmless from and against any and all claims for finders' fees or brokerage or other commission which may at any time be asserted against the indemnified party founded upon a claim that the substance of the aforesaid representation of the indemnifying party is untrue, together with any and all losses, damages, costs and expenses (including reasonable attorneys' fees) relating to such claims or arising therefrom or incurred by the indemnified party in connection with the enforcement of this indemnification provision. 17. DEFINITION AND LIABILITY OF SUBLANDLORD AND SUBTENANT. A. The term "Sublandlord" as used in this Sublease means only the tenant for the time being under the Overlease, so that in the event of a transfer of Sublandlord's interest in the Overlease, Sublandlord shall be and hereby is entirely freed and relieved of all obligations of Sublandlord hereunder and it shall be deemed that the transferee has assumed and agreed to observe and perform all obligations of Sublandlord hereunder. B. Notwithstanding anything to the contrary provided in this Sublease, if Sublandlord or any successor in interest of Sublandlord or any parent corporation or principal of Sublandlord (as, for example, where Sublandlord is the nominee of another party) shall be an individual, partnership, corporation, trust, tenant in common or mortgagee, there shall be absolutely no personal liability on the part of any individual, joint venturer or member of Sublandlord or any stockholder, director, officer, employee, partner or trustee of Sublandlord with respect to the terms, covenants or conditions of this Sublease. C. The term "Subtenant" as used in this Sublease means only the subtenant for the time being under this Sublease, so that in the event of a transfer of Subtenant's interest in this Sublease, Subtenant shall be and hereby is entirely freed and relieved of all obligations of Subtenant hereunder and it shall be deemed that the transferee has assumed and agreed to observe and perform all obligations of the Subtenant hereunder. D. Notwithstanding anything to the contrary provided in this Sublease, if Subtenant or any successor in interest of Subtenant or any parent corporation or principal of Subtenant (as, for example, where Subtenant is the nominee of another party) shall be an individual, partnership, corporation, trust, tenant in common or mortgagee, there shall be absolutely no personal liability on the part of or any individual, joint venture or member of Subtenant or any stockholder, director, officer, employee, partner or trustee of Subtenant with respect to the terms, covenants or conditions of this Sublease. 18. REQUIREMENTS OF LAW. A. During the term of this Sublease (as same may be extended), Subtenant shall, at its own cost and expense, promptly observe and comply with all present and future laws, ordinances, requirements, orders, directives, rules and regulations of the Federal, State, County, Town, Municipal and local governments and of all other governmental authorities affecting the Premises or any part thereof, including Environmental Laws as defined in Paragraph 21D below (collectively, "Laws"), and, except where Sublandlord has indemnified Purchaser with respect thereto under the Asset Purchase Agreement, or has indemnified Subtenant hereunder, Subtenant shall pay all costs, expenses, liabilities, losses, damages, fines, penalties, claims and demands, including reasonable counsel fees, that may in any manner arise out of or be imposed because of the failure of Subtenant to comply with the covenants of this Article 21. B. Sublandlord acknowledges that it has been the tenant under the Overlease for over fifty (50) years. Sublandlord represents and warrants to Subtenant that, to its knowledge and except as set forth in the Asset Purchase Agreement, there are no violations at the Premises of any Laws. Sublandlord agrees to pay, indemnify and hold Subtenant harmless from and against any costs, expenses, liabilities, losses, damages, fines, penalties, claims and demands, including reasonable counsel fees, arising out of or imposed because of the existence of any such violations of Laws existing on or prior to the commencement date of this Sublease. C. The environmental indemnification obligations of Seller and Purchaser shall be handled in accordance with Article IX of the Asset Purchase Agreement. D. Subtenant shall, at Subtenant's own cost and expense except as provided in Paragraph 21B above, comply with all state, federal municipal or local environmental laws and the regulations promulgated thereunder (hereinafter called the "Environmental Laws") including, without limitation, the Comprehensive Environmental Response Compensation and Liability Act, as may be amended; and the Hazardous and Solid Waste Amendments of 1984, as may be amended. Subtenant shall, at Subtenant's own expense, keep and maintain the Premises free from leaks of spills or Hazardous Substances or Hazardous Wastes (as hereafter defined) and free from contamination of Hazardous Substances or Hazardous Wastes. For purposes of this Article 21, Hazardous Substances and Hazardous Wastes shall mean any substance defined as a hazardous substance and/or hazardous waste under the Environmental Laws. 19. WAIVER. One or more waivers of any covenant or condition by Sublandlord or Subtenant shall not be construed as a waiver of a subsequent breach of the same or any other covenant or condition, and the consent or approval by Sublandlord or Subtenant to or of any act by the other requiring the other's consent or approval shall not be construed to waive or render unnecessary the consent or approval to or of any subsequent similar act by the other party hereunder. 20. EFFECT. This Agreement shall be binding upon the parties hereto, their heirs, executors, legal representatives, successors and permitted assigns, and may not be altered, amended, terminated or modified except by written instrument executed by each of the parties hereto. 21. FORUM. This Agreement shall be governed by the laws of the state in which the Premises is located. Sublandlord and Subtenant each waive trial by jury. 22. RECORDING. This Agreement shall not be recorded, but at the request of either party Sublandlord and Subtenant shall execute and acknowledge a memorandum of this Sublease which does not set forth the economic terms hereof but is sufficient to give third persons notice of this Sublease. The memorandum may be recorded by either party with the Clerk of Court for the Parish of Jefferson, State of Louisiana. In the event such memorandum of this Sublease is recorded, Sublandlord and Subtenant shall execute and acknowledge a Notice of Termination of Sublease which shall be deposited in escrow with the Title Company (as defined in the Asset Purchase Agreement) and shall be recorded by the Title Company on the first busi- ness day of January, 2013 or on such earlier date as Sublandlord and Subtenant shall instruct the Title Company in writing. 23. NO PRESUMPTION AGAINST DRAFTER. Sublandlord and Subtenant agree and acknowledge that: (a) This Sublease has been freely negotiated by Sublandlord and Subtenant; and (b) In any event of any ambiguity, controversy, dispute or disagreement over the interpretation, validity or enforceability of this Sublease or any of its covenants, terms or conditions, no inference, presumption or conclusion whatsoever shall be drawn against Sublandlord or Subtenant by virtue of Sublandlord's having drafted this Sublease or Subtenant having commented thereon. 24. CONFLICT WITH AGREEMENTS. Nothing herein shall be deemed to amend or modify the Asset Purchase Agreement or the Supply Agreement ("Supply Agreement") by and between C&S Wholesale Grocers, Inc. and Seller dated __________, 2005. In the event of a conflict between the provisions of this Sublease and the provisions of the Asset Purchase Agreement and/or the Supply Agreement, the terms of the Asset Purchase Agreement and/or the Supply Agreement shall prevail. 25. FORCE MAJEURE. Except as specifically set forth in this Sublease, Sublandlord and Subtenant shall be excused for the period of any delay in the performance of any of its obligations under this Sublease, other than the payment of money, when prevented from so doing by any cause or causes beyond their respective reasonable control, which shall include, without limitation, all labor disputes, inability to obtain any materials or services, civil commotion, restrictions, limitations or delays caused by governmental regulations or governmental agencies, or acts of God, each of which shall be an event of "Force Majeure". 26. SUCCESSORS. The respective rights and obligations of Sublandlord and Subtenant under this Sublease shall bind and shall inure to the benefit of Sublandlord and Subtenant and their respective legal representatives, heirs, successors and assigns. 27. SEVERABILITY. If any provisions of this Sublease shall be held to be invalid, void or unenforceable, the remaining provisions of this Sublease shall in no way be affected or impaired and such remaining provisions shall continue in full force and effect. 28. ENTIRE AGREEMENT; AMENDMENT. This Sublease, together with the Asset Purchase Agreement and the Supply Agreement, contains all the agreements, conditions, understandings, representations and warranties made between Sublandlord and Subtenant with respect to the subject matter hereof, and may not be modified orally or in any manner other than by an agreement in writing signed by both Sublandlord and Subtenant or their respective successors in interest. 29. ESTOPPEL CERTIFICATE. At any time and from time to time and within twenty (20) days after written request by Sublandlord or Subtenant, Subtenant or Sublandlord, as the case may be, shall execute, acknowledge and deliver to the other a statement in writing duly executed by such party certifying that (a) this Sublease is in full force and effect, without modification or amendment (or, if there have been any modifications or amendments, that this Sublease is in full force and effect as modified and amended and setting forth the dates of the modifications and amendments), (b) the dates to which annual Rent has been paid, (c) to the knowledge of such party no default exists under this Sublease or specifying each such default and such other reasonable matters relating to the status of this Sublease and the obligations of the parties thereunder as the other may reasonably request; it being the intention and agreement of Sublandlord and Subtenant that any such statement may be relied upon by the other party or by a prospective permitted assignee or Subtenant or others, in any matter affecting the Premises. IN WITNESS WHEREOF, the parties have hereunto affixed their hands and seals the day and year first above written. SUBLANDLORD: THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. WITNESS: ____________________________ By:_____________________________________________ Vice President ____________________________ Attest:_________________________________________ Assistant Secretary SUBTENANT: OCEAN LOGISTICS LLC WITNESS: ________________________________ By:__________________________________________ President ________________________________ Attest:______________________________________ Secretary EXHIBIT "A" Legal Description That certain leasehold estate created by the Lease affecting the following described property: Tract 1 A certain piece or portion of ground situated in the Parish of Jefferson, State of Louisiana, in Section 47, Township 12 South, Range 10 East, Southeast Land District, East of the Mississippi River, being portions of Lots 10, 11 and 12 of the subdivision of LaBarre Plantation, as shown on plan of A. D'Hemecourt, dated May 9, 1836, which said piece or portion of ground is more particularly delineated on survey of F.G. Stewart, Civil Engineer and Surveyor, dated March 24, 1966, according to which said piece or portion of ground measures as follows, to-wit: Beginning at the point at which the Easterly line of Lot 10 intersects the Northerly line of Jefferson Highway, Louisiana State Highway #1; thence in a Westerly direction along said Northerly line of Jefferson Highway for a distance of 29.44 feet to point A, the point of beginning; thence in a Northerly direction along a line parallel to and lying 29 feet Westerly from the Easterly line of said Lot 10 for a distance of 1044.42 feet to point D; thence at an interior angle of 90 degrees for a distance of 373 feet in a Westerly direction to point C; thence at an interior angle of 90 degrees for a distance of 1109.48 feet along a line parallel to and lying 18 feet Westerly from the Westerly line of Lot 11 to point B on the Northerly line of Jefferson Highway; thence in an Easterly direction for a distance of 378.67 feet along the northerly line of said Jefferson Highway to point A, the point of beginning. Tract 2 - Right of Way and Passage A certain piece or portion of ground, situated in Jefferson Parish, State of Louisiana, in Section 47, Township 12 South, Range 10 East, Southeast Land District of Louisiana, East of the Mississippi River, being a portion of a certain lot designated by the Number 10 of the Sub-division of LaBarre Plantation, as shown on plan of A. D'Hemecourt, dated May 9, 1836, which said piece or portion of ground is for the free and unobstructed use of a right of way and passage, whether by motor vehicle, carriage, wagon or otherwise on, over and across the property more particularly described as follows: Beginning at a point of intersection of the Easterly line of aforesaid Lot 10 with the Northerly line of Jefferson Highway (State Highway No. 1); thence North 20(degree)00' 40" East for a distance of 1039.35 feet along the Easterly line of Lot 10; thence North 69(degree) 59' 20" West for a distance of 29 feet; thence South 20(degree) 00' 40" West a distance of 1044.42 feet to the Northerly line of Jefferson Highway; thence South 79(degree) 53' 00" East a distance of 29.44 feet to the point of beginning. The portion of ground hereinabove described is more fully shown on plan prepared by R. P. Rordam, Civil Engineer, dated New Orleans, Louisiana, July 22, 1949, revised December 18, 1949 and October 9, 1950, and on plan prepared by F.G. Stewart, Civil Engineer and Surveyor, dated New Orleans, Louisiana, March 24, 1966. EXHIBIT "B" Schedule of Lease and Amendments 1. Lease dated October 14, 1950, by and between Jones-Brown Realty Company, Inc. ("Jones-Brown"), as lessor, and Sublandlord, as lessee, a memorandum of which was recorded on December 8, 1950, in the Office of the Clerk and Ex-Officio Recorder of Jefferson Parish, Louisiana (the "Clerk's Office) in Conveyance Book 295, folio 661. 2. Supplemental Lease between Jones-Brown, as lessor, and Sublandlord, as lessee, dated February 19, 1951, a memorandum of which was recorded on March 2, 1950 in the Clerk's Office in Conveyance Book 299, folio 295. 3. Second Supplemental Lease between New York Life Insurance Company, as successor lessor, and Sublandlord, as lessee, dated November 20, 1957, which was recorded in the Clerk's Office in Conveyance Book 634, folio 851. 4. Third Supplemental Lease between Boyle Trust and Investment Company, as successor lessor ("Boyle"), and Sublandlord, as lessee, dated January 16, 1967, which was recorded on January 20, 1967 in the Clerk's Office in Conveyance Book 651, folio 74. 5. Fourth Lease Amendment and Extension Agreement between Boyle, as successor lessor, and Sublandlord, as lessee, dated September 22, 1986, which was recorded in the Clerk's Office, December 15, 1986 in Conveyance Book 1620, folio 284. 6. Fifth Lease Amendment between Alton Ochsner Medical Foundation, as successor lessor ("Alton"), and Sublandlord, as lessee, dated December 6, 1995, a memorandum of which was recorded in the Clerk's Office on August 30, 1996 in Conveyance Book 2945, folio 729. 7. Sixth Lease Amendment by and between Alton, as successor lessor, and Sublandlord, as lessee, dated November 13, 1998, a memorandum of which was recorded on December 1, 1998 in the Clerk's Office in Conveyance Book 2997, folio 64. 8. Seventh Lease Amendment by and between Alton, as successor lessor, and Sublandlord, as lessee, dated May 8, 2000, a memorandum of which was recorded on May 15, 2000 in the Clerk's Office in Conveyance Book 3030, folio 360. Exhibit F Leased Equipment [To list all leased equipment. Subset of Exhibit B.]
WAREHOUSE MAINTENANCE & SERVICE VENDORS Exhibit F Service Vendor Copy Recvd Monthly Payment Term Begin Term End Assumed - --------------------------------------------------------------------------------------------------------------------------- Baltimore: Copiers Xerox (1) X 29.35 13-Dec-01 31-Dec-06 Y Copiers Konica (2) X 99.88 14-Feb-03 13-Feb-08 Y Copiers Konica (2) X 67.34 14-Feb-03 13-Feb-08 Y Copiers Konica (2) X 145.98 9-Dec-03 9-Dec-08 Y Copiers Konica X 135.52 14-Feb-03 13-Feb-08 Y Copiers Nec Financial Services X Provider for 7 KonicasVariable as Variable as above. Y - --------------------------------------------------------------------------------------------------------------------------- Dunmore: Copiers (GE Servicing) Pitney Bowes(1) X 425 26-Sep-00 25-Sep-05 Y Copiers Xerox (1) X 246.73 31-Dec-01 30-Dec-06 Y Copiers Konica X 211.88 14-Nov-03 13-Nov-08 Y Copiers Konica X 145.98 No InformatioNo Information. Y Copiers Konica X 196.21 14-Feb-03 13-Feb-08 Y Copiers Konica (2) X 162.12 14-Feb-03 13-Feb-08 Y Nec Financial Services X Provider for 5 KonicasVariable as Variable as above. Y Storage Crown Distribution LLC (2) X 1-Oct-04 Until Terminated. Y - --------------------------------------------------------------------------------------------------------------------------- Central Islip: Copiers Xerox (5) X 475.86 20-Nov-02 19-Nov-07 Y Copiers Konica X 79.81 4-Aug-04 3-Aug-09 Y Copiers Konica X 72.53 4-Aug-04 3-Aug-09 Y Copiers Nec Financial Services Inc X Provider for 2 KonicasVariable as Variable as above. Y - --------------------------------------------------------------------------------------------------------------------------- New Orleans: Copiers Konica (2) X 72.29 3-Apr-03 2-Apr-08 Y Copiers Konica X 99.88 3-Apr-03 2-Apr-08 Y Copiers Konica X 162.12 3-Apr-03 2-Apr-08 Y - --------------------------------------------------------------------------------------------------------------------------- Corporate: * Note these contracts will only apply to facilities/locations C&S assumes as related to this transaction* - --------------------------------------------------------------------------------------------------------------------------- Notes: Note: There are no contracts in place for waste removal. All in legal review. We'll exclude these locations in the final agreement. Note: Some management personnel in the 4 facilities have company-paid Blackberries, so C&S may get questions from those people as to whether or not they will get this "perk" from C&S.
Exhibit G-1 Special Warranty Deed for the Dunmore Owned Facility Prepared by and return to: Parcel Number: ______________ THIS INDENTURE made the ____ day of ___________, 2005, BETWEEN __________________________________________________________________, a _____________________ (hereinafter called the Grantor), of the one part, and ___________________________________ (hereinafter called the Grantee), of the other part, WITNESSETH That the said Grantor for and in consideration of the sum of ______________________________Dollars (________________ _________), lawful money of the United States of America, unto it well and truly paid by the said Grantee, at or before the sealing and delivery hereof, the receipt whereof is hereby acknowledged, has granted, bargained and sold, released and confirmed, and by these presents does grant, bargain and sell, release and confirm unto the said Grantee, successors and assigns, ALL THAT CERTAIN lot or piece of ground more particularly described on Exhibit "A" attached hereto and made a part hereof. BEING [INSERT RECITAL, UNLESS INCLUDED ON EXHIBIT "A"]. UNDER AND SUBJECT, nevertheless, to the restrictions, covenants, easements and conditions listed on Exhibit "B" attached hereto and made a part hereof. TOGETHER with [add appurtenant easements]. TOGETHER with all and singular the buildings and improvements, ways, streets, alleys, driveways, waters, water-courses, rights, liberties, privileges, hereditaments and appurtenances, whatsoever unto the hereby granted premises belonging, or in any wise appertaining, and the reversions and remainders, rents, issues, and profits thereof; and all the estate, right, title, interest, property, claim and demand whatsoever of it, the said Grantor, as well at law as in equity, of, in, and to the same. TO HAVE AND TO HOLD the said lots or pieces of ground above described, with the messuage or tenement thereon erected, hereditaments and premises hereby granted, or mentioned and intended so to be, with the appurtenances, unto the said Grantee, its successors and assigns, to and for the only proper use and behoove of the said Grantee, its successors and assigns forever. UNDER AND SUBJECT, as aforesaid. AND the said Grantor, for itself, its successors and assigns, does hereby WARRANTY SPECIALLY the property hereby conveyed. IN WITNESS WHEREOF, the party of the first part hereunto has caused these presents to be duly executed by its authorized officer, the day and year first above written. __________________________________, a _______________________________ By:_________________________________ (Corporate Seal) STATE OF NEW JERSEY [__________________] : : SS COUNTY OF __________________ : On this, the _____ day of _______________, 2005, before me, a Notary Public in and for the State and County aforesaid, the undersigned officer, personally appeared ______________________________, who acknowledged himself/herself to be the _______________________of _____________________, a corporation, and that he/she as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself/herself as such officer. IN WITNESS WHEREOF, I have hereunto set my hand and official seal. ________________________________________ NOTARY PUBLIC My Commission Expires: The address of the above named Grantee is: _____________________________ _____________________________ ________________________________________ On behalf of the Grantee EXHIBIT "A" Legal Description EXHIBIT "B" Permitted Title Exceptions Exhibit G-2 ACT OF CASH SALE * UNITED STATES OF AMERICA * BY * STATE OF * [Name of Seller] * PARISH/COUNTY OF * TO * and * [Name of Buyer] * STATE OF * * PARISH/COUNTY OF * * * * * * * * * * * * * * * * * ** * * * BE IT KNOWN, that on this ______ day of ______________, 2005, before me, a Notary Public, duly commissioned and qualified in and for the State of , Parish/County of _____________, and in the presence of the undersigned competent witnesses, personally came and appeared: [Name of Seller], a _______________ (the "Seller"), which is represented herein by _______________, its _______________, who has been duly authorized to act herein by virtue of the resolutions, a certified copy or extract of which is attached hereto as Exhibit "C"; Mailing Address: 470 Chestnut Ridge Road Woodcliff Lake, NJ 07677 Taxpayer Identification No.: xx-xxx______ who, having been duly sworn, declared that it does hereby grant, bargain, sell, convey, transfer, assign, set over, abandon and deliver, with warranty of title with respect to claims by, through or under Seller but not otherwise but with substitution and subrogation in and to any and all rights and actions in warranty against all prior owners and vendors, unto: [Name of Buyer], a _______________ (the "Buyer"), represented herein by _______________, its _______________, who has been duly authorized to act herein ; Mailing Address: 7 Corporate Drive Keene, New Hampshire 03431 Taxpayer Identification No.: xx-xxx___________ here present accepting, and purchasing for itself and its successors and assigns, and acknowledging due delivery and possession thereof, all and singular the property described in Exhibit "A" attached hereto and made a part hereof (the "Property"). To have and to hold the Property unto Buyer, and Buyer's successors and assigns forever. This sale is made and accepted for and in consideration of the price and sum of ______________________________ ($____________), cash, which Buyer has well and truly paid, in ready and current money, to Seller, which hereby acknowledges the receipt thereof and grants full acquittal and discharge therefore. Seller does hereby assign to Buyer all of Seller's right, title and interest in and to all governmental approvals, permits and licenses pertaining to the Property and expropriation awards and other similar incorporeal rights and interests, if any, with respect to the Property. This conveyance is made and accepted subject to the restrictive covenants, servitudes, encumbrances and other matters of public record listed on Exhibit "B" hereto and made a part hereof (the "Permitted Exceptions"). By acquiring the Property subject to the Permitted Exceptions, Buyer does not acknowledge the validity or enforceability of those matters for any purpose, including, but not limited to, interruption of prescription. The parties declared that all taxes up to and including taxes due and eligible in 2004 are paid in full. Taxes for the year 2005 are prorated between the parties based on the 2004 tax bill [unless the 2005 is then available]. Pursuant to La. R.S. ss. 9:2721(B), Buyer is responsible for all property taxes and assessments for and after the year 2005, and the address to which property tax and assessment notices are to be mailed is Buyer's address as set forth above. The parties waive the production of mortgage and conveyance certificates and tax researches and relieve and release the undersigned notaries public from any liability in connection therewith. The parties further acknowledge that the undersigned notaries public have not performed an examination of the title to the Property and express no opinion on the title to the Property. THUS DONE AND PASSED by Seller, in _______________, ____________, on the ______ day of _______________, 2005, in the presence of the undersigned competent witnesses, who hereunto sign their names with Seller and me, Notary, after due reading of the whole. WITNESSES: SELLER: [Name of Seller] _______________________________ Print Name:____________________ By:________________________________ Print Name:________________________ Print Name:____________________ Title:_____________________________ ____________________________ Notary Public My Commission Expires: THUS DONE AND PASSED by Buyer, in _______________, ____________, on the ______ day of _______________, 2005, in the presence of the undersigned competent witnesses, who hereunto sign their names with Buyer and me, Notary, after due reading of the whole. WITNESSES: BUYER: [Name of Buyer] ______________________________ Print Name:___________________ By:______________________________ Print Name:______________________ Print Name:___________________ Title:___________________________ ________________________ Notary Public My Commission Expires: EXHIBIT "A" Legal Description EXHIBIT "B" Permitted Exceptions EXHIBIT "C" Certified Copy of Seller's Board Resolution Authorizing Sale Exhibit G-3 Form of Maryland Deed THIS DEED, Made this day of , 2005, by and between _________________________, Grantor, party of the first part and _______________________, Grantee, party of the second part. WITNESSETH, That in consideration of the sum of ______________________________________, the actual consideration paid and other good and valuable considerations, the receipt of which is hereby acknowledged, the said party of the first part does grant and convey to the party of the second part, its successors and/or assigns, in fee simple, all that parcel of land situate in __________________, State of Maryland, and described as follows, that is to say: SEE LEGAL DESCRIPTION ATTACHED HERETO. BEING the same property described in a Deed dated __________________ and recorded among the Land Records of __________________ in Liber _____, folio _____, from __________________________to _________________________, the grantor herein. BY the execution of this Deed, the party of the first part hereby certifies under the penalties of perjury that the actual consideration paid or to be paid, including the amount of any mortgage or deed of trust outstanding, is as hereinbefore set forth. GRANTOR certifies that this conveyance is not part of a transaction in which there is a sale, lease, exchange or other transfer of all or substantially all of the property and assets of the said corporate grantor. TOGETHER WITH the buildings thereupon, and the rights, alleys, ways, waters, privileges, appurtenances and advantages thereto belonging, or in anywise appertaining. AND the said party of the first part hereby covenants that it has not done or suffered to be done any act, matter or thing whatsoever, to encumber the property hereby conveyed; that it will warrant specially the property hereby granted; and that it will execute such further assurances of the same as may be requisite. TO HAVE AND TO HOLD the described parcel of land and premises to the said party of the second part, its successors and/or assigns, in fee simple. IN WITNESS WHEREOF, Grantor has executed this Deed under seal on the day and year herein first written. WITNESS: _______________________________ BY:______________________(SEAL) Name: Title: SEE SEPARATE PAGE FOR ACKNOWLEDGEMENT AND CERTIFICATION -2- STATE OF , CITY/COUNTY OF , to wit: I HEREBY CERTIFY, That on this day of , 2005, before me, the subscriber, a Notary Public of the State aforesaid, personally appeared who acknowledged him/herself to be the of ________________________ a corporation, and that he/she as such , being authorized so to do, executed the foregoing instrument for the purposes therein contained by signing in my presence, the name of the corporation by him/herself as such . IN WITNESS WHEREOF, I hereunto set my hand and official seal. ______________________________ NOTARY PUBLIC My Commission Expires:______________ THIS IS TO CERTIFY THAT THE WITHIN INSTRUMENT HAS BEEN PREPARED BY OR UNDER THE SUPERVISION OF THE UNDERSIGNED MARYLAND ATTORNEY. ______________________________ RETURN TO: Commonwealth Land Title Insurance Company 31 Light Street Suite 500 Baltimore, Maryland 21202 File No. -3- EXHIBIT A -4- Exhibit H Permits and Licenses [To be verified by A&P] A. Federal US Dept of Agriculture - Meat/Poultry Handlers US Dept of Agriculture - PACA License US Dept of Agriculture - Plant Import Permit / Distribution License US Drug Enforcement Agency - Chemical Control Registration [US Environmental Protection Agency - Ammonia and Lead Acid Batteries] US Food & Drug Administration - Food Facility Registrations US Dept of Transportation - ICC Authority US Dept of Transportation - USDOT Number US Dept of Treasury - Special Tax Stamp Louisiana LA Dept of Health - Permit to Operate Multiple Food Warehouse LA Dept of Agriculture, Division of Measures & Weights - Scales Maryland MD Dept of Agriculture - Egg Inspection MD Dept of Agriculture - Seedman's Permit MD Dept of Environmental Resources - Certificate of Occupancy MD Dept of Health - Food Processing Plant License & Shellstock Shipper MD Dept of Health - Milk Distribution License Traders License Wastewater Discharge Permit New York NY Dept of Agriculture - Food Warehouse License NYS Dept of Env Control - Registration for Solid Waste Management Suffolk County Dept of Health - Permit to Operate a Toxic or Haz Mat Storage Facility Town of Islip, Div of Code Enforcement - Storage of Haz-Mat/Flam Comp Gas-Propane Town of Islip, Dept of Env Control, Permit to Operate Transfer Station/Recycling Center Pennsylvania Dunmore Board of Health - Certificate of Occupancy Dunmore Board of Health - License to Operate a Public Eating/Drinking Place PA Department of Health, Drug & Device Registration - Distributor (Non-Prescription) PA Department of Labor & Industry - Boiler or Pressure Vessel Operation PA Department of Revenue - Sales Tax License DE Division of Professional License - Pharmacy-Wholesale Exhibit J Lease Documents Islip Facility Lease Lease between Central Islip - Grocery, LLC, as lessor and Waldbaum, Inc., as lessee, dated February 13, 2001. Baltimore Facility Lease Lease between Baltimore-Grocery, LLC, as lessor, and the Great Atlantic & Pacific Tea Company, Inc., as lessee, dated February 13, 2001. New Orleans Facility Lease 1. Lease dated October 14, 1950, by and between Jones-Brown Realty Company, Inc. ("Jones-Brown"), as lessor, and The Great Atlantic & Pacific Tea Company, Inc. ("Sublandlord"), as lessee, a memorandum of which was recorded on December 8, 1950, in the Office of the Clerk and Ex-Officio Recorder of Jefferson Parish, Louisiana (the "Clerk's Office) in Conveyance Book 295, folio 661. 2. Supplemental Lease between Jones-Brown, as lessor, and Sublandlord, as lessee, dated February 19, 1951, a memorandum of which was recorded on March 2, 1950 in the Clerk's Office in Conveyance Book 299, folio 295. 3. Second Supplemental Lease between New York Life Insurance Company, as successor lessor, and Sublandlord, as lessee, dated November 20, 1957, which was recorded in the Clerk's Office in Conveyance Book 634, folio 851. 4. Third Supplemental Lease between Boyle Trust and Investment Company, as successor lessor ("Boyle"), and Sublandlord, as lessee, dated January 16, 1967, which was recorded on January 20, 1967 in the Clerk's Office in Conveyance Book 651, folio 74. 5. Fourth Lease Amendment and Extension Agreement between Boyle, as successor lessor, and Sublandlord, as lessee, dated September 22, 1986, which was recorded in the Clerk's Office on December 15, 1986 in Conveyance Book 1620, folio 284. 6. Fifth Lease Amendment between Alton Ochsner Medical Foundation, as successor lessor ("Alton"), and Sublandlord, as lessee, dated December 6, 1995, a memorandum of which was recorded in the Clerk's Office on August 30, 1996 in Conveyance Book 2945, folio 729. 7. Sixth Lease Amendment by and between Alton, as successor lessor, and Sublandlord, as lessee, dated November 13, 1998, a memorandum of which was recorded on December 1, 1998 in the Clerk's Office in Conveyance Book 2997, folio 64. 8. Seventh Lease Amendment by and between Alton, as successor lessor, and Sublandlord, as lessee, dated May 8, 2000, a memorandum of which was recorded on May 15, 2000 in the Clerk's Office in Conveyance Book 3030, folio 360. -2- Schedule 1.1 Excluded Assets Contracts not assigned to Purchaser. Schedule 4.1(e)(vi) Written Notice of Non-Compliance UST issues as set forth on Schedule 4.1(o). Schedule 4.1(e)(vii) Written Notice of Repairs Schedule 4.1(h) Necessary Repairs New Orleans Roof UST issues as set forth on 4.1(o) Results from site visits to occur week of 6/20 Wall in Islip Repairs pursuant to Section 8.19 of this Agreement. Schedule 4.1(j) Litigation The Great Atlantic & Pacific Tea Company, Inc. v. Centimark Corporation (settled) UST issues as set forth on 4.1(o) See attached claims. Created by WHSEOPEN SIGMA. ID: RSGGAP BY--ITEM options currently in effect are: PTBY: BY WHSE NOPR NEWPAGE SET &B01 BY COV_MAJOR_T NOPR NEWPAGE SET &B02 BY I NLIT NOPR NEWPAGE SET &B03 BY ID_OCCUR_DATE NOPR SET &B04 BY WHSE NOPR NEWPAGE SET &B01 BY COV_MAJOR_T NOPR NEWPAGE SET &B02 BY INLIT NOPR NEWPAGE SET &B03 BY ID_OCCUR_DATE NOPR SET &B04 DEFINE items in effect: DEFINE WHSE AS A15 HEADING EXPR= LOC_ORACLE DECODE('0008'='NEW ORLEANS', '0016'='CENTRAL ISLIP','0020'='DUNMORE', '0030'='BALTIMORE',ELSE='OTHER') DEFINE INLIT AS A15 HEADING EXPR= IF LGL_FLAG = 'Y' THEN 'IN LITIGATION' ELSE 'NOT LITIGATED' DEFINE LOC1T AS A15 HEADING EXPR= LOC_LVL1 CATB '--' CAT LOC_LVL1_T Report is per claimant. Generated 06/08/2005 on data valued as of 06/07/2005 using SIGMA version 04.20. No report footing in effect at this time. Display formats currently in effect are: ....Format for dollars is: AS 99,999,999PR .....Format for counts is: AS 999,999 ...Format for percents is: AS 999.999 .....Format for ratios is: AS 9999.9999 Report options currently in effect are: ...........Per claim/occurrence is: Per claim (CLAIMID, TOTVAL, et al) .....Base date of annual period is: \ ..Annual period inception month is: > No time item ...............Reporting period is: / ..........Annual inflation rate is: 00.00% ...............Inflated to date is: 06/08/2005 ................Evaluation date is: 06/07/2005 Selection criteria currently in effect: LOC_ORACLE AMONG('0008','0016','0020','0030') STATUS = 'O' DELETE_FLAG NE 'Y' Report title currently in effect is: THE GREAT ATLANTIC & PACIFIC TEA COMPANY fold OPEN LOSSES AS OF JUNE 7, 2 PAGE 1 THE GREAT ATLANTIC & PACIFIC TEA COMPANY OPEN LOSSES AS OF JUNE 7, 2005 BALTIMORE WORKERS' COMPENSATION IN LITIGATION
Date Date Claim Claim Adjuster Claim Total Claim Total Claim Total Claim Identification Occurred Notified O/F Closed Cov Location Paid to Date $ Outstanding $ Total Incurred $ - -------------------------------- ---------------- ---------------- ------ ---------------- ------ --------------- S861111081644001 06/17/93 06/24/93 O 10/31/01 127 22181--BALTIMORE 101,100 44,597 145,697 S8611DQX19001001 05/07/00 05/09/00 O 08/17/01 127 22181--BALTIMORE 11,830 7,737 19,567 S8611DQX27016001 01/17/02 02/28/02 O 11/24/04 624 22181--BALTIMORE 33,218 3,712 36,930
Generated 06/08/2005 on data valued as of 06/07/2005 using SIGMA version 04.20. Created by WHSEOPEN SIGMA. PAGE 2 THE GREAT ATLANTIC & PACIFIC TEA COMPANY OPEN LOSSES AS OF JUNE 7, 2005 BALTIMORE WORKERS' COMPENSATION NOT LITIGATED
Date Date Claim Claim Adjuster Claim Total Claim Total Claim Total Claim Identification Occurred Notified O/F Closed Cov Location Paid to Date $ Outstanding $ Total Incurred $ -------------------------------- ---------------- ---------------- ------ ---------------- ------ --------------- S8611DQX29703001 09/23/02 09/24/02 O 10/31/03 127 22181--BALTIMORE 82,049 20,701 102,750 S8611DQX30582001 11/19/02 11/19/02 O 08/31/04 127 22181--BALTIMORE 20,935 12,315 33,250 S8611DQX30897001 12/14/02 12/16/02 O N/A 127 22181--BALTIMORE 89,248 4,852 94,100 S8611DQX32660001 04/24/03 05/02/03 O 01/08/05 127 22181--BALTIMORE 37,997 10,703 48,700 S8611DQX32686001 05/05/03 05/05/03 O 03/09/04 127 22181--BALTIMORE 48,055 6,256 54,311 S8611DQX33323001 06/26/03 06/27/03 O N/A 127 22181--BALTIMORE 79,643 48,023 127,666 S8611DQX33710001 08/04/03 08/04/03 O 08/31/04 127 22181--BALTIMORE 14,027 4,903 18,930 S8611DQX35204001 12/21/03 12/24/03 O 02/20/04 127 22381--BALTIMORE 6,140 11,436 17,576 S8611DQX35658001 01/29/04 02/20/04 O 07/30/04 127 22181--BALTIMORE 6,942 13,698 20,640 S8611DQX35796001 03/04/04 03/08/04 O 11/10/04 127 22181--BALTIMORE 9,368 5,073 14,441 S8611DQX36437001 05/26/04 05/27/04 O N/A 127 22181--BALTIMORE 9,508 2,642 12,150 S8611DQX36440001 05/27/04 05/28/04 O 10/29/04 127 22181--BALTIMORE 7,024 26,141 33,165 S8611DQX36469001 05/28/04 06/02/04 O 12/10/04 127 22481--BALTIMORE 575 20,204 20,779 S8611DQX36503001 06/03/04 06/04/04 O 07/29/04 127 22381--BALTIMORE 3,379 7,989 11,368 S8611DQX37077001 09/08/04 09/15/04 O N/A 127 22181--BALTIMORE 32,807 15,833 48,640 S8611DQX37154001 09/28/04 09/29/04 O 01/28/05 127 22181--BALTIMORE 3,147 9,492 12,639 S8611DQX37618001 01/04/05 01/05/05 O N/A 127 22181--BALTIMORE 9,653 27,365 37,018 S8611DQX37744001 01/31/05 01/31/05 O N/A 127 22181--BALTIMORE 229 14,434 14,663 S8611DQX37896001 02/27/05 02/28/05 O N/A 127 22381--BALTIMORE 5,942 13,318 19,260 S8611DQX37930001 03/03/05 03/04/05 O N/A 127 22381--BALTIMORE 500 4,500 5,000 S8611DQX38071001 03/29/05 03/30/05 O N/A 127 22181--BALTIMORE 1,769 10,591 12,360 S8611DQX38181001 04/02/05 04/06/05 O N/A 127 22181--BALTIMORE 4,809 15,782 20,591 S8611DQX38182001 04/06/05 04/06/05 O N/A 127 22181--BALTIMORE 1,956 344 2,300 S8611DQX38424001 04/28/05 04/28/05 O N/A 127 22181--BALTIMORE 428 1,872 2,300 S8611DQX38438001 04/30/05 04/30/05 O N/A 127 22181--BALTIMORE 635 1,665 2,300 S8611DQX38626001 05/05/05 06/01/05 O N/A 127 22381--BALTIMORE 0 4,300 4,300 S8611DQX38466001 05/06/05 05/06/05 O N/A 127 22381--BALTIMORE 19 12,238 12,257 S8611DQX38507001 05/06/05 05/10/05 O N/A 127 22381--BALTIMORE 16 2,284 2,300 S8611DQX38523001 05/11/05 05/13/05 O N/A 127 22181--BALTIMORE 13 4,787 4,800 S8611DQX38524001 05/11/05 05/13/05 O N/A 127 22181--BALTIMORE 84 6,286 6,370 S8611DQX38614001 05/14/05 05/31/05 O N/A 127 22181--BALTIMORE 0 6,800 6,800 S8611DQX38564001 05/20/05 05/23/05 O N/A 127 22281--BALTIMORE 0 4,800 4,800 S8611DQX38587001 05/22/05 05/25/05 O N/A 127 22381--BALTIMORE 0 4,800 4,800 S8611DQX38573001 05/24/05 05/24/05 O N/A 126 22181--BALTIMORE 0 2,300 2,300
Generated 06/08/2005 on data valued as of 06/07/2005 using SIGMA version 04.20. Created by WHSEOPEN SIGMA. PAGE 3 THE GREAT ATLANTIC & PACIFIC TEA COMPANY OPEN LOSSES AS OF JUNE 7, 2005 CENTRAL ISLIP GENERAL LIABILITY IN LITIGATION
Date Date Claim Claim Adjuster Claim Total Claim Total Claim Total Claim Identification Occurred Notified O/F Closed Cov Location Paid to Date $ Outstanding $ Total Incurred $ -------------------------------- ---------------- ---------------- ------ ---------------- ------ --------------- S861177649159001 08/29/02 01/28/03 O N/A 179 77281--MEAT WHSE 2,931 24,569 27,500
Generated 06/08/2005 on data valued as of 06/07/2005 using SIGMA version 04.20. Created by WHSEOPEN SIGMA. PAGE 4 THE GREAT ATLANTIC & PACIFIC TEA COMPANY OPEN LOSSES AS OF JUNE 7, 2005 CENTRAL ISLIP GENERAL LIABILITY NOT LITIGATED
Date Date Claim Claim Adjuster Claim Total Claim Total Claim Total Claim Identification Occurred Notified O/F Closed Cov Location Paid to Date $ Outstanding $ Total Incurred $ -------------------------------- ---------------- ---------------- ------ ---------------- ------ --------------- S861177650675001 06/25/02 05/09/03 O N/A 179 77281--MEAT WHSE 1,263 22,738 24,000 S861177660047001 06/02/04 07/13/04 O N/A 179 77181--WHSE/DIST 6,436 23,564 30,000 S861177663494001 06/21/04 11/10/04 O N/A 179 77181--WHSE/DIST 290 1,710 2,000
Generated 06/08/2005 on data valued as of 06/07/2005 using SIGMA version 04.20. Created by WHSEOPEN SIGMA. PAGE 5 THE GREAT ATLANTIC & PACIFIC TEA COMPANY OPEN LOSSES AS OF JUNE 7, 2005 CENTRAL ISLIP WORKERS' COMPENSATION IN LITIGATION
Date Date Claim Claim Adjuster Claim Total Claim Total Claim Total Claim Identification Occurred Notified O/F Closed Cov Location Paid to Date $ Outstanding $ Total Incurred $ -------------------------------- ---------------- ---------------- ------ ---------------- ------ --------------- S439494302357001 02/12/90 07/12/91 O N/A 127 77181--WHSE/DIST 91,694 6,129 97,824 S439494302303001 04/10/90 07/12/91 O N/A 127 77181--WHSE/DIST 31,779 68,391 100,170 S439494302360001 05/28/91 07/12/91 O N/A 127 77181--WHSE/DIST 43,186 7,220 50,407
Generated 06/08/2005 on data valued as of 06/07/2005 using SIGMA version 04.20. Created by WHSEOPEN SIGMA. PAGE 6 THE GREAT ATLANTIC & PACIFIC TEA COMPANY OPEN LOSSES AS OF JUNE 7, 2005 CENTRAL ISLIP WORKERS' COMPENSATION NOT LITIGATED
Date Date Claim Claim Adjuster Claim Total Claim Total Claim Total Claim Identification Occurred Notified O/F Closed Cov Location Paid to Date $ Outstanding $ Total Incurred $ -------------------------------- ---------------- ---------------- ------ ---------------- ------ --------------- S439494326748001 08/25/89 03/30/93 O N/A 127 77181--WHSE/DIST 6,917 3,051 9,968 S439494302397001 11/13/89 07/12/91 O 06/16/93 127 77181--WHSE/DIST 2,790 18,587 21,377 S439494302349001 09/13/90 07/12/91 O N/A 127 77181--WHSE/DIST 45,890 21,906 67,796 S861194305552001 08/29/91 09/10/91 O 05/04/94 127 77181--WHSE/DIST 52,918 11,195 64,113 S861194308923001 11/13/91 11/20/91 O 09/10/94 127 77181--WHSE/DIST 10,917 2,763 13,680 S861194311074001 01/10/92 01/21/92 O 07/10/93 127 77181--WHSE/DIST 28,606 38,869 67,475 S861194316650001 06/01/92 06/09/92 O N/A 127 77181--WHSE/DIST 498,923 14,414 513,337 S861194318887001 07/27/92 07/31/92 O N/A 127 77181--WHSE/DIST 270,962 13,003 283,965 S861194320071001 08/26/92 09/03/92 O N/A 127 77181--WHSE/DIST 78,375 10,470 88,845 S861194320978001 09/25/92 10/01/92 O 04/21/93 127 77181--WHSE/DIST 1,938 14,107 16,045 S861194325099001 01/25/93 02/04/93 O N/A 127 77181--WHSE/DIST 301,533 14,167 315,700 S861194327827001 04/28/93 05/05/93 O N/A 127 77181--WHSE/DIST 116,370 39,130 155,500 S861194332614001 06/15/93 11/02/93 O N/A 127 77181--WHSE/DIST 48,674 6,493 55,166 S861194332578001 10/21/93 11/01/93 O N/A 127 77181--WHSE/DIST 241,231 43,894 285,125 S861194333007001 11/12/93 11/16/93 O 01/25/94 127 77181--WHSE/DIST 988 13,135 14,123 S861177602071001 06/14/95 06/14/95 O 03/09/96 127 77181--WHSE/DIST 107,513 8,747 116,260 S861177603543001 09/16/95 09/18/95 O N/A 127 77181--WHSE/DIST 187,890 89,810 277,700 S861177604152001 10/31/95 11/01/95 O N/A 127 77181--WHSE/DIST 148,640 56,167 204,807 S861177609457001 04/15/96 09/23/96 O N/A 127 77181--WHSE/DIST 153,337 22,110 175,447 S861177612419001 04/14/97 04/17/97 O N/A 127 77181--WHSE/DIST 296,421 65,236 361,658 S861177622868001 12/04/98 01/06/99 O 10/18/01 127 77181--WHSE/DIST 36,965 4,395 41,360 S861177623228001 01/22/99 01/29/99 O N/A 127 77181--WHSE/DIST 119,027 43,302 162,329 S861177624648001 04/07/99 04/07/99 O N/A 127 77181--WHSE/DIST 216,422 68,508 284,930 S861177625578001 05/19/99 06/01/99 O 10/09/01 127 77181--WHSE/DIST 146,579 22,646 169,225 S861177626924001 08/05/99 08/05/99 O 07/31/01 127 77181--WHSE/DIST 152,228 96,322 248,550 S861177629595001 01/07/00 01/10/00 O N/A 127 77181--WHSE/DIST 128,833 18,707 147,540 S861177629951001 02/04/00 02/07/00 O 10/05/01 127 77181--WHSE/DIST 47,998 2,001 49,999 S861177630764001 03/31/00 04/04/00 O N/A 127 77181--WHSE/DIST 89,508 73,892 163,400 S861177633965001 09/29/00 10/02/00 O N/A 127 77181--WHSE/DIST 115,656 34,363 150,018 S861177636182001 03/05/01 03/06/01 O N/A 127 77181--WHSE/DIST 22,675 15,960 38,635 S861177637647001 06/07/01 06/08/01 O N/A 127 77181--WHSE/DIST 73,970 4,334 78,304 S861177639081001 08/06/01 08/08/01 O N/A 127 77181--WHSE/DIST 11,853 1,257 13,110 S861177640249001 10/04/01 10/05/01 O 11/30/01 126 77181--WHSE/DIST 665 65 730 S861177640335001 10/10/01 10/10/01 O N/A 127 77181--WHSE/DIST 42,180 9,762 51,942 S861177641658001 01/02/02 01/07/02 O N/A 127 77181--WHSE/DIST 54,922 9,690 64,612 S861177642056001 01/29/02 01/31/02 O N/A 127 77181--WHSE/DIST 7,412 7,663 15,075 S861177643221001 04/08/02 04/09/02 O N/A 127 77181--WHSE/DIST 36,750 4,241 40,991 S861177643703001 05/06/02 05/06/02 O N/A 127 77181--WHSE/DIST 8,541 2,935 11,476 S861177645229001 07/16/02 07/16/02 O N/A 127 77181--WHSE/DIST 25,170 3,990 29,160 S861177646406001 08/29/02 08/30/02 O N/A 127 77281--MEAT WHSE 95,660 12,783 108,443 S861177648148001 11/25/02 11/26/02 O N/A 127 77181--WHSE/DIST 163,060 31,581 194,641 S861177648149001 11/26/02 11/26/02 O N/A 127 77181--WHSE/DIST 51,336 1,454 52,790
Generated 06/08/2005 on data valued as of 06/07/2005 using SIGMA version 04.20. Created by WHSEOPEN SIGMA. PAGE 7 THE GREAT ATLANTIC & PACIFIC TEA COMPANY OPEN LOSSES AS OF JUNE 7, 2005 CENTRAL ISLIP WORKERS' COMPENSATION NOT LITIGATED
Date Date Claim Claim Adjuster Claim Total Claim Total Claim Total Claim Identification Occurred Notified O/F Closed Cov Location Paid to Date $ Outstanding $ Total Incurred $ -------------------------------- ---------------- ---------------- ------ ---------------- ------ --------------- S861177649852001 12/31/02 03/13/03 O N/A 127 77181--WHSE/DIST 2,252 398 2,650 S861177650825001 01/30/03 05/19/03 O N/A 127 77181--WHSE/DIST 3,498 17,579 21,077 S861177650111001 03/31/03 04/01/03 O N/A 127 77181--WHSE/DIST 30,334 8,716 39,050 S861177650114001 04/01/03 04/01/03 O N/A 127 77181--WHSE/DIST 12,989 10,032 23,021 S861177650405001 04/18/03 04/21/03 O N/A 127 77181--WHSE/DIST 13,840 4,111 17,951 S861177650558001 04/30/03 04/30/03 O N/A 127 77181--WHSE/DIST 577 1,563 2,140 S861177650599001 05/02/03 05/02/03 O N/A 127 77181--WHSE/DIST 21,923 952 22,875 S861177650704001 05/08/03 05/12/03 O N/A 127 77181--WHSE/DIST 22,074 6,576 28,650 S861177651550001 06/25/03 06/30/03 O N/A 127 77181--WHSE/DIST 6,710 3,223 9,933 S861177653034001 06/25/03 09/02/03 O N/A 127 77181--WHSE/DIST 2,619 331 2,950 S861177654174001 07/04/03 10/27/03 O N/A 127 77181--WHSE/DIST 9,272 3,228 12,500 S861177651955001 07/15/03 07/17/03 O N/A 127 77181--WHSE/DIST 6,471 12,029 18,500 S861177652117001 07/21/03 07/22/03 O N/A 127 77181--WHSE/DIST 5,915 1,047 6,962 S861177653032001 09/02/03 09/02/03 O N/A 127 77181--WHSE/DIST 1,503 1,087 2,590 S861177653076001 09/02/03 09/03/03 O N/A 126 77181--WHSE/DIST 482 618 1,100 S861177653496001 09/18/03 09/19/03 O N/A 127 77181--WHSE/DIST 4,286 431 4,717 S861177653570001 09/19/03 09/23/03 O N/A 127 77181--WHSE/DIST 22,919 13,820 36,739 S861177653608001 09/23/03 09/24/03 O N/A 127 77181--WHSE/DIST 21,522 6,458 27,980 S861177654044001 10/20/03 10/20/03 O N/A 126 77181--WHSE/DIST 0 600 600 S861177654278001 10/27/03 11/03/03 O 12/17/03 127 77181--WHSE/DIST 8,897 2,381 11,278 S861177655151001 12/08/03 12/08/03 O N/A 126 77181--WHSE/DIST 3,246 4,304 7,550 S861177655265001 12/15/03 12/15/03 O N/A 127 77181--WHSE/DIST 6,058 1,109 7,167 S861177655847001 01/14/04 01/14/04 O N/A 127 77181--WHSE/DIST 9,248 1,632 10,880 S861177655848001 01/14/04 01/14/04 O N/A 127 77181--WHSE/DIST 30,746 3,857 34,603 S861177656141001 01/26/04 01/26/04 O N/A 127 77181--WHSE/DIST 5,194 1,006 6,200 S861177656372001 02/05/04 02/06/04 O N/A 127 77181--WHSE/DIST 25,552 11,987 37,539 S861177656799001 03/01/04 03/01/04 O N/A 127 77181--WHSE/DIST 22,867 5,562 28,429 S861177657414001 03/31/04 04/01/04 O N/A 126 77181--WHSE/DIST 629 1,221 1,850 S861177658299001 04/15/04 05/11/04 O N/A 127 77181--WHSE/DIST 4,607 543 5,150 S861177657888001 04/16/04 04/23/04 O N/A 127 77181--WHSE/DIST 5,017 3,813 8,830 S861177658373001 05/14/04 05/14/04 O N/A 126 77281--MEAT WHSE 1,276 1,374 2,650 S861177659502001 06/15/04 06/25/04 O N/A 127 77281--MEAT WHSE 8,991 3,344 12,335 S861177659392001 06/21/04 06/22/04 O N/A 127 77281--MEAT WHSE 1,000 1,523 2,523 S861177659559001 06/24/04 06/28/04 O N/A 127 77281--MEAT WHSE 2,469 317 2,786 S861177659563001 06/26/04 06/28/04 O N/A 126 77281--MEAT WHSE 1,056 119 1,175 S861177659660001 06/26/04 06/30/04 O N/A 126 77281--MEAT WHSE 0 500 500 S861177659556001 06/27/04 06/28/04 O N/A 127 77281--MEAT WHSE 8,120 783 8,903 S861177659557001 06/28/04 06/28/04 O N/A 126 77281--MEAT WHSE 0 500 500 S861177659558001 06/28/04 06/28/04 O N/A 126 77281--MEAT WHSE 0 500 500 S861177659659001 06/30/04 06/30/04 O N/A 127 77281--MEAT WHSE 7,556 894 8,450 S861177659711001 07/02/04 07/02/04 O N/A 126 77281--MEAT WHSE 0 0 0 S861177659872001 07/05/04 07/07/04 O N/A 127 77281--MEAT WHSE 6,881 7,669 14,550
Generated 06/08/2005 on data valued as of 06/07/2005 using SIGMA version 04.20. Created by WHSEOPEN SIGMA. PAGE 8 THE GREAT ATLANTIC & PACIFIC TEA COMPANY OPEN LOSSES AS OF JUNE 7, 2005 CENTRAL ISLIP WORKERS' COMPENSATION NOT LITIGATED
Date Date Claim Claim Adjuster Claim Total Claim Total Claim Total Claim Identification Occurred Notified O/F Closed Cov Location Paid to Date $ Outstanding $ Total Incurred $ -------------------------------- ---------------- ---------------- ------ ---------------- ------ --------------- S861177660653001 07/30/04 07/30/04 O N/A 127 77281--MEAT WHSE 6,800 528 7,328 S861177661506001 08/27/04 08/27/04 O N/A 127 77281--MEAT WHSE 353 147 500 S861177661849001 09/06/04 09/07/04 O N/A 127 77281--MEAT WHSE 9,378 7,797 17,175 S861177661848001 09/07/04 09/07/04 O N/A 127 77281--MEAT WHSE 5,927 4,582 10,509 S861177662127001 09/15/04 09/16/04 O N/A 126 77181--WHSE/DIST 0 0 0 S861177662945001 10/15/04 10/15/04 O N/A 127 77181--WHSE/DIST 3,329 3,491 6,820 S861177665656001 11/09/04 02/03/05 O N/A 127 77181--WHSE/DIST 6,484 2,357 8,841 S861177663816001 11/18/04 11/24/04 O N/A 127 77181--WHSE/DIST 1,097 287 1,384 S861177663733001 11/22/04 11/22/04 O N/A 127 77181--WHSE/DIST 4,129 3,421 7,550 S861177664046001 12/02/04 12/02/04 O N/A 127 77181--WHSE/DIST 5,514 2,281 7,795 S861177664120001 12/03/04 12/06/04 O N/A 126 77181--WHSE/DIST 1,135 1,765 2,900 S861177664121001 12/05/04 12/06/04 O N/A 127 77181--WHSE/DIST 1,902 3,398 5,300 S861177664154001 12/08/04 12/08/04 O N/A 127 77181--WHSE/DIST 2,167 1,633 3,800 S861177664473001 12/16/04 12/16/04 O N/A 127 77181--WHSE/DIST 629 401 1,030 S861177664528001 12/18/04 12/20/04 O N/A 127 77181--WHSE/DIST 0 1,550 1,550 S861177664646001 12/22/04 12/23/04 O N/A 126 77181--WHSE/DIST 1,725 1,675 3,400 S861177664800001 12/22/04 12/28/04 O N/A 127 77181--WHSE/DIST 6,952 1,190 8,142 S861177664799001 12/28/04 12/28/04 O N/A 130 77181--WHSE/DIST 0 500 500 S861177665141001 01/10/05 01/12/05 O N/A 126 77181--WHSE/DIST 348 1,982 2,330 S861177665142001 01/10/05 01/12/05 O N/A 126 77181--WHSE/DIST 444 756 1,200 S861177665361001 01/16/05 01/20/05 O N/A 127 77181--WHSE/DIST 3,137 3,120 6,257 S861177665276001 01/17/05 01/17/05 O N/A 130 77181--WHSE/DIST 0 250 250 S861177665447001 01/24/05 01/24/05 O N/A 130 77181--WHSE/DIST 0 250 250 S861177665488001 01/25/05 01/26/05 O N/A 127 77181--WHSE/DIST 10,849 1,068 11,917 S861177665655001 01/25/05 02/03/05 O N/A 127 77181--WHSE/DIST 334 483 817 S861177665735001 02/05/05 02/07/05 O N/A 126 77181--WHSE/DIST 0 500 500 S861177665800001 02/09/05 02/09/05 O N/A 127 77181--WHSE/DIST 5,985 3,799 9,784 S861177665801001 02/09/05 02/09/05 O N/A 126 77181--WHSE/DIST 0 980 980 S861177665873001 02/14/05 02/14/05 O N/A 126 77181--WHSE/DIST 0 500 500 S861177665981001 02/20/05 02/21/05 O N/A 127 77181--WHSE/DIST 2,095 4,045 6,140 S861177665982001 02/21/05 02/21/05 O N/A 126 77181--WHSE/DIST 0 500 500 S861177666507001 03/17/05 03/17/05 O N/A 127 77181--WHSE/DIST 1,535 1,082 2,617 S861177667566001 03/21/05 05/06/05 O N/A 126 77181--WHSE/DIST 0 500 500 S861177667262001 04/04/05 04/25/05 O N/A 127 77181--WHSE/DIST 1,044 1,766 2,810 S859377666877001 04/07/05 04/07/05 O N/A 127 77181--WHSE/DIST 2,873 2,612 5,485 S861177666983001 04/11/05 04/12/05 O N/A 130 77181--WHSE/DIST 0 500 500 S861177667037001 04/15/05 04/15/05 O N/A 127 77181--WHSE/DIST 0 500 500 S861177667111001 04/18/05 04/18/05 O N/A 127 77181--WHSE/DIST 2,138 6,412 8,550 S861177667231001 04/22/05 04/22/05 O N/A 126 77181--WHSE/DIST 472 628 1,100 S861177667232001 04/22/05 04/22/05 O N/A 126 77181--WHSE/DIST 0 500 500 S861177667320001 04/23/05 04/27/05 O N/A 126 77181--WHSE/DIST 11 489 500 S861177667460001 05/02/05 05/03/05 O N/A 126 77181--WHSE/DIST 0 500 500
Generated 06/08/2005 on data valued as of 06/07/2005 using SIGMA version 04.20. Created by WHSEOPEN SIGMA. PAGE 9 THE GREAT ATLANTIC & PACIFIC TEA COMPANY OPEN LOSSES AS OF JUNE 7, 2005 CENTRAL ISLIP WORKERS' COMPENSATION NOT LITIGATED
Date Date Claim Claim Adjuster Claim Total Claim Total Claim Total Claim Identification Occurred Notified O/F Closed Cov Location Paid to Date $ Outstanding $ Total Incurred $ -------------------------------- ---------------- ---------------- ------ ---------------- ------ --------------- S861177667461001 05/02/05 05/03/05 O N/A 126 77181--WHSE/DIST 84 416 500 S861177667780001 05/16/05 05/16/05 O N/A 127 77181--WHSE/DIST 0 500 500 S861177667994001 05/19/05 05/25/05 O N/A 126 77181--WHSE/DIST 0 500 500 S861177667902001 05/21/05 05/23/05 O N/A 127 77181--WHSE/DIST 0 500 500 S861177667992001 05/21/05 05/25/05 O N/A 126 77181--WHSE/DIST 0 500 500 S861177667901001 05/23/05 05/23/05 O N/A 127 77181--WHSE/DIST 0 5,389 5,389 S861177667903001 05/23/05 05/23/05 O N/A 130 77181--WHSE/DIST 0 500 500 S861177667990001 05/23/05 05/25/05 O N/A 126 77181--WHSE/DIST 0 500 500 S861177668054001 05/27/05 05/27/05 O N/A 126 77181--WHSE/DIST 0 500 500 S861177668104001 05/31/05 05/31/05 O N/A 126 77181--WHSE/DIST 0 500 500 S861177668162001 06/02/05 06/02/05 O N/A 126 77181--WHSE/DIST 0 500 500
Generated 06/08/2005 on data valued as of 06/07/2005 using SIGMA version 04.20. Created by WHSEOPEN SIGMA. PAGE 10 THE GREAT ATLANTIC & PACIFIC TEA COMPANY OPEN LOSSES AS OF JUNE 7, 2005 DUNMORE AUTO LIABILITY NOT LITIGATED
Date Date Claim Claim Adjuster Claim Total Claim Total Claim Total Claim Identification Occurred Notified O/F Closed Cov Location Paid to Date $ Outstanding $ Total Incurred $ -------------------------------- ---------------- ---------------- ------ ---------------- ------ --------------- S859321182371001 12/14/00 01/04/01 O 05/11/01 112 20150--DUNMORE, 0 1,250 1,250 S859377664514001 12/10/04 12/20/04 O N/A 112 20150--DUNMORE, 0 2,000 2,000
Generated 06/08/2005 on data valued as of 06/07/2005 using SIGMA version 04.20. Created by WHSEOPEN SIGMA. PAGE 11 THE GREAT ATLANTIC & PACIFIC TEA COMPANY OPEN LOSSES AS OF JUNE 7, 2005 DUNMORE WORKERS' COMPENSATION NOT LITIGATED
Date Date Claim Claim Adjuster Claim Total Claim Total Claim Total Claim Identification Occurred Notified O/F Closed Cov Location Paid to Date $ Outstanding $ Total Incurred $ -------------------------------- ---------------- ---------------- ------ ---------------- ------ --------------- S316221137661001 05/07/82 05/11/82 O 12/30/94 127 20150--DUNMORE, 254,368 28,818 283,185 S861121186457001 07/31/02 08/02/02 O N/A 127 20150--DUNMORE, 3,376 7,624 11,000 S861121187451001 01/27/03 01/28/03 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S861121188034001 04/22/03 05/07/03 O N/A 127 20150--DUNMORE, 19,472 4,901 24,373 S861121189290001 06/10/03 01/09/04 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S861121188701001 08/14/03 09/13/03 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S861121188703001 09/09/03 09/13/03 O N/A 126 20150--DUNMORE, 18 1,132 1,150 S861121188932001 10/21/03 10/27/03 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S861121189494001 02/03/04 02/09/04 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S861121189566001 02/10/04 02/18/04 O N/A 127 20150--DUNMORE, 8,119 2,881 11,000 S861121189567001 02/16/04 02/18/04 O N/A 130 20150--DUNMORE, 0 1 1 S861121189965001 04/28/04 05/05/04 O N/A 126 20150--DUNMORE, 0 1,150 1,150 S861121189966001 04/30/04 05/05/04 O N/A 126 20150--DUNMORE, 6 1,644 1,650 S861121189994001 05/11/04 05/17/04 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S8611ECK20243001 05/24/04 05/26/05 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S861121190242001 07/14/04 07/19/04 O N/A 127 20150--DUNMORE, 6,933 7,367 14,300 S861121190390001 08/25/04 08/27/04 O N/A 127 20150--DUNMORE, 3,064 1,236 4,300 S861121190459001 09/01/04 09/14/04 O N/A 127 20150--DUNMORE, 6,254 10,046 16,300 S861121190468001 09/13/04 09/16/04 O N/A 127 20150--DUNMORE, 0 1,650 1,650 S861121190600001 10/04/04 10/06/04 O N/A 126 20150--DUNMORE, 0 1,150 1,150 S861121190728001 10/07/04 11/24/04 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S861121190644001 10/18/04 10/22/04 O N/A 127 20150--DUNMORE, 6,026 7,039 13,065 S861121190706001 11/08/04 11/16/04 O N/A 126 20150--DUNMORE, 0 1,150 1,150 S861121190710001 11/12/04 11/16/04 O N/A 126 20150--DUNMORE, 750 1,650 2,400 S861121190707001 11/15/04 11/16/04 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S861121190729001 11/22/04 11/24/04 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S861121190789001 12/01/04 12/03/04 O N/A 126 20150--DUNMORE, 0 6,000 6,000 S861121190790001 12/01/04 12/03/04 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S861121190835001 12/14/04 12/16/04 O N/A 126 20150--DUNMORE, 14 4,386 4,400 S861121190836001 12/16/04 12/16/04 O N/A 126 20150--DUNMORE, 0 1,150 1,150 S861121190837001 12/16/04 12/16/04 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S861121190907001 12/27/04 01/07/05 O N/A 126 20150--DUNMORE, 353 147 500 S8611ECK18215001 02/03/05 02/22/05 O N/A 127 20150--DUNMORE, 4,191 5,559 9,750 S8611ECK18393001 02/28/05 03/02/05 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S8611ECK18556001 03/07/05 03/09/05 O N/A 126 20150--DUNMORE, 708 8,442 9,150 S8611ECK18630001 03/10/05 03/11/05 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S8611ECK19315001 04/15/05 04/15/05 O N/A 127 20150--DUNMORE, 1,289 7,374 8,663 S8611ECK19502001 04/20/05 04/25/05 O N/A 126 20150--DUNMORE, 69 2,802 2,871 S8611ECK19517001 04/25/05 04/25/05 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S8611ECK19686001 04/28/05 05/02/05 O N/A 126 20150--DUNMORE, 27 1,623 1,650 S8611ECK19688001 04/29/05 05/02/05 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S8611ECK19887001 04/29/05 05/12/05 O N/A 127 20150--DUNMORE, 305 595 900
Generated 06/08/2005 on data valued as of 06/07/2005 using SIGMA version 04.20. Created by WHSEOPEN SIGMA. PAGE 12 THE GREAT ATLANTIC & PACIFIC TEA COMPANY OPEN LOSSES AS OF JUNE 7, 2005 DUNMORE WORKERS' COMPENSATION NOT LITIGATED
Date Date Claim Claim Adjuster Claim Total Claim Total Claim Total Claim Identification Occurred Notified O/F Closed Cov Location Paid to Date $ Outstanding $ Total Incurred $ -------------------------------- ---------------- ---------------- ------ ---------------- ------ --------------- S8611ECK19702001 05/02/05 05/03/05 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S8611ECK19758001 05/04/05 05/05/05 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S8611ECK19764001 05/04/05 05/05/05 O N/A 126 20150--DUNMORE, 0 650 650 S8611ECK19757001 05/05/05 05/05/05 O N/A 126 20150--DUNMORE, 23 1,627 1,650 S8611ECK19871001 05/09/05 05/11/05 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S8611ECK20404001 05/11/05 06/02/05 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S8611ECK19923001 05/12/05 05/13/05 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S8611ECK20051001 05/16/05 05/18/05 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S8611ECK20053001 05/17/05 05/18/05 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S8611ECK20083001 05/19/05 05/19/05 O N/A 126 20150--DUNMORE, 0 3,550 3,550 S8611ECK20105001 05/19/05 05/20/05 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S8611ECK20440001 05/23/05 06/03/05 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S8611ECK20244001 05/24/05 05/26/05 O N/A 126 20150--DUNMORE, 0 1,650 1,650 S8611ECK20405001 06/01/05 06/02/05 O N/A 126 20150--DUNMORE, 0 1,650 1,650
Generated 06/08/2005 on data valued as of 06/07/2005 using SIGMA version 04.20. Created by WHSEOPEN SIGMA. PAGE 13 THE GREAT ATLANTIC & PACIFIC TEA COMPANY OPEN LOSSES AS OF JUNE 7, 2005 NEW ORLEANS AUTO LIABILITY NOT LITIGATED
Date Date Claim Claim Adjuster Claim Total Claim Total Claim Total Claim Identification Occurred Notified O/F Closed Cov Location Paid to Date $ Outstanding $ Total Incurred $ -------------------------------- ---------------- ---------------- ------ ---------------- ------ --------------- S8593ETL01405001 08/27/04 08/27/04 O N/A 112 47871--HARAHAN, 2,402 348 2,750 S8593ETL01943001 10/16/04 10/18/04 O N/A 112 47871--HARAHAN, 201 2,549 2,750 S8593ETL02146001 11/05/04 11/05/04 O N/A 111 47871--HARAHAN, 0 2,550 2,550 S8593ETL02146002 11/05/04 11/05/04 O N/A 112 47871--HARAHAN, 12,035 339 12,373 S8593ETL02146003 11/05/04 11/05/04 O N/A 112 47871--HARAHAN, 0 0 0
Generated 06/08/2005 on data valued as of 06/07/2005 using SIGMA version 04.20. Created by WHSEOPEN SIGMA. PAGE 14 THE GREAT ATLANTIC & PACIFIC TEA COMPANY OPEN LOSSES AS OF JUNE 7, 2005 NEW ORLEANS WORKERS' COMPENSATION NOT LITIGATED
Date Date Claim Claim Adjuster Claim Total Claim Total Claim Total Claim Identification Occurred Notified O/F Closed Cov Location Paid to Date $ Outstanding $ Total Incurred $ -------------------------------- ---------------- ---------------- ------ ---------------- ------ --------------- S861151384027001 11/07/00 11/08/00 O N/A 127 47181--NEW ORLEA 130,721 26,079 156,800 S861151390465001 04/29/02 04/30/02 O N/A 127 47871--HARAHAN, 47,666 6,997 54,662 S861151392073001 09/17/02 09/19/02 O N/A 127 47871--HARAHAN, 86,079 12,520 98,599 S861151398547001 01/30/04 02/02/04 O N/A 126 47871--HARAHAN, 346 204 550 S8611ETL02200001 11/03/04 11/09/04 O N/A 126 47923--NEW ORLEA 8,848 6,152 15,000 S8593ETL03589001 04/09/05 04/11/05 O N/A 127 47871--HARAHAN, 5,277 12,935 18,212
Generated 06/08/2005 on data valued as of 06/07/2005 using SIGMA version 04.20. Created by WHSEOPEN SIGMA. PAGE 15 THE GREAT ATLANTIC & PACIFIC TEA COMPANY OPEN LOSSES AS OF JUNE 7, 2005
Date Date Claim Claim Adjuster Claim Total Claim Total Claim Total Claim Identification Occurred Notified O/F Closed Cov Location Paid to Date $ Outstanding $ Total Incurred $ -------------------------------- ---------------- ---------------- ------ ---------------- ------ --------------- *GRAND TOTAL 6,095,272 2,016,781 8,112,053 REPORT IS LIMITED TO CLAIMS WHERE: LOC_ORACLE AMONG('0008','0016','0020','0030') STATUS = 'O' DELETE_FLAG NE 'Y'
Generated 06/08/2005 on data valued as of 06/07/2005 using SIGMA version 04.20. Created by WHSEOPEN SIGMA. Schedule 4.1(p)(i)(B) Employment Agreements, Severance Agreements and Severance Plans With Respect to Affected Employees Employment Agreements: None Severance Agreements: None Severance Plans: None except The Great Atlantic & Pacific Tea Company, Inc. Severance Policy Fiscal Year 2005 Schedule 4.1(p)(iii) Contributions Made to Each Multiemployer Pension Plan For the Most Recent 5 Plan Years Teamsters Local 707 Pension Fund: 2004 - $1,114,027. 2003 - 1,100,120. 2002 - 934,845. 2001 - 802,902. 2000 - 1,014,088. Central Pennsylvania Teamsters Pension Fund: 2004 - $423,940. 2003 - 448,888. 2002 - 411,161. 2001 - 414,405. 2000 - 411,201. Operating Engineers Locals 30 and 30A Pension Fund: 2004 - $30,872. 2003 - 41,653. 2002 - 39,544. 2001 - 47,467. 2000 - 51,829. Schedule 8.8 Conveyance Taxes Maryland: State Transfer Tax (.5%) County Transfer Tax (1.5%) Recordation Tax ($5.00/$1000 rounded) Pennsylvania: 2% of Purchase Price Louisiana: N/A New York: N/A Schedule 8.17 IT Services Infrastructure Support Services * Telecom Services * Network Services * Desktop Support Services * RF Support Services * All after hours on-call support services as provided today Application Support Services * Tricepts Warehouse System Support * Chain Stores Warehouse System Support * SMS Stock Locator System * SMS Tote Sorting System * Physical Inventory System * Perishable Warehouse Inventory System * Payroll Support Services * Kronos T&A Support services * Manugistics Routing System * Manugistics Network Transport System * Slot Info - Warehouse Slotting System * Reclamation System * All after hours on-call support services as provided today Schedule 12.1(g) Assumed Collective Bargaining Agreements Baltimore IBT Local 570 Warehousemen (EDP #6000) Exp. 04/02/06 IBT Local 27 Meat (EDP #2307) Exp. 05/14/05 IBT Local 355 Warehouse Maintenance (EDP #2309) Exp. 08/20/05 Dunmore (Supermarket Service Corp.) IBT Local 229 Warehousemen and Drivers Exp. 03/27/06 Islip IBT Local 707 Warehousemen (Waldbaum's) EDP #8010 Exp. 12/18/04 Memorandum of Agreement Extending CBA Exp. 03/11/05 IBT Local 707 Clerks (Waldbaum's) EDP #8009 Exp. 05/07/05 OP Eng Local 30, 30A Maintenance (Waldbaum's) EDP #8005 Exp. 08/20/05 (in negotiations) New Orleans IBT Local 270 Drivers and Warehousemen (EDP #1012) Exp. 10/09/04 IBT Local 270 Maintenance Exp. 10/09/04 IBT Local 270 Agreement Extension Exp. 10/08/06 IBT Local 270 Side Letter to Agreement EX-10 6 ex1039supplyagreement.txt EX. 10.39 SUPPLY AGREEMENT C&S Exhibit 10.39 SUPPLY AGREEMENT BY AND BETWEEN THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. AND C&S WHOLESALE GROCERS, INC. THIS AGREEMENT, made as of the 27th day of June, 2005 (this "Agreement"), is by and between The Great Atlantic & Pacific Tea Company, Inc. and its subsidiaries ("A&P"), a Maryland corporation with its principal office at 2 Paragon Drive, Montvale, New Jersey 07645, and C&S Wholesale Grocers, Inc. ("C&S"), a Vermont corporation with its principal office at 7 Corporate Drive, Keene, New Hampshire 03431. Whereas, A&P desires to exit the distribution business; Whereas, A&P sells groceries and other merchandise through its retail stores under the banners A&P, The Food Emporium, Waldbaum's, Foodmart, Food Basics, Sav-A-Center, and Super Fresh; Whereas, C&S is a wholesale supplier of groceries, perishables and other merchandise sold in supermarkets; Whereas, C&S currently supplies A&P product in a number of item categories (including grocery, frozen, dairy and deli) and the parties desire to continue and expand their relationship by C&S increasing the volume of merchandise C&S supplies to A & P; and Whereas, the current supply relationship is covered in the Master Supply Agreement dated October 27, 2003 (the "Existing Supply Agreement") and the parties deem it in their respective best interest to enter into this Agreement, which covers volume that is separate and apart from the volume covered by the Existing Supply Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter set forth, A&P and C&S, intending to be legally bound, hereby agree as follows: Section 1. Defined Terms. The following capitalized terms shall have the meanings set forth below: 1.1 Term. "Term" means, unless earlier terminated in accordance with the terms of this Agreement, the period from June 27, 2005 until June 27, *. 1.2 Contract Year. "Contract Year" means the twelve-month period commencing on October 9, 2005 and on the anniversary of October 9 thereafter. Each Contract Year consists of four 13-week "Contract Quarters ". Each Contract Year shall begin on October 9 and continue through and include the following October 8. The parties will in good faith attempt to make the beginning and ending of ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. each Contract Quarter coincide with the beginning and ending of A&P's fiscal accounting periods. 1.3 Commencement Date. "Commencement Date" means July 10, 2005. 1.4 Facilities. "Facilities" means collectively the A&P distribution facilities in Islip, New York, Baltimore, Maryland, and Dunmore, Pennsylvania. 1.5 A&P Store Locations. "A&P Store Locations" means the A&P stores set forth on Schedule 1.5. Any new or replacement stores of A&P or any of its subsidiaries or affiliates in the geographic region of any of the A&P Store Locations shall also be supplied by C&S under this Agreement, provided that if A&P purchases a group of 10 or more stores, then, regardless of whether or not C&S has a supply agreement with the former owner of the purchased stores, C&S and A&P will meet and in good faith adjust the terms of this Agreement to the extent of any benefits or costs resulting from such additional volume and the existing agreement, if any. 1.6 Merchandise. "Merchandise" means A&P's entire requirements of grocery, bakery, GM/HBC, candy, spices, meat, deli, seafood, produce, dairy, floral, and certain other merchandise in the product categories carried by C&S or A&P, provided, however, Merchandise does not include products that, as of the Effective Date are not supplied from an A&P or C&S warehouse (i.e., are supplied by direct store delivery ("DSD") vendors), provided, further, if C&S elects to warehouse a DSD item, then A&P will support C&S and will purchase such item from C&S if, and for so long as, A&P in its discretion determines it is cost-competitive to do so taking into account the costs associated with any services provided by the vendor of such product. If A&P decides to have an item of C&S supplied Merchandise become a DSD item, then the parties shall meet and in good faith agree on an appropriate upcharge adjustment if appropriate to keep C&S whole while permitting A&P to receive the net benefits of such change. A&P will in good faith negotiate with C&S with respect to C&S taking over the supply of tobacco, ice, store supplies and front-end candy. 1.7 CPI. "CPI" means the Consumer Price Index for all urban consumers (CPI-U) for New York-Northern New Jersey-Long Island for food and beverages or similar appropriate index chosen by the parties if the CPI is no longer available. 1.8 ECI. "ECI" means the U.S. Department of Labor Employment Cost Index -- Wholesale Trade Excluding Sales Occupations (Series ID ECU11402I) or similar appropriate index chosen by the parties if the ECI is no longer available. 1.9 Shipped Cases/Pieces. C&S will continue to count shipped cases/pieces in a manner that is consistent with A&P's historical practices. ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -2- Section 2. Agreement to Purchase and Implementation. 2.1 Agreement. During the Term, A&P agrees to purchase from C&S, and C&S agrees to sell to A&P, A&P's entire requirements of Merchandise for all A&P Store Locations. From the date hereof (the "Effective Date") until the respective Procurement Conversion Date (the "Transition Period"), the parties shall use their respective best efforts to coordinate the transition of A&P's distribution business to C&S on the respective Procurement Conversion Date. 2.2 Schedule. C&S will phase in the supply and procurement of Merchandise from July 10, 2005 through October 16, 2005, and all A&P Stores will be accepting delivery of their entire requirements of Merchandise from C&S by October 16, 2005. The detailed implementation schedule is attached hereto as Schedule 2.1. The implementation schedule may, by mutual agreement of the parties, be adjusted. Section 3. Price, Upcharges and Fees. 3.1 Base Price. A&P shall pay C&S the Base Price for each product as set forth below, plus the applicable upcharges and fees. (a) General. Except as stated below, the Base Price shall be the manufacturer's published list price (as delivered) in the best bracket in which A&P or C&S normally purchases such item for the applicable facility (including all inbound transportation charges), less any published retail off-invoice allowances. (b) Reserve Price. The "Reserve Price" shall be the price established at the time product is purchased into the Reserve. (c) Fresh Deli (non-packaged), Produce, Floral, Fresh Meat, and Fresh Seafood. The Base Price for items in the Fresh Deli (non-packaged), Produce, Floral, Fresh Meat, and Fresh Seafood will be quoted * by C&S based upon market conditions and availability. The Base Price shall be reviewed with and accepted * by A&P. Produce and meat items covered by an A&P negotiated contract or any renewal thereof shall be sold at the A&P contracted price. If A&P can purchase an item covered by this Section 3.1(c) at a price lower than C&S's quote, then C&S will match such quote or purchase the item from the A&P specified vendor. Additional perishable procurement procedures are set forth on Schedule 3.1(c). (d) Private Label. A&P shall have the right to negotiate directly with vendors on the delivered price of A&P private label items to be shipped by C&S to A&P Stores. The private label items covered by this Section 3.1(d) will have a Base Price equal to the amount agreed to between A&P and the vendor, including all inbound and accessorial charges payable by C&S, provided that the price negotiated by A&P represents a market price. C&S and A&P will explore a program for cooperative buying on private label brands. (e) Price Bulletin. C&S will publish electronically the Base Price * in a bulletin and price file prepared for A&P. ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -3- (f) Logistics Programs. The Base Price shall include all current logistics, plant direct and other similar logistics programs that A&P is involved with as of the Effective Date. (Such programs are set forth on Schedule 3.1(f)). If a vendor initiates a new logistics program similar to those on Schedule 3.1(f), then C&S will reflect * of the net savings of such program in the Base Price after subtracting any costs of C&S related to compliance with such program, provided, however, if a vendor converts an A&P trade funding program into a logistics initiative, then A&P will be entitled to the full amount of such initiative less any costs related to C&S's compliance with such initiative. (g) Transferred Inventory. The Base Price for each item of Transferred Inventory (as defined in the Asset Purchase Agreement) will be the price paid by C&S to A&P for such item. 3.2 Upcharges. (a) General Background. The per case cost to A&P under this Agreement will be * per case following June 1, 2006 premised on the provisions set forth in Sections 3.2(b), (c) and (d). While this per case cost is implemented in several components as noted below, the intent is that the upcharge of * per case will be the baseline cost and C&S will provide * reconciliation for variances or changes. The fee was reached based on A&P's present overall distribution costs of approximately * minus over * in annual savings, which savings do not include any A&P overhead savings. Following such savings, C&S annual expenses charged to A&P would be approximately * initially following each Procurement Conversion Date and * following October 1, 2006. For example, if A&P's annual case volume hereunder is * then the upcharge would be calculated as follows: A&P's blended warehousing and transportation: * A&P Initial Savings * Final Additional Initial Savings * Diverting Buyout (Section 3.2(c)(iv)) * Facility Credit * Stop Fee Savings (Section 3.2(b)(ii)) * Coupon Conversion Credit (Section 3.2(c)(v)) * Additional Savings (Section 3.2(c)(vi)) *__ Total: * (b) (i) Warehouse Upcharge. A&P shall pay to C&S the per case Upcharges set forth on Schedule 3.2(b)(i) (the "Upcharge") on all Merchandise delivered to A&P following a Procurement Conversion Date as set forth below, except GM/HBC Merchandise and Merchandise supplied to the New Orleans division ("New Orleans Merchandise"). In addition to the Upcharge, A&P will pay to C&S a surcharge of * per case on all private label cases in excess of * of the Merchandise supplied hereunder in any Contract Year. ` The Procurement Conversion Date for Merchandise presently supplied from the below facilities shall be: ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -4- July 10, 2005 Edison and Freshtown August 28, 2005 Baltimore September 18, 2005 Central Islip October 2, 2005 New Orleans October 16, 2005 Dunmore Prior to a Procurement Conversion Date, A&P will reimburse C&S for the total actual cost of operating the Facilities and the New Orleans Facility and delivering Merchandise consistent with A&P's past practices, including without limitation, labor and benefit costs of the hired Affected Employees (as defined in the Asset Purchase Agreement), all as calculated pursuant to Schedule 3.2(a)(i). However, the costs attributable to conversion to C&S systems, including costs related to training for EXE, shall not be reimbursed by A&P but will be borne by C&S. Within * following a Procurement Conversion Date the parties shall reconcile the actual costs charged for a facility prior to the Procurement Conversion Date. (ii) Stop Fee. (A) Facility Deliveries. Prior to October 2, 2005, C&S will charge A&P for deliveries from the Facilities the amounts set forth on Schedule 3.2(b)(i), provided that if A&P opens or closes a store(s), then the transportation expense to deliver or not to deliver to these stores will be added to or subtracted from such amount. The parties shall work together in good faith to reduce the transportation costs from the Facilities and C&S Facilities and, based on * cases supplied per Contract Year, in no event will such savings be less than * in the first Contract Year. Prior to August 1, 2005, C&S will provide A&P with a list of savings programs totaling at least *. On October 2, 2005, the parties will (i) take the projected annual transportation costs from the Facilities as they exist as of October 2 , 2005, minus (ii) the projected savings from the implementation of the savings programs implemented by C&S, (iii) divide the projected annual transportation costs by the projected number of total annual stops as of October 2, 2005 and (iv) the result of such calculation shall be the Stop Fee for Facilities following October 2, 2005. The method of calculating the Stop Fee is more fully set forth on Schedule 3.2(b)(ii). It is agreed that A&P has the obligation to implement the savings programs needed to achieve the * savings except to the extent that to do so would in, A&P's reasonable judgment, be materially detrimental to its business. (B) C&S Facility Deliveries. For Merchandise that is not delivered from a Facility (e.g. Harrisburg, Windsor Locks, North Hatfield and PDC) (collectively, C&S Facilities"), prior to October 2, 2005, C&S will charge A&P for deliveries from C&S Facilities the amounts set forth on Schedule 3.2(b)(i), provided that if A&P opens or closes a store(s), then the transportation expense to deliver or not to deliver to these stores will be added to or subtracted from the such amount. On October 2, 2005, the parties will calculate the Stop Fee for C&S Facilities as follows: (i) * minus (ii) the projected amount of the annual savings resulting from the implementation of a savings program for a C&S ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -5- Facility set forth on the list provided pursuant to Section 3.1(b)(ii)(A) (which when combined with the savings under Section 3.2(b)(ii)(A) shall be no less than * ), (iii) divide the projected transportation costs by the number of total projected annual stops as of October 2, 2005 and (iv) the result of such calculation shall be the Stop Fee for C&S Facilities following October 2, 2005. (iii) Dunmore Upcharge. (A) Following October 9, 2005, the upcharge for GM/HBC Merchandise is * per unit. The Dunmore upcharge reflects * of savings from A&P's present costs in Dunmore. Attached as Schedule 3.2(b)(iii) is the calculation of the Dunmore Upcharge. In addition, the agreed to imputed rent for the Dunmore Facility shall be paid by A&P to C&S. The parties will establish the standard credit policy and reserve for Dunmore within * of the Effective Date. The parties will meet and discuss in good faith a volume incentive for GM/HBC volume. (B) * . Notwithstanding the prior sentence, if A&P sells a division, then (i) the GM/HBC Upcharge shall be reduced to reflect any GM/HBC transportation savings resulting from such sale, (ii) the Upcharge will be adjusted to reflect the fact that fewer cases are absorbing fixed costs associated with the supply of GM/HBC merchandise, and (iii) the base for the GM/HBC Reduced Volume Surcharge shall be adjusted to reflect the loss of cases. (iv) New Orleans Upcharge. Following September 25, 2005, the upcharge for the New Orleans division shall be * per case (the actual cost of the New Orleans operations). In addition, the agreed to imputed rent for the owned New Orleans facility shall be paid by A&P to C&S. The New Orleans division supply arrangements shall be in accordance with this Agreement and Schedule 3.2(b)(iv). (v) Baltimore Imputed Rent. In addition to the Warehouse Upcharge, the agreed to imputed rent for the owned Baltimore facility shall be paid by A&P to C&S. (c) Warehouse Adjustments. (i) Upcharges. The essence of this upcharge section is that the Upcharge reflects A&P's cost per case for the trailing * prior to February 26, 2005 for all distribution related expenses with a savings of * per case. Schedule 3.2(c)(i) sets forth the information used to calculate the Upcharge. Notwithstanding the parties' best efforts regarding the determination of the proper Upcharge and other fees, surcharges, and incentives under Section 3 of this Agreement, within * of the end of the first Contract Quarter and * Contract Year, the parties shall meet to review the projections and data used to calculate the Upcharge and the other fees, surcharges, and incentives covered under Section 3 of this Agreement and shall in good faith adjust, if necessary, the Upcharge and other fees, surcharges, and incentives under Section 3 of this Agreement based on the accuracy of the data provided or data unavailable at the time of the original calculations. It is the parties' intent that A&P will continue to employ the same business practices with respect to the Facilities or otherwise with respect to supplying the A&P Stores as it employed while it ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -6- was operating the Facilities (i.e., full pallet rounding and full pallet ordering, mix of inner packs/eaches/full cases) and the parties will maintain the same methodology for converting eaches to cases. If there is a fundamental change following the Commencement Date in A&P's sales mix, service requirements or other substantive changes affecting the cost of supplying the A&P Stores, then the parties agree to meet and in good faith adjust the Upcharge. (ii) *. (iii) Vendor Inbound Compliance. C&S will continue vendor inbound compliance programs and charge vendors for noncompliance (i.e., noncompliance with routing guide instructions, late delivery, missed appointments, broken pallets). If a fee is reduced or eliminated and A&P has not provided the support set forth in the prior sentence, then the upcharge will be increased to reflect such reduction or elimination, provided, however, prior to any such increase the Presidents of A&P and C&S shall meet to try and find another method for making up the decrease in vendor compliance income in lieu of increasing the upcharge. (iv) * . (v) Coupons. A&P will transfer its coupon processing to C&S and the parties will follow the coupon processing program set forth on Schedule 3.2(c)(v). Immediately following the commencement of C&S processing A&P's coupons, the Upcharge will be reduced by * per case. (vi) Additional Savings. On June 1, 2006, the Upcharge shall be reduced by * per case. (d) Stop Fee Adjustments. (i) Fuel Cost Adjustment. For purposes of this Section 3.2(d)(i), the Base Cost of Fuel is as set forth on Schedule 3.2(d)(i). The Base Cost of Fuel is calculated as set forth on Schedule 3.2(d)(i). Within * of the end of each Contract Quarter, C&S shall calculate the cost of fuel for such Contract Quarter (the "Quarterly Fuel Cost") in the same method as set forth on Schedule 3.2(d)(i) and shall either bill A&P if the Quarterly Fuel Cost is more than the Base Cost of Fuel or credit A&P if the Quarterly Fuel Cost is less than the Base Cost of Fuel calculated as follows: * . The Stop Fee Fuel Component for Facilities and C&S Facilities shall be calculated as part of the calculations done pursuant to Section 3.2(b)(ii). For example, if * . (ii) Tolls and Road Taxes. Each Contract Quarter the Stop Fee for both Facilities and C&S Facilities shall be adjusted to reflect any increase or decrease in tolls and road taxes as compared to the prior Contract Quarter. (iii) * . (iv) Driver Cost Increases. Commencing with the * Contract Year, ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -7- on the * following any increase in the labor and/or employee benefit costs with respect to the drivers delivering Merchandise from a Facility, the Stop Fee for Facilities will be adjusted to reflect * of the actual cost of any such increases. If A&P can demonstrate that any such driver cost increase is materially out of line with labor and employee benefits cost increases for truck drivers in the trucking industry in the Northeastern United States, then the parties will meet and in good faith determine whether * or some lower percentage is the fair and equitable percentage to use to adjust the Stop Fee. If there is a non-productivity related negotiated benefit that offsets a labor or employee benefit cost increase, then such negotiated benefit shall be factored into the determination of the cost increase used to adjust the Stop Fee. For example, if there is a wage increase, but a holiday is eliminated, then the cost benefit of the elimination of such holiday will be factored into the calculation of such wage increase. By way of further example, if there is an employee benefit cost increase, but eligibility requirements are changed, then the cost benefit of such eligibility requirements will be factored into the calculation of the employee benefit cost increase. (v) Stop Fee Savings. Following October 2, 2005, A&P will receive * and C&S * of any Stop Fee Savings for Facilities and C&S Facilities resulting from A&P decreasing the number of stops. (e) Notice/Backup. C&S will provide A&P with back-up documentation of any increase under Section 3 (c) or (d) and written notice prior to the implementation of any such change. (f) * . 3.3 * . 3.4 Restocking Fee. C&S will charge A&P a restocking fee of * for the return of all cases ordered in error by A&P. This fee will not apply to the return of any cases generated by C&S mispicks or other errors or returns from a new store or a major remodel within * of the store's grand opening or reopening. 3.5 Cross-Dock. C&S will charge A&P a cross dock fee of * per case for cross-dock cases. If A&P commences cross-docking cases of a new DSD vendor C&S will charge A&P * per pallet for any such cross-docked pallets, provided that (i) the * fee is premised on there being an average of * cases per pallet and if there is not such average, then the parties shall in good faith adjust the * fee, and (ii) the Stop Fee shall be adjusted to reflect the increased transportation cost, if any, resulting from these additional cross-dock cases. If A&P converts selected cases to cross-dock, then C&S will charge A&P * per pallet for such cross-dock cases. If the mix of existing cross-dock Merchandise changes or the average cases per pallet changes, then parties will meet and good faith adjust the relevant fees set forth above. With respect to cross-dock pallets or totes that require breakdown, A&P and C&S will negotiate in good faith to determine an appropriate fee. The handling fee will be subject to adjustment for cases exceeding * cubic feet. Cross-dock product is not slotted in C&S facilities and C&S is not required to hold any cross-dock product more than * . ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -8- 3.6 Cardboard Bales. For * per bale C&S will pick up A&P's cardboard bales at A&P stores, transport them to a C&S Facility or Facility and load them on a trailer to be provided by A&P or a party designated by A&P. A&P shall promptly remove full trailer loads of bales from the applicable facility. Any costs incurred by C&S with respect to proper disposal or other disposition of the baled cardboard shall be the responsibility of A&P. A&P shall clearly mark its bales, e.g. with an A&P day glow sticker. 3.7 Volume Incentive. If for either * , A&P's purchases from C&S are more than * cases, then C&S shall pay to A&P a Volume Incentive (the "Volume Incentive") equal to * per case for all case purchases for the applicable * in excess of * . The Volume Incentive calculated as set forth in this Section 3.7 for any * period shall be paid by C&S by the * following any such period. 3.8 Reduced Volume and Lost Profits Surcharge. (a) If for either the * , A&P's purchases from C&S are less than * cases, then A&P shall pay to C&S a Reduced Volume Surcharge (the "Reduced Volume Surcharge") equal to * per case for all case purchases for the applicable * less than * . (b) The Reduced Volume Surcharge calculated as set forth in this Section 3.8 for any * period shall be paid by A&P by the * after the end of any such period. (c) As for all other purposes under this Agreement, volume under the Existing Supply Agreement shall be excluded from the calculations under this Section 3.8 and Section 3.7 (Volume Incentive). In addition, GM/HBC Merchandise, New Orleans Merchandise and cross-dock Merchandise shall be excluded from the calculations under this Section 3.8 and Section 3.7 (Volume Incentive). 3.9 Seasonal GM/HBC Storage. C&S will oversee the operation of seasonal GM/HBC storage and A&P shall be responsible for the cost of seasonal GM/HBC storage, including occupancy, transportation and warehousing, which costs A&P shall reasonably approve in advance. Section 4. Implementation Committee. 4.1 Implementation Committee. The parties will form an implementation committee to oversee the implementation of this Agreement. The committee will establish the requisite information flow. It also will work to (i) foster efficient and timely communications and information sharing, (ii) to develop mutually beneficial operating efficiencies and savings, (iii) ensure that the actions of one party do not negatively impact the operations and/or profits of the other, (iv) monitor, adjust and/or create new key performance indicators ("KPIs") and (v) identify items that could be added or subtracted for the parties' mutual benefit. 4.2 Committee Priorities. Within the first six months following the date of this Agreement, the committee will work to develop mutually beneficial policies in the ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -9- following areas: store order frequency; better programs with respect to packaging to reduce damages; pallet rounding; reduction in vendor lead times; ordering efficiencies; receiving efficiencies (store and warehouse); combined purchasing (cooperative purchasing opportunities in not for resale items); service level/fill rate; new items speed to shelf; inventory management; seasonal item management; manufacturer out of stock issues; ad underpulls and overpulls (future promotions and past performance); new store openings and remodels; and pallet exchange efficiencies. Section 5. Additional Buying and Supply Provisions. 5.1 Deal Extensions. C&S will reflect all vendors' retail trade allowances * after the vendors' last order date, except for the short coded items set forth on Schedule 5.1. 5.2 Slow Movers. C&S is entitled to discontinue any A&P unique items that move less than * , unless A&P elects to pay a * cent per case surcharge on such items or allows C&S to deliver such items * . On or before the * , C&S shall provide A&P with a report indicating all A&P unique items that averaged less than * of movement. A&P shall have until the * to determine whether C&S may discontinue such items or whether A&P elects to pay the additional surcharge for such slow moving items. 5.3. New Items. C&S will work with vendors to make new items available for shipment to A&P at the earliest shipment date. If A&P provides C&S at least * notice of any new item, C&S will ship such new product within * of vendor's first available ship date, subject to vendor availability of the product. Strategic items, as reasonably determined by A&P, shall be shipped on the vendor's first available ship date, subject to vendor product availability. 5.4 Expedite. If C&S causes the shortage of any time sensitive items, such items will be expedited at no expense to A&P, provided that A&P shall pay additional costs for any shortages due to its error. 5.5 Standard Credit Policy. (a) With respect to the Facilities, the parties shall follow the standard credit policy set forth on Schedule 5.5(a), which is intended to mirror A&P's current standard credit practices. With respect to any other C&S facilities, the parties shall follow the standard credit policy set forth on Schedule 5.5(b). The audit procedures to support the C&S facilities' policy are also set forth on Schedule 5.5(b). With respect to Facilities, C&S will, after taking into account credits that it has issued to the stores pursuant to its warehouse audits and store called-in credits and all other reserve adjustments, pay to or bill A&P the net shortage or gain in each warehouse, all as described on Schedule 5.5(c). A&P will continue to receive current swell allowances for product shipped from a Facility. C&S will receive all swell allowances on any vendor that switches to a swell allowance and will pass on to A&P * of such allowances received. C&S will receive all swell allowances for Merchandise shipped from a C&S Facility and will pass on to A&P * of such allowances received. If a vendor that switches to a swell allowance is a successor to an A&P swell vendor, then the parties will meet and in good faith agree on the proper allocation of the swell ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -10- allowance from the successor vendor. C&S will primarily rely on the A&P Help Desk to issue credits because A&P is being billed for or paying the net shortages or gains. C&S shall maintain a level of security at the facilities serving A&P sufficient to mutually satisfy the parties that the Merchandise is being adequately protected, with the presumption that the relative level of security on the date hereof is sufficient for such purposes. C&S shall provide A&P with a reconciliation report of net shortages and gains in inventory within * of the end of each A&P accounting period. (b) Other Customers. Following the commencement of shipment by C&S to customers other than A&P from the Facilities, the parties will follow the standard credit policy attached as Schedule 5.5(b). 5.6 Discontinued/No Movement items. The parties will work together to eliminate items that have no movement for * , including, without limitation working together to have the responsible manufacturer repurchase and remove such inventory. For any and all items that A&P discontinues or items that have no movement for * (excluding seasonal items that A&P represents it will sell the following year), C&S will provide A&P notice. Upon receipt of such notice, A&P will either provide for the vendor to remove and repurchase all such cases remaining in the warehouse or give C&S a distribution for such cases. In either event, such goods will be removed by vendor or store distribution within * of A&P's receipt of notice. To minimize such inventory, A&P will give C&S advance notice of any discontinuance to avoid unnecessary ordering. Furthermore, if such item is not unique to A&P in the applicable facility, A&P will only be responsible for such discontinued items to the extent that such leftover inventory is A&P leftover ad product. 5.7 Ads. (a) A&P shall book all ads by facility for the first 18 months following the Commencement Date. Following such 18 month period A&P shall only be responsible for providing C&S with the aggregate number of cases per ad per item across all facilities supplying A&P. In addition, the parties will in good faith work on a feathering process to bring in ad product to each facility prior to the commencement of the ad. A&P shall provide to C&S distribution quantities for dry grocery by store for at least * of the product booked for a front page ad for C&S' distribution prior to the commencement of the ad, provided that A&P will use its commercially reasonable efforts to provide C&S distribution quantities of * . Prior to the end of the * Contract Year, A&P will strive to provide C&S distribution quantities for at least * of all ad product prior to the commencement of an ad. Left-over ad product may be sent back to the Facilities subject to Section 3.4. A&P will purchase left-over perishable ad product from C&S prior to such product being out-of-code, provided that if A&P is unable to so purchase, A&P will be responsible for the cost and disposition of such product. C&S and A&P will work together to minimize leftover ad product, including, continuing A&P's practices of remerchandising items where possible, canceling trucks and having vendors pick-up leftover ad product. Left-over ad product in excess of * normal turn movement (as measured against the physical balance) shall be placed into the Reserve. ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -11- (b) A&P will be responsible for all fresh seafood, chicken and other poultry pre-orders and will purchase such items from C&S prior to the seafood or chickens being out-of-code, provided that if A&P is unable to so purchase, A&P will be responsible for the disposition of such product. 5.8 SKU's. C&S shall not be obligated to carry more than * above the number of SKU's per Facility than A&P carries as of the Effective Date absent the consent of C&S, which consent will not be unreasonably withheld, provided that the maximum increase in SKU's per Contract Year shall be no more than * of the number of SKU's per Facility that A&P carried in the prior Contract Year. Schedule 5.8 sets forth the present number of A&P SKU's by category and warehouse. 5.9 * . 5.10 * . 5.11 Base Price and other Adjustments. (a) To the extent that an income item formerly available to one party is eliminated but such program dollars are made available to the other party in another form, then the party benefited by such change will make the other party whole by an adjustment to the Base Price of such goods or other agreed to adjustment. (b) Each party acknowledges that the other party has historically benefited from certain sources of income, including, but not limited to: Cross-Roads, warehouse slotting, retail store slotting, alternative source buying, and cash discounts. Furthermore, as of the date hereof, A&P earns a certain amount of trade funds, but also engages in certain activities that one may claim could impact trade funds, such as diverting or vendor compliance programs. Neither party will knowingly interfere with the other party's programs. More specifically, no action by C&S that differs from A&P's actions, be it, for example, C&S' increasing the amount of diverting or vendor charges from A&P's level, will negatively impact A&P's current level of trade funds. A&P will use its commercially reasonable best efforts to both prevent a vendor from claiming that C&S' programs interfere with A&P's trade funds and to preserve C&S' programs. As part of A&P's efforts in this regard, on a case-by-case basis, A&P will include C&S in vendor meetings, and with all parties present, inform such vendor that it is the vendor's issue to resolve with C&S and that in no way is the vendor to reduce A&P's trade funds. (c) The pricing provisions herein are based upon the parties' mutual assumption that no fundamental changes will occur in the structuring or level of promotions or other factors affecting the wholesale cost of Merchandise. If the parties' mutual assumptions cease to be true at any time during the Term, the parties agree to negotiate in good faith to reach agreement on new, mutually acceptable pricing terms. It is A&P's intention to continue to negotiate and structure deals that will lower A&P's net cost of goods. ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -12- (d) Within * of the end of each Contract Quarter or as reasonably requested by a party, the most senior merchandising executive at C&S and the most senior merchandising executive at A&P will meet and review any instances where a party's trade funding has decreased in the prior Contract Quarter. If a party can show that a decline in its funding on a vendor is due to a program of the other party that has resulted in an increase in such party's trade funding from such vendor, then the benefited party will promptly meet with such vendor and attempt to determine what effect, if any, its increased trade funding had on the other party's trade funding. If a program of a party has had a negative impact on the other party's funding, then the benefited party will seek to cause such vendor to reverse such decline. If the benefited party is unsuccessful in causing the vendor to reverse the other party's decline in trade funds, then A&P and C&S shall jointly meet with the applicable vendor and attempt to cause the vendor to reverse the decline. If such effort is unsuccessful, then the benefited party will either take such vendor off the program in its entirety, take the vendor off the program with respect to the other party or otherwise make up the decline in the other party's trade funds. As part of the quarterly reconciliation between the A&P and C&S executives, the parties will provide each other with any information regarding the other party's programs requested by a party, unless any such information is subject to a confidentiality obligation. Any dispute under this Section 5.11(d) that cannot be resolved by the merchandising executives shall be elevated to and settled by the Presidents of A&P and C&S prior to the end of the subsequent Contract Quarter. 5.12 * . Section 6. Billing and Payment. 6.1 * Statements. Each * , C&S shall electronically transmit to A&P, files (such files shall be referred to collectively as the "* Statement") for all amounts owed (including purchases, fees, upcharges and credits) for the immediately preceding * (the "* Statement Amount"). There will be a Shipment File with all product charges to the stores; an Adjustment File with fees, upcharges, and credits; a Cost and Weight File for random weight product; and a Cost File for all other products. A separate Manual Charge file will be provided, which shall include special delivery and trailer fees and all other miscellaneous charges, by customer number and by invoice. The * Statement will be received on the * following the * such shipments were made. 6.2 Payment. Each * , A&P will make a wire transfer in the amount of * (adjusted as set forth below) with respect to purchases to be made on such * together with the purchases made on the immediately preceding * , * and * . Each * , A&P will make a second wire transfer in the amount of * with respect to purchases made on the immediately preceding * and to be made on * and * . A&P will adjust the payment to be made on the next succeeding * to reflect any overpayment or underpayment for the previous * purchases, based upon the statement rendered by C&S on * . Should the due date of A&P's payment fall on a date on which banks in New York are required to be closed, the due date shall be accelerated to the previous day that banks in New York may legally open. The parties acknowledge that the * figure used in this Section 6.2 is * of the projected * purchases, plus ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -13- the projected fees and other charges under this Agreement for the first Contract Quarter. The parties agree that such figure shall be adjusted up or down from time to time (but no less than each Contract Quarter) to approximately * of the actual volume of * purchases then being made by A&P pursuant to this Agreement. If at any time A&P's S&P corporate credit rating is * or above, then C&S will adjust A&P's payment terms for a * payment of the * estimated * payment amount. 6.3 Miscellaneous Billing and Payment Matters. Time is of the essence. If any payment under Section 6.2 is in default, and A&P has failed to cure the default within * after receiving notice from C&S, then, subject to Section 14, C&S shall have the right (which rights shall be nonexclusive, cumulative of and additional to all other remedies) to defer further deliveries until all payments in default have been made or, if such payment is in default for more than * following notice from C&S, to terminate this Agreement. If A&P disputes any portion of a statement, absent manifest error, it shall nonetheless pay the full amount of the statement by the payment due date, without any deductions or offsets. A&P shall give C&S notice of any billing adjustments it believes should be made, and the parties shall attempt to reach agreement on any adjustments within * . If either party believes a billing adjustment should be made, it shall give notice to the other party and the parties shall attempt to reach agreement on any adjustments within * from the date notice is received. In the event an agreement cannot be reached on disputed adjustments within said * , the parties will settle the dispute pursuant to Section 31. 6.4 * . 6.5 Review Rights. The parties will within * of the Effective Date develop a * price file reconciliation process in a format with sufficient detail as reasonably requested by A&P, whereby C&S will transmit to A&P all Base Price information on a * basis and A&P may review and comment on such information. A&P may also review C&S' Base Price information as set forth in Section 15. 6.6 Third Party Deductions. From time to time, A&P may ask C&S, in writing, to act as its agent to deduct amounts that are due from manufacturers to A&P. A&P must provide C&S with supporting documentation before C&S will process such deduction. C&S has the right, in its discretion, to refuse to honor any third party deduction request that A&P may make; provided that C&S shall use this right to refuse a deduction in a reasonable manner and shall discuss such with A&P, in advance, and work with A&P to resolve any of A&P's concerns. If C&S makes a deduction on A&P's behalf and the manufacturer disputes the deduction made by C&S, A&P agrees to indemnify, defend and hold C&S harmless from any claim by the manufacturer related to such deduction, provided that C&S will cooperate with A&P in the defense of any such claim. If after taking a deduction and paying the amount of such deduction to A&P, C&S repays any such deduction, A&P will, upon receipt of notice and supporting documentation from C&S, repay such amount to C&S. A&P will use its best efforts so that the supply of merchandise from manufacturers to C&S is not adversely affected solely by any third party deductions that C&S may take on A&P's behalf. Service level shall not be adversely affected by an interruption in the supply of Merchandise from a ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -14- manufacturer to C&S if the interruption is caused by the refusal of the manufacturer to ship product to C&S and such refusal is attributable to a disputed deduction that C&S has taken on A&P's behalf at A&P's direction. C&S will add to each deduction from a vendor a fee to process the deduction made by C&S on A&P's behalf; such processing fee shall be (i) * for deductions equal to or less than * and (ii) * for deductions in excess of * . Section 7. Reserve System. The parties have established the reserve system described below (the "Reserve"). 7.1 Designated Reserve Product. Promptly following receipt of notice from A&P that it wishes C&S to acquire specified product to be held in reserve for forward buy, C&S will purchase such product and hold it in reserve for A&P at the Reserve Price which is established when the product is purchased by C&S. If A&P requests that C&S buy more than a * supply of private label product, the amount in excess of * will be added into the Reserve unless A&P's order on such product is in excess of * in order to meet the vendor's minimum order size and is consistent with past practice. In addition, leftover ad product covered under Section 5.7 and leftover seasonal items (such as Halloween candy) that will have no or minimal movement until the commencement of the next season for such item shall be added to the Reserve. The amount of forward buy product shall be an economically rational amount based on A&P's normal * movement. * . 7.2 Delivery Out of Reserve. Every * C&S shall provide a report detailing all product held in reserve for A&P. It is A&P's obligation to take delivery of all reserve product from C&S before such product is out-of-code. 7.3 Limitation on Reserve. The Reserve shall not exceed * cases of grocery Merchandise composed of a mix of product reflective of past sales of Merchandise under this Agreement (collectively, the "Reserve Limit"). A&P will not forward buy on fixed fund or straight line accrual vendors. 7.4 Reserve Charges. From time to time, C&S may, in its sole discretion, consent to the number of cases in the Reserve to exceed the Reserve Limit. In such an event, A&P will pay C&S a Reserve Charge equal to * for each case of product in excess of the Reserve Limit that is held as of the * . All Reserve Charges will be calculated each * after the last morning billing has been run and before the first afternoon billing has been run, and shall be billed to and paid by A&P in accordance with Section 3. Reserve Charges are in addition to, and not in lieu of, Upcharges and other fees and charges described in Section 3. 7.5. Allocation of Reserve. The Reserve Limit shall be allocated among the facilities based on available space at each facility supplying A&P and a particular facility's percentage of the overall volume under this Agreement. ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -15- Section 8. Delivery 8.1 Requirement. Delivery frequencies shall be as set forth on the Delivery Schedule, which shall be mutually agreed to by the parties and be attached hereto as Schedule 8.1. C&S will communicate to A&P and the stores via e-mail the estimated time of arrival. A delivery shall be considered on time if it is within the delivery window set forth on the Delivery Schedule as amended from time to time by mutual agreement of the parties, provided that a delivery shall not be considered late if a delay is caused by A&P, adverse weather (i.e., ice and snow), or an event of force majeure. If C&S is late to the first stop, it shall communicate revised ETA's to the subsequent stops. A&P will provide a list of stores with municipal and/or lease restrictions as of the Commencement Date. C&S is responsible for meeting all municipal and/or lease restrictions unless such failure is caused by A&P or an event of force majeure, and C&S shall hold A&P harmless from any damages caused by such C&S failure. In the event that A&P receives a notice of default under a lease arising out of the delivery(s) of C&S, A&P will provide C&S with a copy of same and C&S will use its best efforts to immediately cure such default and provide A&P with documentation thereof so A&P may provide same to its landlord. C&S will provide A&P with routing information prior to a delivery's departure from the C&S facility. The parties acknowledge that the higher the cube utilization, the lower the transportation fees per case. Consequently, the parties will work together and adjust delivery schedules wherever reasonable and practical so as to have full truckloads. 8.2 The Delivery and Service Levels are as follows:
----------------------------- ----------------- -------------------------- ----------------------- Contract Quarter "Target Level" "Required/Penalty Level" "Termination Level" ----------------------------- ----------------- -------------------------- ----------------------- 1st Contract Quarter * N/A N/A ----------------------------- ----------------- -------------------------- ----------------------- 2nd Contract Quarter * * * ----------------------------- ----------------- -------------------------- ----------------------- Thereafter * * * ----------------------------- ----------------- -------------------------- -----------------------
8.3 Delivery Schedule Violation. If, for any reason other than a delay caused by A&P or an event of force majeure, C&S fails to deliver at least the Required/Penalty Level of all deliveries on time in accordance with the Delivery Schedule for deliveries scheduled to be made during a Measurement Period, then such failure shall be a "Delivery Schedule Violation." Each four-week period will be a "Measurement Period" and there will be 13 Measurement Periods each Contract Year. 8.4 Delivery Penalty. Should A&P believe that a Delivery Schedule Violation has occurred, A&P shall give notice to C&S and C&S shall use its best efforts to immediately restore the Required Service Level. Following such notice, upon a Delivery Schedule Violation, A&P will be entitled to a penalty payment equal to * per load for all unexcused late loads below the Required/Penalty Level for such Measurement Period (the "Penalty Payment"). C&S will pay the Penalty Payment within * of the end of the applicable Measurement Period. This penalty will not apply for the * Contract Quarter. ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -16- 8.5 Delivery Termination. If the Delivery Service Level is below the Termination Level for * consecutive Measurement Periods, A&P may terminate the Agreement, provided that it has provided Timely Notice of Termination. Timely Notice of Termination shall mean written notice provided to C&S by A&P anytime within * of the expiration of the * Measurement Period. If, after receipt of a Timely Notice of Termination, C&S does not achieve at least the Termination Level in the * Measurement Period, then, as set forth in the Notice of Termination, the entire Agreement will terminate * following the end of the * Measurement Period. Should A&P give late Timely Notice of Termination, the time periods for cure, including extension into subsequent consecutive Measurement Periods, shall be extended accordingly. Following an event under this Section 8.5 that gives rise to a right of termination by A&P, A&P may request that only a portion of this Agreement be terminated. Following such request C&S will promptly meet with A&P and the parties will in good faith amend this Agreement to both parties' mutual satisfaction to accommodate A&P's request. 8.6 Service Level Adjustments. The operating committee will from time to time review and, if appropriate, adjust the Delivery and Service levels and calculations set forth in Sections 8.2 and 9.1, based on actual operational experience and changes in service requirements taking into account the parties' performance, technological advances and capabilities and the type of items that C&S is supplying. 8.7 Serious Late Delivery Penalty. If a C&S delivery is more than * late, then, to the extent such delay was not due to A&P (including, but not limited to, delay at the first stop or a transmission delay) or an event of Force Majeure, such late delivery shall be considered a Serious Late Delivery. Upon a Serious Late Delivery, A&P may bill C&S * for a delivery that is between * late and * for a delivery that is more than * late. The payment for this penalty will be received by A&P as a credit on the billing statement the * after it has been levied. 8.8 Drop Trailers. C&S will continue A&P's present practices with respect to providing drop trailers to the A&P Stores, provided that if there is a material increase in drop trailers, the parties shall meet and in good faith come up with a fee for the incremental trailers. In addition, C&S will provide (i) a trailer within * of a store's request when necessary as a result of an emergency and (ii) a trailer on a non-emergency basis within * of a store's request. A&P will provide C&S, with as close as reasonably possible, * advance notice of trailers A&P will require for seasonal purposes and C&S will use its commercially reasonable efforts to provide, at A&P's expense, such trailers. The parties acknowledge and agree that the foregoing time frames do not cover emergencies or catastrophes affecting * or more A&P stores and in such a case C&S will use its commercially reasonable efforts to provide A&P with as many trailers as requested by A&P as quickly as possible. 8.9 Trailer Advertising. A&P may, at A&P's expense, place A&P logos and signage on up to * of the C&S trailers delivering Merchandise from the Facilities or the New Orleans facility, provided that if there is a significant shift of volume out of the Facilities, then the parties shall meet and in good faith agree on a method of advertising that will not ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -17- diminish the number of trailers with advertising as compared with the number prior to such shift in volume. 8.10 Perishables. The general method for shipping meat, dairy and produce Merchandise shall be to ship these categories on the same truck. Section 9. Service Level. 9.1 Service Level Requirement. The parties' mutual objective is to maintain the Target Levels set forth in Section 8.2. In computing the Service Level the numerator shall be the number of cases shipped, and the denominator shall be the number of cases ordered, less unauthorized cases, discontinued, and documented manufacturer's out-of-stocks. An item will qualify as a manufacturer out of stock if the manufacturer provides written proof of such status to C&S or if the manufacturer consecutively scratches such item * . Ad overpulls will not be factored into the calculation of service levels, provided that (i) C&S receives A&P's ad projection * in advance of each ad, (ii) C&S is provided with the retail and ad placement of the ad and the ad layout, and (iii) the ad distribution is no more than * above A&P's aggregate ad projection. If A&P materially changes its promotional advertising strategy in a manner that adversely impacts C&S's ability to meet Service Levels, then the immediately prior sentence shall not apply for * following such change, provided that during such * period, A&P shall use its best efforts to provide C&S with accurate ad forecasting. Prior to the Commencement Date, A&P will provide C&S with * of A&P ad movement data. 9.2 Service Level Violation. If, for any reason other than due to an act or omission by A&P, a documented vendor issue, adverse weather (i.e. ice and snow), or an event of force majeure, C&S fails to maintain a Service Level of at least the Required/Penalty Level for the Measurement Period, then such failure shall be a "Service Level Violation." The Required/Penalty Level may be adjusted in accordance with Section 8.6. 9.3 Service Level Penalty. Should A&P believe that a Service Level Violation has occurred, A&P shall give notice to C&S and C&S shall use its best efforts to immediately restore the Required Service Level. Following such notice, upon a Service Level Violation, A&P will be entitled to a penalty payment equal to: (i) the difference between the Required/Penalty Level and the average actual service level percentage during the Measurement Period, multiplied by (ii) the number of cases delivered during such Measurement Period, multiplied by (iii) * (the "Service Penalty Payment"); provided, that before any penalty is assessed the parties will meet to discuss the cause for such Service Level failure, what can be done to prevent future failure, and to determine, given the reasons for such failure, whether or not a penalty should be charged. Once it has been determined that the charge is appropriate, A&P will bill C&S for any such penalty and C&S will pay such bill within * . This penalty will not apply for the first Contract Quarter. In addition, during the period of any Service Level Violation, A&P may purchase from other sources Merchandise that is causing the Service Level to fall below the Required Service Level and any such purchases shall nonetheless be included as volume purchased under this Agreement. ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -18- 9.4 Service Level Termination. If the Service Level is below the Termination Level for * consecutive Measurement Periods, A&P may terminate the Agreement, provided that it has provided Timely Notice of Termination. Timely Notice of Termination shall mean written notice provided to C&S by A&P anytime within * of the expiration of the * Measurement Period. If, after receipt of a Timely Notice of Termination, C&S does not achieve at least the Termination Level in the * Measurement Period, then, as set forth in the Notice of Termination, the Agreement will terminate * following the end of the * Measurement Period. Should A&P give late Timely Notice of Termination, the time periods for cure, including extension into subsequent consecutive Measurement Periods, shall be extended accordingly. Following an event under this Section 9.4 that gives rise to a right of termination by A&P, A&P may request that only a portion of this Agreement be terminated. Following such request C&S will promptly meet with A&P and the parties will in good faith amend this Agreement to both parties' mutual satisfaction to accommodate A&P's request. Section 10. Transmission Delays. Just as C&S delivery delays can cause expense for A&P, delays in A&P's order transmissions (store polling) can cause severe expenses for C&S. C&S will report * A&P's on-time and late transmission delays. The parties will meet to fix any such problems and ensure that they are not repeated. If delays continue to occur, then the parties will meet to determine how C&S will be kept whole. Section 11. Pallet Exchange. C&S will primarily select and ship product on plastic pallets. C&S will record the number and type of shipped pallets on each manifest and collect all such pallets at A&P's warehouse or stores each * ; provided that the operating committee will analyze the feasibility and cost of an at store pallet exchange program. C&S will track pallets delivered and returned by type of pallet and report such numbers to A&P each * . At the end of each * , C&S will bill A&P for any shortfall in returned pallets at C&S' cost (currently * per plastic pallet and * for CHEP pallets). A&P may pay any such shortfall in cash or in kind. At the * of the first quarter, the operating committee shall reasonably determine the amount of pallets in A&P's system that will be returned the * following the * of the first quarter and this amount shall be factored into any amount owing by A&P. Section 12. Liaison. Two additional full-time employees of C&S for this Agreement will be located at A&P's designated headquarters to provide on-site service solely for A&P for all business between the parties. The key responsibilities of the liaison are set forth on the job description attached as Schedule 12. Section 13. Reclamation Program. A&P will participate in C&S' reclamation program for all of its stores. C&S will assume A&P's rights and obligation as the Customer under A&P's contract (the "Carolina Agreement") with Carolina Logistics Services ("CLS") and live up to all terms and conditions of the contract. The CLS contract is attached hereto as Schedule 13. C&S will provide to A&P substantially the same services, including but not limited to reports, salvage income and directed charitable gifts, as are being provided by CLS. A&P has provided to C&S its calculation of income derived from reclamation and C&S ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -19- will make A&P whole, including providing A&P with its current level of chute and salvage income. The parties will also work together to drive additional benefits throughout the term of the agreement. C&S will use Carolina to produce the reports and provide the services that they are providing to meet A&P's business requirements and C&S will continue to do so until it can produce the same reports and can deliver the same services (or their substantial equivalents) to A&P's reasonable satisfaction. A&P will make every effort to support the transfer of its reclamation program to C&S in a reasonable timeframe, provided such transfer does not expose A&P to any claims, charges or obligations under the Carolina Agreement. Section 14. Force Majeure. Notwithstanding any other provision of this Agreement, the performance of the affected party shall be excused to the extent (but only to the extent) it is delayed, hindered or prevented by the following events: the business operations of either C&S or A&P are interrupted by reason of riots, insurrection, war, acts of terrorism, acts of God, or if beyond the reasonable control of C&S or A&P producers or manufacturers establish allocations or restrictions on quantities of supplies available to C&S. In the event of a Force Majeure, the party whose performance is affected will promptly notify the other party of such event and the steps that the affected party is taking to mitigate such event. Section 15. Verification. A&P shall have the right to audit C&S' records in order to confirm that the Base Price charged to A&P during the six month period covered by the audit is in accordance with the provisions of Section 3 of this Agreement. Such audits will be conducted at C&S' premises and will be limited to two in any twelve month period and be limited to the six month period immediately preceding the audit. Notwithstanding the preceding sentence, in the event that a discrepancy is discovered by an audit during the six months covered by such audit, then the audit may include prior periods but only to verify that the same discrepancy had not occurred during such prior periods, provided, however, if a material issue is detected then such issue will be addressed. Unless any significant discrepancies are found, each such audit shall be completed in fifteen working days. As is the customary practice, C&S will continue to produce reports and price verifications traditionally supplied to A&P and such other information and reports as are reasonably requested or needed by A&P to have the full transparency upon which this Agreement is premised. The parties' mutual objective is to identify and resolve any errors promptly after they occur rather than to rely upon the audit procedure to identify errors. Section 16. Financial Reports. C&S shall provide A&P with an audited Financial Statement including the comparative balance sheets, statements of income, retained earnings and cash flows prepared by C&S's independent certified public accountants, not later than ninety (90) days after the end of each fiscal year of C&S. Section 17. Operations. C&S shall conduct all operations required of it hereunder in conformance with the standards set by the Federal Food and Drug Administration from time to time and at a level of sanitation at least equal to that required by the Federal Food and Drug Administration or any other governmental agency having jurisdiction over merchandise and other facilities utilized by C&S in the performance of this Agreement. In addition, prior to commencement of supply and periodically during the term, the parties will review and mutually agree on recall procedures with respect to the merchandise covered by this Agreement, which procedures shall be substantially in accordance with A&P's recall procedures. -20- Section 18. Insurance. C&S agrees to maintain and cause to be maintained, at its own cost and expense, the following policies of insurance from insurance companies duly authorized to do business in New York and the other jurisdictions covered by this Agreement. 18.1 Casualty Insurance. Casualty insurance providing all risk coverage with limits not less than the full insurable value of the warehouses from which C&S is serving A&P hereunder ("C&S Premises", whether Facilities or C&S Facilities) and all of the goods and merchandise held or to be held therein. 18.2 Comprehensive Public Liability Insurance. Comprehensive public liability insurance, including products liability and contractual liability coverage, with limits of liability of not less than $5,000,000 for property damage, personal injury and bodily injury. The products liability coverage shall be continued in effect for not less than two (2) years after delivery of the product. 18.3 Worker's Compensation Insurance. Workers' compensation insurance and employer's liability insurance in the amounts required by law. 18.4 Commercial Automobile Liability Insurance. Commercial automobile liability insurance affording coverage on all owned, non-owned and hired vehicles with limits of liability of not less than $50,000,000 per occurrence for bodily injury and property damage liability. Said policies of insurance (except for the workers' compensation and employer's liability policies) shall name A&P as an additional insured and shall provide that they may not be cancelled unless thirty (30) days' prior written notice has been given to all named insureds, and such policies of insurance and certificates of insurance shall be delivered to A&P within fifteen (15) days from the date of this Agreement and renewals thereof, as required, shall be delivered at least thirty (30) days prior to the expiration of the policy term. All insurance policies shall be written by insurers reasonably acceptable to A&P. 18.5 Indemnification. (a) C&S. C&S shall defend, indemnify and hold harmless A&P and its employees, affiliates, servants, agents, successors and assigns from any and all losses, claims charges and expenses including reasonable attorney's fees and costs of settlement which are incurred by virtue of or result from (a) the inaccuracy in or breach of any representation or warranty made by C&S in this Agreement, (b) the non-fulfillment of any covenant, provision or agreement to be performed by C&S under this Agreement during the Term; or (c) any claims for injury to person or damage to property arising out of or resulting from (i) acts or omissions of C&S in any manner relating to its handling, storage, use or delivery of the merchandise supplied to A&P pursuant to the terms of this Agreement or (ii) the willful misconduct or negligent acts of C&S or its employees, provided, however, this indemnification and hold harmless shall not apply to the extent of any claims arising from or as a result of the omission, willful misconduct or negligent acts of A&P or its employees. Whenever A&P receives notice of a claim or demand that would be covered by this provision, A&P shall in turn provide C&S with prompt written notice of such claim or demand. (b) A&P. A&P shall defend, indemnify and hold harmless C&S and its employees, affiliates, servants, agents, successors and assigns from any and all losses, claims charges and expenses including reasonable attorney's fees and costs of settlement which are incurred by virtue of or result from (a) the inaccuracy in or breach of any representation or warranty made by A&P in this Agreement, (b) the non-fulfillment of any covenant, provision or agreement to be performed by A&P under this Agreement during the Term; or (c) any claims for injury to person or damage to property arising out of or resulting from (i) acts or omissions of A&P in any manner relating to the handling or use of the merchandise supplied to A&P pursuant to the terms of this Agreement or (ii) the willful misconduct or negligent acts of A&P or its employees, or (iii) subject to exhaustion of efforts in 18.5(c), for Merchandise procured and delivered hereunder; provided, however, this indemnification and hold harmless shall not apply to the extent of any claims arising from or as a result of the omission, willful misconduct or negligent acts of C&S or its employees. Whenever C&S receives notice of a claim or demand that would be covered by this provision, C&S shall in turn provide A&P with prompt written notice of such claim or demand. -21- (c) Product Liability. Notwithstanding any provision to the contrary contained herein, with respect to product liability claims, the parties shall look to the manufacturer of such product for any and all defense, indemnity or hold harmless claims unless there is clear proof that such claim is the result of an act or omission by the counter-party, in which case the provisions of this Section 18.5 shall apply. 18.6 Confidentiality. Each of A&P and C&S agree to and will cause its respective authorized agents, representatives, affiliates, employees, officers, directors, accountants, counsel and other designated representatives (collectively, "Representatives") to (i) treat and hold as confidential (and not disclose or provide access to any Person to) this Agreement and all records, books, contracts, instruments, computer data and other data and information (collectively, "Information") concerning the other in its possession or furnished by the other or the other's Representatives pursuant to this Agreement, (ii) if either party or its Representatives become legally compelled to disclose any such Information, provide the other party with prompt written notice of such requirement so that such other party may seek a protective order or other remedy or waive compliance with this Section 18.6, and (iii) if such protective order or other remedy is not obtained, or the other party waives compliance with this Section 18.6, furnish only that portion of such Information which is legally required to be provided and exercise its best efforts to obtain assurances that confidential treatment will be accorded such Information; provided, that this sentence shall not apply to any Information that, at the time of disclosure, is (a) available publicly and was not disclosed in breach of this Agreement by such party or its Representatives; or (b) is required to be disclosed by A&P pursuant to its obligations arising under Federal securities law or the rules of a national securities exchange. Each party agrees and acknowledges that remedies at law for any breach of its obligations under this Section 18.6 are inadequate and that in addition thereto the other party shall be entitled to seek equitable relief, including injunction and specific performance, in the event of any such breach, without the necessity of demonstrating the inadequacy of monetary damages. Section 19. Access to Premises. C&S shall allow A&P reasonable access to the C&S Premises during C&S's regular business hours. C&S shall permit A&P, at reasonable times and on reasonable notice, (a) to review the inventory records of A&P relating to any -22- A&P owned goods and merchandise, (b) to inspect the warehouse facilities and transportation equipment and (c) as otherwise needed in connection with Section 15. The parties shall follow the facility inspection procedures attached as Schedule 19. C&S shall provide workspace with internet capabilities for up to and including 3 A&P quality assurance personnel and will allow such personnel to inspect in-coming and out-going loads of fresh product. Section 20. Termination. 20.1 Termination by C&S. (a) Subject to the provisions of Section 14, C&S may terminate this Agreement for cause upon written notice to A&P setting forth the termination date (i) as provided in Section 6.3; (ii) upon * written notice, if A&P's purchases from C&S under this Agreement are less than * cases in any Contract Year; (iii) if A&P has breached any of its material obligations under this Agreement and if such breach is curable, remains uncured after * following written notice of such breach from C&S, or (iv) if an Event of Insolvency occurs with respect to A & P; provided, that C&S shall not terminate this Agreement upon the occurrence of an Event of Insolvency if A&P is otherwise in compliance with the terms of this Agreement and A&P provides adequate assurance of future performance under this Agreement. (b) If C&S terminates this Agreement pursuant to this Section 20.1 (Termination for Cause), then, A&P shall, among other things, be responsible for and pay C&S's Wind-down Costs. Wind-down Costs shall include all of C&S's costs in connection with or related to the shut-down, as a result of C&S's terminating this Agreement pursuant to Section 20.1, of any facility then primarily supplying A&P with Merchandise hereunder. Specifically, Wind-down Costs shall include (i) the Net Book Value of any and all of the assets employed by C&S in a facility primarily supplying A&P that are transferred to A&P following termination, including, without limitation, any and all Facilities and any replacement facilities primarily supplying A&P pursuant to this Agreement ("Replacement Facilities"), and the property, plant, equipment and rolling stock used with respect to each such facility (collectively, the "Assets"), (ii) any costs following the Termination Date arising out of or related to any lease or agreement related to the provision of the services required by this Agreement, including any lease of a Facility or any and all Replacement Facilities, (iii) reimbursement for any and all severance and other employee termination costs incurred by C&S as a result of C&S terminating the employment of individuals providing services to A&P hereunder at any and all Facilities and Replacement Facilities, including, but not limited to any and all WARN costs incurred by C&S in terminating employees, (iv) the total ERISA withdrawal liability paid by C&S attributable to a shut Facility, and (v) any other costs established by C&S directly related to the shutdown of any and all Facilities and Replacement Facilities. A&P may mitigate the above C&S Wind-down Costs by purchasing at Net Book Value the above described Assets C&S agrees to sell to A&P and/or assuming the above described liabilities. A&P will upon C&S's termination under this Section 20.1 purchase at the applicable Base Price any and all saleable inventory purchased by C&S for ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -23- delivery to A&P (the "Inventory"). The parties agree and acknowledge that the remedies under this section are nonexclusive, cumulative of and additional to all other rights or remedies in law or equity of C&S, including, without limitation, C&S's right to collect any volume related surcharges for the remainder of the Term. "Net Book Value" shall mean, as of the Termination Date, the acquisition cost less the accumulated depreciation of an Asset determined in accordance with Generally Accepted Accounting Principles. "Termination Date" means the effective date of the termination of this Agreement pursuant to Section 20.1(b). 20.2 Termination by A&P. Subject to the provisions of Section 14, A&P may terminate this Agreement for cause upon written notice to C&S setting forth the termination date (i) if an Event of Insolvency occurs with respect to C & S; provided that A&P shall not terminate this Agreement upon the occurrence of an Event of Insolvency if C&S is otherwise in compliance with the terms of this Agreement and C&S provides adequate assurance of future performance under this Agreement; (ii) if C&S has breached any of its material obligations under this Agreement and if such breach is curable, remains uncured after * following written notice of such breach from A & P; or (iii) as provided for in Sections 8.5 and 9.4. 20.3 Event of Insolvency. "Event of Insolvency" shall mean that, with respect to an entity, such entity shall (a) become insolvent, (b) make a general assignment for the benefit of creditors or to an agent authorized to liquidate any substantial amount of its assets, (c) become the subject of an "order for relief" within the meaning of the United States Bankruptcy Code, (d) file a petition in bankruptcy or for reorganization or to effect a plan or other arrangement with creditors, (e) file an answer to a creditor's petition, admitting the material allegations thereof, for involuntary bankruptcy or for reorganization or to effect a plan or other arrangement with creditors, (f) apply to a court for the appointment of a receiver or custodian for any of its assets or properties, with or without consent, and such receiver shall not be discharged within sixty (60) days after appointment, or (g) adopt a plan of complete liquidation of its assets. 20.4 A&P Buyout Options. (a) If there is a change in control of A&P or C&S or there is a fundamental change in the grocery business, then, at any time following the * Contract Year and prior to the * Contract Year, A&P shall, upon * prior written notice (the "Notice"), have the option to pay C&S the Buyout Price (as defined below) and perform its obligations under the first sentence of Section 20.1(b) with respect to Wind Down Costs and, following such payment and performance, this Agreement shall become null and void and of no further force and effect. The "Buyout Price" shall equal: (i) A&P's Projected Purchases from C&S under this Agreement multiplied by * , plus (ii) any amounts due by A&P to C&S in connection with the performance of A&P's obligations under the first sentence of Section 20.1(b). "A&P's Projected Purchases" means an amount equal to projected purchases (Base Price) under this Agreement by A&P from the date of termination until * based on an annual purchase baseline equal to A&P's purchases under this Agreement in the * prior to the Notice divided by * . For example, if A&P exercised its option and sent the Notice on the * . ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -24- (b) At any time following the commencement of the * Contract Year, A&P shall, upon * prior written notice, have the option to perform its obligations under the first sentence of Section 20.1(b) with respect to Wind-down Costs and, following such performance, this Agreement shall become null and void and of no further force and effect. In addition, A&P will on the date that is * following A&P's notice under this Section 20(b) purchase at the applicable Base Price any and all Inventory. Section 21. Facilities. C&S may, in its sole discretion, cease operations at and/or sell any or all of the facilities supplying A&P. C&S shall provide A&P * prior notice of its intention to close such a facility. Notwithstanding anything contained in the Asset Purchase Agreement to the contrary, if C&S closes a facility supplying A&P, then C&S will be liable for the amount of the total withdrawal liability related to such closure except to the extent set forth in Section 20.1 and 20.4. Section 22. Remedies. Any right of termination set forth in this Agreement is a nonexclusive remedy and any termination shall be without prejudice to any claims for damages or other rights of the terminating party. Section 23. Nonassignability; Subcontracting. The rights and obligations of this Agreement may not be assigned or subcontracted by C&S or A&P without the prior written consent of the other party. Further, C&S shall not sell all or substantially all of its assets, nor shall ownership or control of C&S be changed, without at least * prior notice of such sale or change being first given to A&P. Finally, if C&S is acquired by a major direct competitor of A&P, such as The Stop & Shop Supermarket Company, Pathmark, Inc., or Wakefern, Inc., then, upon * prior written notice, A&P may terminate this Agreement. Section 24. Binding Effect. This Agreement is binding upon permitted successors and assigns of each party. Section 25. Notices. All notices hereunder shall be in writing and shall be deemed to have been duly given if (i) hand-delivered, (ii) delivered by overnight courier, (iii) mailed by registered or certified mail, postage prepaid or (iv) faxed with receipt confirmed by phone; in each case to the following addresses or fax number, unless and until either party notifies the other in accordance with this Agreement of a change of address: If to C&S: C&S Wholesale Grocers, Inc. 7 Corporate Drive Keene, NH 03431 Attn: Chief Executive Officer (Richard B. Cohen) Via fax (603) 354-4692 With a copy to: ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -25- Chief Financial Officer (Mark Gross) Via fax (603) 354-4692 Senior Vice President of Legal and Business Affairs (Carl Wistreich) Via fax (603) 354-4694 If to A&P: The Great Atlantic & Pacific Tea Company, Inc. 2 Paragon Drive Montvale, NJ 07645 President (Brian Piwek) With a copy to: Executive Vice President, Chief Financial Officer and Secretary (Mitchell Goldstein) Via fax (201) 571-8715 Vice President, Chief Legal Officer and Asst. Secretary (Mary Ellen Offer) Via Fax (973) 321-3387 Section 26. Entire Agreement. This Agreement contains the entire understanding of the parties with respect to its subject matter and may be amended only by written instrument executed by both parties or their respective successors or permitted assigns. The Existing Supply Agreement is a separate and independent agreement. On the date hereof the parties are executing an Asset Purchase Agreement (the "Asset Purchase Agreement") which covers, among other things, C&S's acquisition of the effected warehousing and distribution business of A&P. The Asset Purchase Agreement is an essential material condition to this Agreement and hereby incorporated and made a part of this Agreement. It is agreed that upon execution hereof by the parties hereto, that the Negotiation-Inducement/Continuation Agreement, dated May 9, 2005, between C&S and A&P, is terminated and canceled and all rights and obligations thereunder are extinguished and satisfied. Section 27. Waiver. No claim or right arising out of the breach of this Agreement can be discharged in whole or in part by waiver or renunciation of a claim or right unless the waiver or renunciation is supported by consideration and is in writing and signed by the aggrieved party. Waiver by either party of a breach by the other of any provision of this Agreement shall not be deemed a waiver of any other provision or future compliance with all provisions hereunder, and all such provisions shall remain in full force and effect. Failure of either party to enforce any right hereunder shall not be deemed a waiver of any subsequent right hereunder. Section 28. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed to do so and all of which together shall constitute one and the same instrument. -26- Section 29. Authority. Each individual signing this Agreement hereby represents and warrants that he has the full corporate power and authority to do so and thereby bind the corporation on whose behalf the individual has signed the Agreement. Section 30. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to the principles of conflicts of laws thereof. If any provision, clause or part, or the application thereof under certain circumstances, is held invalid, the remainder of this Agreement or the application of such provision, clause or part shall not be affected thereby. Section 31. Dispute Resolution. (a) Any controversy, claim, or dispute between the parties, directly or indirectly, concerning this Agreement or the breach hereof, or the subject matter hereof, including questions concerning the scope and applicability of this arbitration clause, shall be finally settled by arbitration in New York City pursuant to the rules then applying of the American Arbitration Association, with the sole exception as envisioned in Section 18.6 for a breach of confidentiality requiring injunctive relief. The arbitrators shall consist of one party representative selected by A&P, one party representative selected by C&S and one neutral representative selected jointly by the first two arbitrators. The party arbitrators shall be selected within * after the commencement of the arbitration proceeding, and the neutral arbitrator shall be selected within * of the appointment of the last party arbitrator. The parties agree that the arbitrators' Award shall be duly made in writing within * after the hearings in the arbitration proceedings are closed, and that an Award agreed upon by any two of the arbitrators shall be binding and conclusive on all of the parties to this Agreement. The arbitrators shall have the right and authority to assess the cost of the arbitration proceedings and to determine how their decision as to each issue or matter in dispute may be implemented or enforced. (b) Judgment upon the Award may be sought and entered in any competent federal or state court located in the United States of America. An application may be made to such court for confirmation of the Award and for any other equitable or legal remedies that may be necessary to effectuate such Award or otherwise preserve any rights for which no adequate remedy at law exists. (c) The parties understand and agree that they hereby are giving up and waiving any claim or right to litigate in court or by a jury trial, unless or to the extent that such rights are specially provided for under this Agreement or cannot be waived under applicable law. Section 32. Exhibits. The Parties agree that the attached exhibits and schedules ("Exhibits") may not at the time of execution of this Agreement all be final and shall be supplemented and/or revised prior to the applicable Procurement Conversion Dates or at another time to be mutually agreed to by the Parties. The Parties acknowledge and agree that substantially all of the terms of the Exhibits have been agreed upon and are reflected in the attached Exhibits and accordingly the Exhibits shall be in substantially similar forms as ______________________________ * *Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24-b2. -27- the Exhibits attached to this Agreement on the date hereof. The Parties agree to engage in subsequent good faith negotiation with respect to any outstanding issues or requested supplements or revisions to the Exhibits. [Remainder of page intentionally left blank] -28- Section 33. Capitalized Terms. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Asset Purchase Agreement. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. THE GREAT ATLANTIC & PACIFIC C&S WHOLESALE GROCERS, INC. TEA COMPANY, INC. By: By: --------------------------- ---------------------------- Name: Name: Title: Title: -29- SCHEDULES Schedule 1.5 Store Locations Schedule 2.1 Implementation Schedule [CONFIDENTIAL] Schedule 3.1(c) Perishable Procurement Procedures [CONFIDENTIAL] Schedule 3.1(f) Logistics Programs Schedule 3.2(a)(i) Transition Period Actual Costs [CONFIDENTIAL] Schedule 3.2(b)(i) Upcharge Calculation [CONFIDENTIAL] Schedule 3.2(b)(ii) Stop Fee Calculation Template [CONFIDENTIAL] Schedule 3.2(b)(iii) Dunmore [CONFIDENTIAL] Schedule 3.2(b)(iv) New Orleans Specifics [CONFIDENTIAL] Schedule 3.2(c)(v) Coupons [CONFIDENTIAL] Schedule 3.2(d)(i) Base Cost of Fuel Schedule 5.1 Short Coded Items[CONFIDENTIAL] Schedule 5.5(a) Standard Credit Policy for Facilities [CONFIDENTIAL] Schedule 5.5(b) Non-Facility Standard Credit Policy [CONFIDENTIAL] Schedule 5.5(c) Shrink Gain/Loss [CONFIDENTIAL] Schedule 5.8 SKU's [CONFIDENTIAL] Schedule 8.1 Delivery Schedule [CONFIDENTIAL] Schedule 12 Liaison Job Description Schedule 13 Carolina Logistics Services ("CLS") [Attach] [CONFIDENTIAL] Schedule 19 Facility Inspection Procedures [CONFIDENTIAL] Schedule 1.5 Store Locations
Location Banner Address City State Zip 34698 A&P 293 ROUTE 206 FLANDERS NJ 07836 32609 A&P AVENUE A AND 8 TH STREET BAYONNE NJ 07002 32752 A&P 19 BELLEVILLE AVENUE BLOOMFIELD NJ 07003 34610 A&P 550 MYRTLE AVENUE & RT 202 BOONTON NJ 07005 32607 A&P 289 BERGEN BOULEVARD FAIRVIEW NJ 07022 32618 A&P 421 ANDERSON AVE FAIRVIEW NJ 07022 34895 A&P 105 SOUTH AVENUE FANWOOD NJ 07023 32809 A&P 59 OUTWATER LANE GARFIELD NJ 07026 32867 A&P 801 KENILWORTH BLVD. KENNILWORTH NJ 07033 32847 A&P 453 VALLEY STREET MAPLEWOOD NJ 07040 32864 A&P 510 VALLEY ROAD UPPER MONTCLAIR NJ 07043 34801 A&P 177 WASHINGTON VALLEY ROAD WARREN NJ 07059 34650 A&P 907 OAK TREE ROAD SOUTH PLAINFIELD NJ 07080 32897 A&P 230 GALLOPING HILL ROAD UNION NJ 07083 34836 A&P 789 ST GEORGES AVE WOODBRIDGE NJ 07095 32640 A&P 125 18TH STREET JERSEY CITY NJ 07310 34639 A&P 45 DE MURCIO DRIVE ALLENDALE NJ 07401 34685 A&P 1938 UNION VALLEY ROAD WEST MILFORD NJ 07421 34701 A&P 1730 ROUTE 46 WEST PATERSON NJ 07424 34677 A&P 117 FRANKLIN TURNPIKE MAHWAH NJ 07430 34620 A&P 137 LAKE STREET MIDLAND PARK NJ 07432 34642 A&P 5734 BERKSHIRE VALLEY ROAD JEFFERSON NJ 07438 34990 A&P 500 ROUTE 23 POMPTON PLAINS NJ 07440 34638 A&P 63 WANAQUE AVE POMPTON LAKES NJ 07442 34684 A&P 455 ROUTE 23 SUSSEX NJ 07461 34621 A&P ROUTES 515 AND 94 VERNON NJ 07462 34668 A&P 560 VALLEY ROAD WAYNE NJ 07470 32653 A&P 4 MEMORIAL DRIVE LODI NJ 07644 32664 A&P 199 KINDERKAMACK ROAD PARK RIDGE NJ 07656 32391 A&P 75 MAYHILL STREET SADDLEBROOK NJ 07663 32651 A&P 315 PASCACK ROAD WASHINGTON TWNSHP NJ 07675 32658 A&P 216 OLD TAPPAN ROAD OLD TAPPAN NJ 07675 34659 A&P 520 CHESTNUT RIDGE ROAD WOODCLIFF LAKE NJ 07675 34924 A&P ROUTE 35 & VALLEY DRIVE NAVESINK NJ 07716 34927 A&P 2007 ROUTE 35 WALL TOWNSHIP NJ 07719 34626 A&P 990 SHREWSBERRY AVE TINTON FALLS NJ 07724 34656 A&P 2101 ROUTE 35 NORTH HOLMDEL NJ 07730 34855 A&P 507 PROSPECT AVENUE LITTLE SILVER NJ 07739 34926 A&P 460 COUNTY LINE ROAD & ROUTE 520 EAST MARLBORO NJ 07746 34825 A&P 325 ROUTE 35 MATAWAN NJ 07747 34874 A&P 517 RT 46 EAST BELVEDERE NJ 07823 34686 A&P 152 ROUTE 94 BLAIRSTOWN NJ 07825 34806 A&P ROUTE 513 AND LITTLE BROOK ROAD CALIFON NJ 07830 34649 A&P 123 EAST MAIN STREET DENVILLE NJ 07834 34951 A&P 7 NAUGHTRIGHT ROAD MOUNT OLIVE NJ 07840 34688 A&P 148 CENTER GROVE ROAD & RT 10 RANDOLPH NJ 07869 34417 A&P 407 KING GEORGE ROAD BASKING RIDGE NJ 07920 34687 A&P 110 WASHINGTON STREET MORRISTOWN NJ 07960 34891 A&P 580 CENTRAL AVENUE NEW 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OCEAN CITY MD 21842 22888 SUPERFRESH 12741 OCEAN GATEWAY OCEAN CITY MD 21842 22892 SUPERFRESH 11531 COASTAL HIGHWAY OCEAN CITY MD 21842 22377 SUPERFRESH 447 EAST UWCHLAN AVE CHESTER SPRINGS PA 49425 47068 SUPERFRESH 1000 WEST ESPLANADE SUITE 300 KENNER LA 70065 13362 WALDBAUMS 772 NORTH MAIN STREET WEST HARTFORD CT 06117 27863 WALDBAUMS 375 TOMKINS AVENUE ROSEBANK NY 10304 27890 WALDBAUMS 454 NEW DORP LANE NEW DORP NY 10306 27219 WALDBAUMS 3251 RICHMOND AVENUE STATEN ISLAND NY 10312 27238 WALDBAUMS 4343 AMBOY ROAD STATEN ISLAND NY 10312 27230 WALDBAUMS 1441 RICHMOND AVE STATEN ISLANE NY 10314 27672 WALDBAUMS 778 MANOR ROAD STATEN ISLAND NY 10314 27613 WALDBAUMS 259-01 UNION TURNPIKE GLEN OAKS NY 11004 27617 WALDBAUMS 40 GREAT NECK ROAD GREAT NECK NY 11021 27223 WALDBAUMS 2475 JERICHO TURNPIKE GARDEN CITY PARK NY 11040 27248 WALDBAUMS 81-21 NEW UTRECHT AVENUE BROOKLYN NY 11219 27231 WALDBAUMS 2424 FLATBUSH AVENUE SOUTH FLATBUSH NY 11234 27240 WALDBAUMS 2149 RALPH AVENUE BROOKLYN NY 11234 27235 WALDBAUMS 3100 OCEAN AVENUE BROOKLYN NY 11235 27643 WALDBAUMS 1871 ROCKAWAY PARKWAY BROOKLYN NY 11236 27275 WALDBAUMS 133-11 20TH AVENUE COLLEGE POINT NY 11356 27270 WALDBAUMS 153-01 TENTH AVENUE WHITESTONE NY 11357 27657 WALDBAUMS 35-10 FRANCIS LEWIS BLVD BAYSIDE NY 11358 27632 WALDBAUMS 213-15 26TH AVENUE BAY TERRACE NY 11360 27209 WALDBAUMS 46-40 FRANCIS LEWIS BOULEVARD BAYSIDE NY 11361 27247 WALDBAUMS 240-02 61ST AVENUE DOUGLASTON NY 11363 27641 WALDBAUMS 75-55 31ST AVENUE JACKSON HEIGHTS NY 11372 27243 WALDBAUMS 196-35 HARACE HARDING BLVD FLUSHING NY 11375 27651 WALDBAUMS 156-01 CROSS BAY BLVD HOWARD BEACH NY 11414 27668 WALDBAUMS 83-25 153RD AVENUE HOWARD BEACH NY 11414 27669 WALDBAUMS 1050 WILLIS AVENUE ALBERTSON NY 11507 27633 WALDBAUMS 660 SUNRISE HIGHWAY BALDWIN NY 11510 27685 WALDBAUMS 905 ATLANTIC AVENUE BALDWIN NY 11510 27610 WALDBAUMS 2 WESTBURY AVENUE CARLE PLACE NY 11514 27655 WALDBAUMS 1-1 PARK PLAZA GLEN HEAD NY 11545 27639 WALDBAUMS 1530 FRONT STREET EAST MEADOWS NY 11554 27245 WALDBAUMS BAY & ROCKWAY BOULEVARD LAWRENCE NY 11559 27658 WALDBAUMS 85 WEST PARK AVENUE LONG BEACH NY 11561 27279 WALDBAUMS 1686 MERRICK ROAD MERRICK NY 11566 27647 WALDBAUMS 399 OCEAN AVENUE ROCKVILLE CENTRE NY 11570 27213 WALDBAUMS 3600 LONG BEACH ROAD OCEANSIDE NY 11572 27210 WALDBAUMS 595 OLD COUNTRY ROAD WESTBURY NY 11590 27616 WALDBAUMS 112-15 BEECH CHANNEL DRIVE BELLE HARBOR NY 11694 27661 WALDBAUMS 725 SUNRISE HIGHWAY BABYLON NY 11704 27253 WALDBAUMS 1934 MIDDLE COUNTRY ROAD CENTEREACH NY 11720 27203 WALDBAUMS 55 JERICHO TURNPIKE COMMACK NY 11725 27215 WALDBAUMS 40 VANDERBILT PARKWAY COMMACK NY 11725 27699 WALDBAUMS 1960 DEER PARK AVE DEER PARK NY 11729 27673 WALDBAUMS 300 MONTAUK HIGHWAY EAST ISLIP NY 11730 27277 WALDBAUMS 4054 NESCONSET HIGHWAY EAST SETAUKET NY 11733 27638 WALDBAUMS 450 MAIN STREET FARMINGDALE NY 11735 27217 WALDBAUMS 777 PULASKI ROAD GREENLAWN NY 11740 27286 WALDBAUMS 328 UNION AVENUE HOLBROOK NY 11741 27236 WALDBAUMS 60 WALL STREET HUNTINGTON NY 11743 27681 WALDBAUMS 711 EAST JERICHO TURNPIKE HUNTINGTON STA. NY 11746 27298 WALDBAUMS 890 WALT WHITMAN RD MELVILLE NY 11747 27289 WALDBAUMS 336 NORTH BROADWAY JERICHO NY 11753 27697 WALDBAUMS ROUTE 25A & JOHNSLAND ST. SAN REMO NY 11754 27283 WALDBAUMS 3377 HEMPSTEAD TURNPIKE LEVITTOWN NY 11756 27251 WALDBAUMS 50 HOFFMAN AVE LYDENHURST NY 11757 27256 WALDBAUMS 5508 SUNRISE HIGHWAY MASSAPEQUA NY 11758 27688 WALDBAUMS 702 HICKSVILLE ROAD MASSAPEQUA NY 11758 27261 WALDBAUMS MILLER PLACE ROAD MILLER PLACE NY 11764 27288 WALDBAUMS 4560 SUNRISE HIGHWAY OAKDALE NY 11769 27241 WALDBAUMS 440 WEST SUNRISE HIGHWAY NORTH PATCHOGUE NY 11772 27660 WALDBAUMS 665 MONTAUK HIGHWAY EAST PATCHOGUE NY 11772 27611 WALDBAUMS 245 ROUTE 25A ROCKY POINT NY 11778 27630 WALDBAUMS 601 PORTION ROAD LAKE RONKONKOMA NY 11779 27662 WALDBAUMS 211 MIDDLE COUNTRY ROAD SELDEN NY 11784 27214 WALDBAUMS 1236 VETERANS HWY HAUPPAUGE NY 11788 27278 WALDBAUMS 124 EAST MAIN STREET SMITHTOWN NY 11788 27601 WALDBAUMS 2162 NESCONSET HWY STONY BROOK NY 11790 27285 WALDBAUMS 910 SOUTH BROADWAY HICKSVILLE NY 11801 27212 WALDBAUMS 1510 OLD COUNTRY ROAD RIVERHEAD NY 11901 27229 WALDBAUMS 812 MONTAUK HIGHWAY CENTER MORICHES NY 11934 27263 WALDBAUMS ROUTE 25 & FACTORY AVENUE MATTITUCK NY 11952 27604 WALDBAUMS 999 MONTAUK HIGHWAY SHIRLEY NY 11967
Schedule 3.1(f) Logistics Programs Current Logistical Vendors CAMPBELL-WL/ONE SOU CLOROX / OCHLOCKNEE GA JOHNSON SC KIMBERLY CLARK/HAZELTON KRAFT - BATTLE CREEK MFG NESTLE FDS/DISTRIBUTION NESTLE/LIBBY BVRGE 28000 UNILEVER HPC Schedule 3.2(d)(i) Base Cost of Fuel BASE COST OF FUEL
Cost of Fuel components Edison Islip Baltimore Freshtown Dunmore Raw price of fuel $ 1.3640 $ 1.4350 $ 1.2590 $ 1.5040 $ 1.3460 Terminal fee Low Sulfer differential Diesel additive freight federal excise tax $ 0.244 $ 0.244 $ 0.244 $ 0.24 $ 0.24 state excise tax $ 0.135 $ 0.080 $ 0.243 $ 0.31 state transfer fees Sales tax $ 0.040 $ 0.135 $ 0.21 Addl delivery fee - (ie: no storage tank/wet hose) Other $ 0.161 $ 0.192 $ 0.05 =========================================================== Total Base Cost of fuel: $ 1.783 $ 2.055 $ 1.746 $ 2.155 $ 1.948 Note: ALL UPCHARGES STILL SUBJECT TO FINAL DUE DILIGENCE AND CONTRACT SIGNING
Schedule 12 Liaison Job Description POSITION TITLE: A&P / C&S LIAISON REPORTS TO: POSITION SUMMARY: This individual will work with Category Management, Procurement, and C&S to minimize the effect of residual inventory. Day to day he/she will monitor KPI's and make the necessary adjustments including order cancellations and creating additional purchase orders. The incumbent will work collaboratively with Central Purchasing, Category Management, Transportation and C&S to make the appropriate decisions. KEY ACCOUNTABILITIES: o Work with A&P to coordinate developing promotional forecast and reporting back to both A&P and C&S the accuracy of those forecast o Meet with appropriate A&P liaisons to resolve service level issues including authorizing proper substitutions. o Meet with the appropriate authority to make timely order adjustments. o Assist in the disposal of the residual add inventory. o Responsible for daily procurement tactical activity. o Researches, resolves and responds to questions/issues in a timely manner and in accordance with standards and protocol o Regularly follows up on problems/issues to ensure that they are being resolved to our customer's satisfaction and within an acceptable timeframe. o Establishes a weekly/period report of accomplishments for submission to Supervisor. PERFORMANCE METRICS: Customer: Achievement of the KPI's set fourth in the A&P and C&S agreement. Financial: Bonus reward based on 50% tactical and 50% on how well A&P and C&S achieves its agreed upon goals. Decrease in residual inventory/number of days. Employee: Measures of effective working relationships. Measures of system and process knowledge and proficiency. Operations: The ability to achieve the objectives that are set by A&P and C&S. SPECIAL SKILLS, TRAINING, OR EXPERIENCE: o Experience in retail, logistics, warehousing, and transportation o Knowledge and understanding of Company systems, policies, and procedure POSITION SPECIFIC COMPETENCIES: 1. Communication Skills - Strong oral, written, presentation, and listening skills. Demonstrated ability to present information in a clear, concise, and compelling manner that commands attention and respect. Exhibits empathy and self-awareness, and has the ability to convincingly persuade and influence others. Must be comfortable dealing at all levels of the organization. 2. Customer Service - Creates and operates within high standards for quality customer service; regularly speaks with customers, associates and suppliers; promptly acts on feedback; provides staffing levels to achieve customer satisfaction levels. 3. Business Case Assessment - Demonstrated ability to analyze the impact of changing business processes, systems, techniques or other methodology and present a strategic assessment of the change to the overall operation. 4. Decision-Making: Demonstrated ability to make decisions, render judgments, or take action. 5. Analytical Skills - Demonstrated ability to gather, relate and compare data from different sources; ensure data is reliable, complete and accurate; identify issues; secure relevant information and identify relationships. 6. Multi-Tasking - Demonstrated ability to effectively handle a variety of tasks simultaneously while maintaining efficiency in task accomplishment. 7. Planning and Organizing - Demonstrated ability to develop strategies and schedules for meeting goals. Anticipates obstacles to goal attainment and devises alternate strategies to achieve objectives. Applies effective planning and time management tools. Demonstrated ability to think ahead, monitor own and others progress, and make adjustments as needed to fulfill commitments within reasonable timeframes and to meet deadlines. CORE COMPANY VALUES: 1. Respect and Integrity: Treat each of our customers, associates, vendors and investors with integrity and respect deserving of a member of the A&P family. 2. Customer Focus: Strive towards understanding and anticipating what our customers want, and more importantly, delivering what they truly value. 3. Teamwork: Encourage commitment to hard working teams that understand the power of a team is greater than the sum of its individuals. 4. Excellence and Accountability: Take personal ownership for ensuring that we strive for excellence in all aspects of our daily responsibilities. 5. Learning: Develop a spirit of inquiry and encourage ongoing growth and development. 6. Community and Social Responsibility: Play an active role in enhancing the quality of life both personally and in our community. -2- EX-10 7 ex1040ittransitionsvcsagrmt.txt EX. 10.40 ITTRANSITION SERVICES AGREEMENT Exhibit 10.40 EXECUTION VERSION =============================================================================== INFORMATION TECHNOLOGY TRANSITION SERVICES AGREEMENT by and among THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., THE GREAT ATLANTIC & PACIFIC TEA COMPANY AND METRO INC. Dated as of August 15, 2005 ================================================================================ INFORMATION TECHNOLOGY TRANSITION SERVICES AGREEMENT (this "Agreement"), dated as of August 15, 2005 (the "Effective Date"), by and among The Great Atlantic & Pacific Tea Company, a Nova Scotia unlimited liability company ("Service Recipient") and Metro Inc., a Quebec company, ("Metro") (as guarantor of Service Recipient's obligations under this Agreement) on the one hand, and The Great Atlantic & Pacific Tea Company, Inc., a Maryland corporation ("Service Provider"), on the other hand. Capitalized terms used and not otherwise defined herein have the meanings ascribed to them in the Purchase Agreement (as defined below). W I T N E S S E T H: WHEREAS, pursuant to that certain Purchase Agreement by and among Metro, 4296711 Canada Inc., a Canadian corporation ("Purchaser"), A&P Luxembourg S.a.r.l, a Luxembourg societe a responsabilite limitee and Service Provider dated as of July 19, 2005 (the "Purchase Agreement"), Service Provider agreed to provide to Service Recipient certain information technology ("IT") and other services, as more fully set forth herein; and WHEREAS, Service Recipient wishes to receive such IT and other services for use in connection with its business in order to ensure a smooth transition to such other IT systems as Purchaser may select. NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements set forth herein, the Parties, intending to be legally bound hereby, agree as follows: ARTICLE I SERVICES Section 1.01 Description of various services to be provided. (a) IT Services. Service Provider shall provide the IT services set forth on Exhibit A (collectively, the "IT Services"). Except as otherwise specifically agreed by the parties, and subject to the terms of this Agreement, the IT Services shall be substantially similar to the equivalent IT services that Service Provider provides for its own business needs. (b) Project Services. If Service Recipient desires to receive any of the application development, enhancement or integration services listed in Exhibit B (collectively, the "Project Services"), Service Recipient will provide Service Provider with a detailed written request for such proposed services (such request sufficiently detailed, to the extent reasonably practicable, to enable Service Provider to assess the feasibility of such request, and if reasonably feasible, estimate the resources and effort required to provide such proposed services). Based on such request, Service Provider shall evaluate such proposal, and if reasonably feasible, and not unduly burdensome in light of Service Provider's resource constraints and obligations, provide a draft work order (a "Work Order") for such services for Service Recipient's approval. Such Work Order shall be accepted or rejected as set forth in Section 1.01(e). Notwithstanding the foregoing, the Service Provider shall be obligated to provide any and all Data Extraction Services on a commercially reasonable timeline to be mutually agreed by the parties pursuant to Section 4.01(b). For purposes of this Agreement, "Data Extraction Services" shall mean the following Project Services in connection with the transition of the data related solely to the operation of the Business: (i) working with Service Recipient as necessary to determine the format in which such data shall be provided; (ii) extracting such data from Service Provider's systems; (iii) providing such data to Service Recipient in such format; and (iv) working with Service Recipient as necessary to determine the most efficient manner in which to complete the transition. Service Provider will be obligated to consider in accordance with the foregoing only such requested services that are directly related to the IT Services and that could not be obtained from other commercial service providers. (c) Additional Services. Service Recipient may request, and Service Provider may propose, services in addition to the IT Services and the Project Services, or the expansion of the scope of any such service (collectively, "Additional Services"). Additional Services shall include all services that (i) are not primarily related to the transition of the IT aspects of the Business to Service Recipient's systems or (ii) that could be obtained from other commercial service providers. If Service Recipient desires to receive any such Additional Services, Service Recipient will provide Service Provider with a detailed written description of such proposed services. Based on such description, Service Provider shall have the right, in its sole discretion, to decline to provide such Additional Services. If Service Provider does not decline such Additional Services, Service Provider shall provide a draft Work Order for the provision of such services for Service Recipient's approval. Such Work Order shall be accepted or rejected as set forth in Section 1.01(d). (d) Work Orders. Any Work Order shall describe (i) the services to be provided under such Work Order, (ii) the timeline for such services and (iii) the cost for such services (which may be expressed as an hourly rate). Upon delivery of a draft Work Order to Service Recipient, Service Recipient may approve or decline such Work Order. If Service Recipient declines such Work Order, then, within ten (10) business days or receipt of such Work Order, Service Recipient shall so notify Service Provider and Service Provider shall have no obligation to provide the services described therein. If Service Recipient approves such Work Order, then Service Provider shall provide the services in accordance therewith and subject to the terms and conditions of this Agreement. No Work Order shall be binding unless signed by both parties. (e) Services. The IT Services, and any Project Services and Additional Services described in mutually agreed Work Orders, are collectively referred to herein as the "Services." Section 1.02 Disaster Recovery. (a) As part of the IT Services, Service Provider will provide to Service Recipient substantially the same disaster recovery services as Service Provider provides to itself. In the event that Service Recipient wishes to receive additional or different disaster recovery Services, such services will be deemed Additional Services and be subject to the provisions of Section 1.01(d). (b) Service Provider will consult with, and will not unreasonably discriminate against, Service Recipient in the creation, implementation and, if required, execution of Service Provider's disaster recovery plan. Service Provider will minimize any such discrimination where reasonably practicable to do so. Service Recipient acknowledges that certain discrimination is practically unavoidable, such as with respect to any Services that, practically speaking, must or should be restored serially among service recipients rather than simultaneously for all service recipients. (c) Notwithstanding Sections 1.02(a) and (b), Service Provider shall not be required to provide disaster recovery services to the extent that Service Recipient has materially altered the facilities, equipment, hardware or software to which such disaster recovery services pertain. If Service Recipient wishes to receive disaster recovery services in such circumstances, then such services will be deemed Additional Services and be subject to the provisions of Section 1.01(d). Section 1.03 Service Standards. (a) For Services not governed by SLAs (as defined below) or other express service standards set forth herein, Service Provider will use commercially reasonable efforts to provide the Services substantially in the same manner, and with substantially the same functionality and performance, as it provides such services to itself, subject to the terms and conditions of this Agreement. (b) As set forth in Exhibit E, certain of the IT Services will be subject to the Service Level Agreement ("SLA") set forth on Exhibit E. Service Provider will measure and report its performance relative to the SLAs, and the parties shall meet periodically to review such performance. In the event that Service Provider materially fails to meet any SLA, Service Provider will initiate a root cause analysis for any incident that contributed to the Service Provider missing such Service Level within a reasonable period of time after such incident and use commercially reasonable efforts to ascertain the actual root cause of such failure, which analysis shall include, where reasonable and practicable, Service Provider's plan for avoiding such incidents in the future. For the sake of clarity, there are no financial penalties associated with Service Provider's failure to meet an SLA. (c) If the performance of the IT Services provided to Service Recipient as measured by the SLAs is materially inferior to the services Service Provider provides to itself, then Service Provider shall endeavor to identify and resolve the cause of the disparity. Service Provider shall attach greater priority to such endeavor than it attaches to any new or ongoing enhancement projects being performed (other than projects for emergency maintenance, to address changes in law, other time-sensitive matters or other matters that pose a material risk to Service Provider's or Service Recipient's respective businesses). The foregoing obligations shall not apply if the disparity is caused by any act or omission by Service Recipient, differences in the Services being provided (including differences attributable to changes in law applicable to Service Recipient), or in Service Recipient's facilities, equipment, hardware or software, or if such disparity is excused by the service standards or other provisions of this Agreement. (d) Service Provider shall have the right, in its sole discretion, to make additions, deletions and other modifications to the SLAs from time to time, subject to the standard set forth in Section 1.03(a). Subject to the foregoing sentence, Service Provider will provide prior written notice to Service Recipient of such additions, deletions and modifications, and shall consider in good faith Service Recipient's concerns regarding such additions, deletions and modifications. (e) It shall not be deemed to be a breach of this Agreement if Service Provider fails to meet the service standards set forth in this Section 1.03 because of (i) the failure of Service Recipient to cooperate with or provide information, services or decisions to Service Provider as required hereunder, (ii) changes reasonably deemed to be required by changes in law, technology or the availability of reasonably commercially available products and services, (iii) changes otherwise permitted hereunder, (iv) the inability of Service Provider to maintain such levels as a result of the demands on, or changes to, the relevant systems, processes or personnel, provided Service Recipient is not disproportionately affected, (v) the implementation of Work Orders or other changes to the Services agreed by the parties, (vi) failures by third party service providers or general Internet services, (vii) force majeure, or (viii) any other event or circumstance beyond Service Provider's reasonable control, provided that, with respect to (iv), (vi) and (viii) only, Service Provider expends commercially reasonable efforts to correct the situation within a reasonable period of time, at its cost. (f) With respect to Services other than IT Services and Data Extraction Services, Service Provider shall endeavor to perform such Services in a workmanlike manner, and shall use commercially reasonable efforts to perform such Services in accordance with any specifications and timelines set forth in any Work Order or other mutually agreed documentation provided. Subject to the foregoing sentence, Service Provider provides no guarantees whatsoever that it will be able to deliver the functionality or other deliverables intended to be created or delivered pursuant to any Work Order related to Additional Services, that such functionality or other deliverables will meet Service Recipient's requirements, or that it will be able to meet any timelines set forth in such a Work Order. Subject to the previous sentence and the remedy provisions of Section 10.04, Service Provider shall not be liable for any failure to provide such Services. Section 1.04 Service Recipients. Service Provider shall provide the Services to and for the benefit of Service Recipient and the Converted Stores. The Services may not be used by a third party, or by Service Recipient for the benefit of third parties, without Service Provider's prior written consent. For purposes of this Agreement, "Converted Stores" shall mean such stores owned by Loeb Canada Inc. ("Loeb Canada") as of the Effective Date and conducted under the "Loeb" or "Super C" banners in Ontario as Loeb Canada may elect to re-banner to "A&P" during the Term. Section 1.05 Means of Providing Services. Service Provider shall, in its sole discretion, determine the means and resources used to provide the Services in accordance with its business judgment. Service Provider shall have sole discretion and responsibility for staffing, instructing and compensating its personnel and third parties who perform the Services. Without limiting the foregoing, Service Provider may elect to modify or replace at any time (a) upon reasonable notice where practicable, the IT Services, provided that such modifications or replacements apply to Service Provider and Service Recipient; (b) its policies and procedures; or (c) the environment used to provide the Services, including (i) the Affiliates of Service Provider or the third parties that provide all or any portion of the Services; (ii) the location from which any Service is provided; or (iii) the intellectual property, IT, products and services used to provide the Services, provided in each case that the service standards set forth in Section 1.03 are substantially maintained. Service Provider shall use commercially reasonable efforts: (a) to eliminate or minimize disruption to Service Recipient's business as a result of such modifications (for the avoidance of doubt, subject to Section 1.06), (b) not to implement such modifications during mutually agreed periods of time before and after cut-overs from such systems to Service Recipient's systems. Section 1.06 Right to Suspend Services. Notwithstanding anything set forth herein to the contrary, Service Provider may suspend or, if Service Provider deems necessary in its sole discretion, terminate, the provision of all or any part of any or all Services if Service Provider reasonably believes that (a) the performance of its obligations relating thereto would violate any applicable law, regulation, judicial or administrative ruling, decision or policy issued by any governmental entity, (b) the performance of its obligations relating thereto would violate any third party patent of which Service Provider was not and should not reasonably have been aware, and Service Provider is unable to implement a commercially reasonable workaround; or (c) continued provision of such Services would preclude or materially impair Service Provider's ability to provide similar services to itself or its other service recipients, but only in the case of clause (a), to the extent reasonably necessary for Service Provider to ensure compliance therewith. Section 1.07 Compliance with Law. Without limiting the provisions of Section 1.06, if any change in law or regulation renders Service Provider's performance of one or more of the Services burdensome or illegal, in Service Provider's reasonable judgment, the party becoming aware of such change in law shall provide prompt written notice thereof to the other party. The parties shall discuss the appropriate means of addressing such change in law, provided that (a) subject to Section 1.07(b), Service Recipient and Service Provider will be responsible for all incremental costs arising from changes in law in connection with their respective businesses, and (b) the Parties will share on a pro rata basis (based on each party's usage of the affected Services) all incremental costs arising from changes in law affecting the Services or their provision. Section 1.08 Modifications to IT Services by Service Provider. Service Provider reserves the right to modify the environment used to provide the IT Services, and the IT Services themselves, as Service Provider deems appropriate to serve Service Provider's internal business needs, provided that Service Provider shall not materially disrupt the Service Recipient's business as a result of such modifications. Service Provider shall not implement such modifications during mutually agreed periods of time before and after cut-overs from such systems to Service Recipient's systems. Section 1.09 Change Control. Should Service Recipient desire to make any changes to the Services (other than requests for Project Services or Additional Services) Service Recipient shall submit to Service Provider in writing a full description of such proposed changes. Service Provider shall, within a reasonable time after receipt of such description, advise as to whether Service Provider will agree to the proposed changes and, if so, submit to Service Recipient a Work Order setting forth a quotation for implementing such changes and specifying any impact on pricing or other terms of this Agreement. ARTICLE II COOPERATION AND ACCESS Section 2.01 Cooperation. Each party will perform all of its obligations hereunder in good faith, and will cooperate diligently with the other in all matters relating to provision and receipt of the Services. Without limiting the generality of the foregoing, each party shall notify the other in advance of any changes to such party's operating environment or personnel, including changes with respect to employee status, and each party shall work with the other to minimize the effect of such changes. Section 2.02 Access to Facilities, Equipment and Personnel. (a) Service Recipient shall grant to Service Provider's and its Affiliates' employees, service providers and other contractors physical and remote access to Service Recipient's facilities, systems, equipment and personnel as necessary for Service Provider to provide the Services. (b) In connection with Data Extraction Services, Service Provider shall provide, at Service Recipient's request and on an as-available, mutually agreed basis, office space and network connections for approximately ten (10) employees of Service Recipient or its consultants at no additional charge. All office space and network connections requested by Service Recipient that are not related directly to Data Extraction Services shall be provided as Project Services and subject to Section 1.01(b). (c) In connection with Data Extraction Services, Service Recipient may request and Service Provider shall provide access in a manner to be mutually agreed by the parties to Service Provider's facilities, personnel and equipment to Service Recipient at no additional charge. All access to Service Provider's facilities, personnel and equipment not related directly to Data Extraction Services shall be provided as Project Services and subject to Section 1.01(b). Section 2.03 Access to Information. (a) Each party shall provide upon the written request of the other any information within such party's possession, subject to applicable privacy laws, that the requesting party (i) reasonably requires to comply with requirements imposed on the requesting party by a governmental authority; (ii) reasonably requires for use by such requesting party in any proceeding or to satisfy audit, accounting, tax or similar requirements; or (iii) which the requesting party reasonably determines is necessary or advisable in the preparation of its financial statements or any reports or filings with any governmental agency. (b) At the request of Service Provider, Service Recipient shall timely provide information, documentation and resources sufficient for Service Provider to perform the Services. Service Recipient will provide Service Provider with timely notice of decisions, approvals and acceptances in order that Service Provider may perform its obligations hereunder in a timely and efficient manner. Section 2.04 Errors. Service Provider may assume all information, documentation, decisions, approvals and acceptances provided by Service Recipient in connection with the Services are accurate, complete and final, and shall have no obligation to inquire as to any errors or omissions nor any obligation or liability for relying thereon (absent actual knowledge of any material error or omission). Service Recipient shall be responsible for the accuracy of all information and data provided by it or on its behalf to Service Provider. Section 2.05 Compliance. Each party shall comply with all applicable laws, regulations, statutes and guidelines. Without limiting the generality of the foregoing, Service Recipient shall comply with Service Provider's policies, standards and guidelines relating to the Services, information protection, and information and system security as such policies, standards and guidelines may be provided to Service Recipient from time to time. Such policies, standards, and guidelines are subject to change by Service Provider (as deemed necessary by Service Provider in the course of conducting its business operations); provided, however, that such changes shall be communicated to Service Recipient in advance in an effort to avoid or minimize any adverse impact on the business operations of Service Provider. Section 2.06 Security. (a) Subject to Section 2.05, the parties shall work together to ensure that Service Provider is able to maintain its security requirements as new security-related issues may arise for either party. (b) If either party, or its personnel, will be given access to the other party's computer systems or software ("Systems") in connection with the performance of the Services, the accessing party or its personnel, as the case may be, shall comply with all of such other party's written system security policies, procedures and requirements made available by each party to the other (as amended from time to time, the "Security Regulations"), and will not tamper with, compromise or circumvent any security or audit measures employed by such other party. (c) Each party shall use its reasonable endeavors to ensure that only those of its personnel who are specifically authorized to have access to the Systems of the other party gain such access, and to prevent unauthorized access, use, destruction, alteration or loss of information contained therein, including notifying its personnel regarding the restrictions set forth in this Agreement and establishing appropriate policies designed to effectively enforce such restrictions. (d) If, at any time, either party determines that the other party or its personnel has sought to circumvent, or has circumvented, its Security Regulations, that any unauthorized personnel of the other party has accessed its Systems or that the other party or any of its personnel has engaged in activities that may lead to the unauthorized access, use, destruction, alteration or loss of data, information or software, such party shall immediately terminate any such personnel's access to the Systems and notify the other party. Each of Service Provider and Service Recipient shall access and use only those Systems, and within such Systems, only such data and information, to which it has been granted the right to access and use. Notwithstanding the foregoing, any party shall have the right to deny the personnel of the other party access to such party's Systems, after prior written notice, in the event the party reasonably believes that such personnel pose a security concern. (e) A material failure to comply with the Security Regulations shall constitute a material breach of this Agreement. All user identification numbers and passwords of a party disclosed to the other party and any information obtained from the use of the disclosing party's Systems shall be deemed Confidential Information of the Disclosing Party without the need for the Disclosing Party to specifically identify such information as such. (f) Each party will cooperate with the other party in investigating any apparent unauthorized access to party's Systems or any apparent unauthorized release by a party or such party's personnel of Confidential Information of a party. Each party will: (i) immediately notify the other party if such party has revoked access to its own Systems to any of its personnel if such personnel also has access to the other party's Systems; and (ii) to the extent reasonably possible, will immediately revoke any access to the other party's Systems once such party's Personnel no longer has a need to access the other party's Systems. (g) Each party will use commercially reasonable efforts to prevent the introduction of viruses and other unauthorized software or mechanisms into their and, to the extent of such party's access to the other party's computer systems, the other party's computer systems. If a virus or other unauthorized software or mechanism is found to have been introduced into Service Recipient's systems or Service Provider's systems and affected the Services, as Service Recipient's sole and exclusive remedy, Service Provider shall take reasonable efforts to remove such virus, unauthorized software or mechanism from such systems and to assist in mitigating any interruption to the Services (subject to Article X). Section 2.07 Services Information. Service Provider shall maintain reasonable documentation in respect of the Services provided hereunder, consistent with its past practice, which Service Provider will make available to Service Recipient upon Service Recipient's request, subject to Service Provider's confidentiality and other obligations to any third parties. ARTICLE III THIRD PARTY CONTRACTS Section 3.01 Subcontractors and Suppliers. Service Provider may subcontract some or all of the Services to another provider, including third parties and Service Provider's Affiliates. Service Provider shall have sole discretion with respect to the evaluation and selection of such other providers; provided that Service Provider shall (a) consult with and consider in good faith any recommendations or concerns raised by Service Recipient with respect to such other providers, and (b) remain responsible for the performance of the Services in accordance with the terms and conditions of this Agreement. Section 3.02 Third Party Contracts. Services provided by third parties through Service Provider or using third party intellectual property, products or services are subject to the terms and conditions of any agreements between Service Provider and such third parties. Each of Service Provider and Service Recipient is responsible for its compliance with its own third party contracts and the applicable third party contracts of the other party disclosed to such party, provided that, Service Provider will not be obligated to comply with any onerous or unreasonable terms under any such third party contract of Service Recipient. In the event that Service Provider reasonably determines that any such terms are onerous or unreasonable, Service Provider shall so notify Service Recipient, and the parties will work together to implement either a compromise with such third party or an alternative arrangement. Each party will pass through to the other party any applicable rights or benefits under the underlying contract with the third party, including any warranties or indemnifications, to the extent permitted by the applicable contracts. Section 3.03 Required Consents. Service Recipient will be responsible for obtaining any necessary third party consents, additional licenses and other rights under its third party contracts to which Service Provider requires access to perform the Services. Service Provider shall use commercially reasonable efforts to obtain any necessary third party consents, additional licenses and other rights under its third party contracts in order to perform the Services. If any consent, additional license or other right cannot be reasonably obtained, the parties shall discuss acceptable alternative arrangements, if possible and as necessary, to provide the Services sufficient for the Service Recipient's purposes. In no event shall the foregoing require Service Provider to undertake any material changes to its IT infrastructure or to its development, operational or business processes or plans. The Service Recipient and the Service Provider shall share equally up to CA$6,000,000 (or up to CA$3,000,000 each) with respect to any and all costs related to obtaining any such necessary third party consents, additional licenses and other rights under Service Provider's third party contracts in order to perform the Services (collectively, "Consent Costs"). Service Provider shall be solely responsible for Consent Costs in excess of CA$6,000,000 and up to CA$20,000,000. Service Recipient and Service Provider shall share equally Consent Costs in excess of CA$20,000,000. ARTICLE IV GOVERNANCE Section 4.01 Relationship Managers and Committees. (a) Relationship Managers. Each of Service Provider and Service Recipient shall appoint a Relationship Manager to coordinate provision of the Project Services to Service Recipient. The Relationship Managers will meet on a monthly basis to review performance, discuss issues and address any other relevant relationship management issues. The name and contact information of each party's Relationship Manager is set forth on Exhibit D. (b) Operational Steering Committee. The parties shall establish an Operational Steering Committee consisting of an equal number of representatives from each of Service Provider and Service Recipient. The Operational Steering Committee shall meet as frequently as necessary, in person or by telephone, to discuss and agree upon, subject to the other terms and conditions of this Agreement, the Services to be provided in connection with system transition and system integration, including Data Extraction Services, and the schedule pursuant to which such Services will be provided. (c) Executive Committee. The parties shall establish an Executive Steering Committee consisting of an equal number of executives from each of Service Provider and Service Recipient. During the twelve (12) months immediately following the Effective Date, the Executive Steering Committee shall meet once per month, in person or by telephone, to discuss the Strategic Plan, and thereafter at least once annually and otherwise as mutually agreed by the parties. Section 4.02 Project Services. Subject to Section 4.01(b), in connection with Project Services, the parties will use the project life cycle and software life cycle procedures as are used by Service Provider as of the Effective Date.(1) Section 4.03 Strategic Plan. Service Recipient shall provide to Service Provider by January 31, 2006 an initial strategic plan for Services for calendar year 2006, and thereafter, for each calendar year during the Term, provide its strategic plan for Services at least three (3) months prior to the end of the then-current calendar year, in order to allow Service Provider to assess the requested Services, approve, propose modifications to, or reject the strategic plan, in whole or in part, and make appropriate resource allocations and prioritizations for approved elements of such plan. ARTICLE V INTELLECTUAL PROPERTY AND DATA Section 5.01 License Grant to Service Recipient. Service Provider hereby grants to Service Recipient a non-exclusive, non-transferable license to (a) copy and use the documentation provided hereunder solely for the purposes of receiving the Services, and (b) copy and use such Service Provider software (such as client software for receiving Services delivered using a client-server software application) as may be required by Service Recipient to receive the Services. Section 5.02 License Grant to Service Recipient in connection with its Business. Service Provider hereby grants to Service Recipient a non-exclusive, perpetual, sublicensable, transferable, royalty-free, irrevocable license to exercise all rights under intellectual property owned by Service Provider and used by Service Provider as of the Closing Date in connection with such warehouse and store systems set forth on Exhibit H as Service Recipient may select for any and all purposes in Service Recipient's and the Converted Stores' businesses. Service Recipient's license rights shall survive any termination of this Agreement for the intellectual property that Service Recipient shall continue to use following the system transition and system integration processes. Section 5.03 License Grant to Service Provider in connection with the Services. Service Recipient hereby grants to Service Provider a non-exclusive, royalty-free, fully paid-up license to all intellectual property owned or licensed (subject to Section 3.03) by Service Recipient and necessary or desirable for Service Provider to perform the Services, solely in connection with provision of the Services in accordance with this Agreement. Section 5.04 License Grant to Service Provider in connection with its Business. Service Recipient hereby grants to Service Provider a non-exclusive, perpetual, sublicensable, transferable, royalty-free, irrevocable license to exercise all rights under intellectual property owned by Service Recipient and used by Service Provider as of the Closing Date for any and all purposes in its and its Affiliates' businesses, through any and all means, now known or hereafter invented or discovered. Service Provider's license rights shall survive any termination of this Agreement. Section 5.05 Ownership of Data. Service Recipient shall own all right, title and interest in and to all data generated for Service Recipient by Service Provider in performing the Services ("Service Data"), provided that Service Provider shall own all right, title and interest in and to all data of a technical nature generated in providing the Services that relates to the operation of Service Provider's services infrastructure. Notwithstanding the foregoing, Service Provider may retain and use one copy of the Service Data for regulatory purposes only. Section 5.06 Ownership of Intellectual Property. Except as otherwise set forth herein, each of Service Provider and Service Recipient shall retain all right, title and interest in and to its respective intellectual property and data, and no other license or other right, express or implied, is granted hereunder by either party to its intellectual property or data. Except as otherwise expressly agreed to in writing for any given project, Service Provider shall exclusively own all right, title and interest throughout the world in and to all intellectual property created by it in connection with the performance of this Agreement, and Service Recipient hereby assigns any and all right, title or interest it may have in any such intellectual property to Service Provider. Service Recipient agrees to execute any documents and take any other actions reasonably requested by Service Provider to effectuate the purposes of this Section. ARTICLE VI FEES Section 6.01 Implementation and Set-Up Costs. Each party shall bear all of its own implementation and set-up costs and expenses incurred in connection with the Services. Such implementation and set-up costs shall include, without limitation, any costs incurred in connection with converting Service Provider's IT environment to enable Service Provider to provide the Services, provided that the parties shall cooperate in good faith to minimize the implementation and set-up costs of both parties. Section 6.02 IT Services. In consideration of the IT Services set forth on Exhibit A, Service Recipient shall pay to Service Provider a fee of CA$20,000,000 per year (the "Flat Fee"). For the sake of clarity, such Flat Fee includes data archiving services, but does not include telecommunications fees, which services may be requested as Additional Services. With respect to IT Services provided to Converted Stores, the Flat Fee shall be subject to a pro rata increase to be mutually agreed by the parties and based on (a) the number of Converted Stores and (b) the number and nature of the IT Services provided to such stores. Section 6.03 Project Services. (a) In consideration of the Project Services, Service Recipient shall pay to Service Provider a blended rate of eighty dollars ($80 USD) per employee per hour (the "Blended Rate"), which rate is subject to increases once annually, increases corresponding to increases in the Consumer Price Index. For the purposes of this Section, "Consumer Price Index" means the "Consumer Price Index-All Urban Consumers" published by the United States Department of Labor, Bureau of Labor Statistics. (b) Notwithstanding Section 6.03(a), (i) in the event that Service Recipient requests a Project Service other than a Data Extraction Service that requires an elevated degree of expertise, such that the third party engaged by Service Provider to provide such service would charge a fee substantially in excess of the Blended Rate, Service Provider shall so advise Service Recipient in response to such request and, subject to Section 1.01(b), Service Provider shall provide such Project Services at the rate charged by such third party provider, and (ii) in the event that the parties elect jointly to develop a project for their mutual benefit, the cost of such project shall be allocated between them in a manner to be agreed by the parties and set forth in the project plan for such project. (c) All hours billed to Service Provider in connection with Project Services shall be tracked by Service Provider's time tracking system, "OutProj." Section 6.04 Service Provider Costs. Except as otherwise set forth in Sections 6.01 through 6.03 above, Service Recipient shall pay any incremental costs incurred by Service Provider as a result of its provision of the Services to Service Recipient. Section 6.05 Service Recipient Costs. Service Recipient shall be solely responsible for its own costs and expenses in connection with its receipt of the Services including the cost of all required modifications to store topography that provides required data to the central core systems. Section 6.06 Taxes (a) Generally. Service Recipient shall pay all taxes imposed on the Services or on any payments made hereunder, including sales and use taxes, if and as applicable, but excluding any Service Provider income taxes, if any. (b) Sales Tax, GST, HST. (i) All fees and other amounts payable hereunder are exclusive of any sales or value added taxes, including retail sales, Goods and Services Tax ("GST"), and Harmonized Sales Tax ("HST"). (ii) Service Provider is not required to be and is not a GST or HST registrant for the purposes of Part XI of the Excise Tax Act (Canada) and shall not charge GST or HST on any fees or other amounts payable hereunder in respect of Services. In the event Service Provider is required to or becomes a GST or HST registrant, Service Provider shall charge and Service Recipient shall pay GST or HST as required by Law. (c) Withholding Tax. (i) All fees and other amounts payable hereunder shall be paid net of any withholding for tax required by applicable law. (ii) In the event that the Service Recipient proposes to withhold an amount, in accordance with section 105 of the Income Tax Regulations (Canada), in respect of the payment of any fees or other amounts payable to Service Provider hereunder, Service Recipient shall so inform Service Provider prior to making such payment. The parties shall in good faith use reasonable efforts to determine and agree, in writing, the amount of the payment allocable solely to Services rendered in Canada, and Service Recipient shall withhold only on such amount. Section 6.07 Payment Terms. The Flat Fee will be paid in thirteen (13) equal four-week installments. All other fees and expenses hereunder will be invoiced on a monthly basis. All invoices are payable within thirty (30) days of receipt. All fees and other amounts not paid when due are subject to an interest rate of the lesser of twelve percent (12%) per annum, compounded monthly, and the maximum amount permitted by law. All fees and other amounts payable hereunder shall be paid in U.S. dollars. ARTICLE VII REPRESENTATIONS AND WARRANTIES Section 7.01 Corporate Status. Each party represents and warrants to the others that it is duly incorporated and validly existing under the Laws of the jurisdiction of its incorporation and each (a) has all requisite corporate power and authority to carry on its business as it is now being conducted and (b) is duly qualified to do business in each of the jurisdictions in which the ownership, operation or leasing of its properties and assets and the conduct of its business requires it to be so qualified. Section 7.02 Authority and Enforceability. Each party represents and warrants to the others that the execution and delivery of this Agreement by it and the consummation by it of the transactions contemplated hereby have been duly authorized and no other corporate proceedings are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by each party and (assuming due authorization, execution and delivery by each other party) this Agreement constitutes a valid and binding obligation of such party, enforceable against such party in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar Laws relating to or affecting creditors' rights generally or by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at Law). Section 7.03 No Conflict. Each party represents and warrants to the others that the execution and delivery of this Agreement by it and the consummation by it of the transactions contemplated hereby will not (a) violate any applicable Law to which such Party is subject; (b) except with respect to consents that will be obtained pursuant to Section 3.03, conflict with, result in a violation or breach of, or constitute a default under, result in the acceleration of or create in any party the right to accelerate, terminate or cancel any Contract or (c) violate its charter, bylaws or other organizational documents. ARTICLE VIII TERM AND TERMINATION Section 8.01 Term. This Agreement is effective on the Effective Date and shall continue in effect until the expiration of the Term. Service Provider will provide the Services to Service Recipient for an initial term of twenty-four (24) months (the "Initial Term"). Service Recipient may request renewal of this Agreement with respect to any Service hereunder for two (2) additional six (6) months term (the Initial Term, together with any such renewal term, the "Term") upon six (6) months' prior written notice. The terms and conditions of the Agreement shall continue to apply during any renewal term except that the then current Flat Fee shall be subject to an increase, such increase corresponding to the increase in the Consumer Price Index as defined under Section 6.03 of this Agreement. Section 8.02 Termination. (a) Either party may terminate this Agreement in the event of: (i) a material breach by the other any of its obligations under this Agreement that is not cured within thirty (30) days after written notice thereof to the breaching party's Relationship Manager; or (ii) the other party (1) being proposed or filing for bankruptcy, (2) becoming or being declared insolvent, or being the subject of any bona fide proceedings related to its liquidation, administration, provisional liquidation, bankruptcy or insolvency that is not dismissed within sixty (60) days, or having a receiver, manager, receiver-manager, trustee or similar officer appointed for it, (3) passing a resolution for its voluntary liquidation, (4) having a receiver, manager, receiver-manager, trustee or similar officer appointed over all or substantially all of its assets, (5) making an assignment for the benefit of all or substantially all of its creditors, (6) entering into an agreement or arrangement for the composition, extension, or readjustment of substantially all of its obligations or any class of such obligations, or (7) experiencing an event analogous to any of the foregoing in any jurisdiction in which any of its assets are situated; (b) Service Recipient may terminate a Service: (i) in accordance with the Strategic Plan with respect to any of the core IT Services listed in Exhibit F (collectively, the "Core Services"), provided that, if Service Recipient terminates a Core Service in its entirety, such termination shall result in a pro rata reduction of the Flat Fee by the annual amounts set forth in Exhibit F once such Service is no longer provided; (ii) on six (6) months' prior written notice with respect to all Services that are not Core Services, provided that such termination shall not result in a reduction of the Flat Fee; and (iii) if such Service is a Service subject to an SLA Termination Event (as set forth on Exhibit G), upon twelve (12) months prior written notice, if, subject to Section 1.03, an SLA Termination Event occurs. (c) Service Provider may terminate this Agreement (i) upon twelve (12) months prior written notice, in the event Service Recipient is acquired by a competitor of Service Provider. (d) Any termination under this Section shall take effect upon the completion of the Termination Transition Assistance services, as described in Section 8.04 below. Section 8.03 Survival. Sections 5.02, 5.04-5.06, 8.03, 10.01-10.03, 12.01, 12.03, 12.06-12.08, 12.11-12.13 and 12.15-12.19, and Articles VI and IX shall survive any expiration or termination of this Agreement. Section 8.04 Termination Transition Assistance. (a) If requested by Service Recipient, prior to the termination or expiration of this Agreement or any Service, Service Provider shall provide termination assistance services to assist Service Recipient in transitioning the IT Services to Service Recipient or a successor service provider ("Termination Transition Assistance") as a Project Service pursuant to Section 1.01(b). For the avoidance of doubt, Service Provider shall not be obligated to provide Termination Transition Assistance following the expiration of the Term. ARTICLE IX CONFIDENTIALITY Section 9.01 Confidentiality. In the course of the provision or receipt of Services, each party may disclose or make accessible to the other (for purposes of this Article IX, the Party disclosing or making accessible such information shall hereinafter be referred to as the "Disclosing Party," and the party receiving such information shall hereinafter be referred to as the "Recipient") certain information which is material and non-public, confidential or proprietary in nature. Such information may include, without limitation, (a) personnel data, business plans and strategies and marketing ideas and concepts, including with respect to unannounced products and services, present and future product plans, pricing, volume estimates, financial data, product enhancement information, sales strategies, customer information, market testing information, development plans, specifications, customer requirements, configurations, designs, plans, apparatus, software, hardware, data, prototypes, or other technical and business information, and (b) the specific terms, conditions and information contained in this Agreement and the Exhibits hereto (collectively, the "Confidential Information"). Section 9.02 Duty to Maintain Confidentiality. The Recipient shall use commercially reasonable efforts to disclose Confidential Information only to those of its employees, Affiliates, agents and contractors on a reasonable need-to-know basis in connection with this Agreement and the Recipient's rights and obligations hereunder, and the Recipient shall use commercially reasonable efforts to: (a) protect the confidentiality of Confidential Information in accordance with the policies and procedures which the Recipient has in effect at any such time with respect to its own comparable Confidential Information but in no event less than in accordance with industry standards; and (b) use, and cause its employees, Affiliates, agents and contractors (during their employment or association with the Recipient) to use and maintain the confidentiality of, all Information received by it from the Disclosing Party solely in connection with the provision, receipt or pricing of the Services or performance of other obligations under this Agreement, and for no other purpose whatsoever except to the extent necessary to exercise, enforce or protect any rights of the Recipient under this Agreement, whether in any dispute arising pursuant to this Agreement or otherwise. Section 9.03 Limitations. For the purposes of this Agreement, the Confidential Information shall not be deemed non-public, confidential or proprietary in nature and the Recipient shall have no obligation with respect to any information that: (a) is or becomes part of the public domain through publication or otherwise, and through no breach of this Agreement, negligence or other fault of the Recipient; (b) is reasonably documented as developed by the Recipient independent of any Confidential Information that it receives from the Disclosing Party; (c) is or becomes available to the Recipient from a source other than the Disclosing Party, provided that the Recipient has no reason to believe that such source has an obligation of confidentiality to the Disclosing Party in respect of such Confidential Information; (d) is, subject to paragraph (f) of this Section 9.03, required to be disclosed by law, governmental order, judicial process or the rules of an applicable securities exchange; or (e) the disclosure of which is mutually agreed to by the parties. Section 9.04 Required Disclosure. If the Recipient is required by oral questions, interrogatories, examinations for discovery, cross-examinations, requests for information or documents, subpoena, civil investigative demand or similar process to disclose any Information, the Recipient shall promptly notify the Disclosing Party of such request or requirement and shall reasonably cooperate with the Disclosing Party such that the Disclosing Party may seek an appropriate protective order or other appropriate remedy. If, in the absence of a protective order or the receipt of a waiver hereunder, the Recipient is compelled to disclose the Confidential Information, the Recipient may disclose only so much of the Information to the party compelling disclosure as is required by law, and shall exercise commercially reasonable efforts to ensure that such Information receives confidential treatment. The Disclosing Party shall reimburse the Recipient for all reasonable out-of-pocket costs it incurs in complying with this Section. Section 9.05 Care and Inadvertent Disclosure. With respect to any Confidential Information, the Recipient agrees that, upon discovery of any inadvertent disclosure or unauthorized use of said Information, or upon obtaining written notice of such a disclosure or use from the Disclosing Party, it shall take commercially reasonable actions to seek to prevent any further inadvertent disclosure or unauthorized use. Section 9.06 Effectiveness. The confidentiality obligations contained in this Article IX shall survive for a period of five (5) years after the termination or expiration of this Agreement. ARTICLE X DISCLAIMER AND LIMITATION OF LIABILITY Section 10.01 Disclaimer of Representations and Warranties. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH HEREIN, EACH OF THE PARTIES HEREBY SPECIFICALLY DISCLAIMS ANY AND ALL CONDITIONS, REPRESENTATIONS AND WARRANTIES WHATSOEVER, WHETHER EXPRESS, IMPLIED COLLATERAL OR STATUTORY, IN CONNECTION WITH THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING REGARDING ANY OF THE SOFTWARE LICENSED HEREUNDER. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, SERVICE RECIPIENT ACKNOWLEDGES THAT THE LICENSES GRANTED IN THIS AGREEMENT AND THE SERVICES PROVIDED HEREUNDER ARE PROVIDED "AS IS." SERVICE RECIPIENT ASSUMES ALL RISKS IN CONNECTION WITH ITS USE OF SUCH SOFTWARE AND SERVICES. NOTHING IN THIS AGREEMENT IS INTENDED TO LIMIT ANY RIGHTS OR REMEDIES OF EITHER PARTY UNDER THE PURCHASE AGREEMENT. Section 10.02 Limitation of Service Provider's Liability. EXCEPT IN CONNECTION WITH SERVICE PROVIDER'S INDEMNIFICATION OBLIGATIONS HEREUNDER TO THE MAXIMUM EXTENT PERMITTED BY LAW, IN NO EVENT SHALL SERVICE PROVIDER BE LIABLE TO ANY OTHER PARTY FOR ANY DAMAGES UNDER THIS AGREEMENT OTHER THAN DIRECT DAMAGES. IN NO EVENT SHALL SERVICE PROVIDER'S AGGREGATE LIABILITY HEREUNDER EXCEED CA$5,000,000. Section 10.03 Limitation of Consequential Damages. EXCEPT IN CONNECTION WITH EACH PARTY'S INDEMNIFICATION OBLIGATIONS HEREUNDER, NO PARTY SHALL UNDER ANY CIRCUMSTANCES BE LIABLE TO ANY OTHER PARTY FOR ANY SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES (INCLUDING LOSS OF PROFITS OR REVENUE) RESULTING OR ARISING FROM THIS AGREEMENT, EVEN IF ADVISED OF THE POSSIBILITY THEREOF. THIS LIMITATION APPLIES REGARDLESS OF WHETHER SUCH DAMAGES OR OTHER RELIEF ARE SOUGHT BASED ON BREACH OF CONDITION, WARRANTY, BREACH OF CONTRACT, NEGLIGENCE, STRICT LIABILITY IN TORT, OR ANY OTHER LEGAL OR EQUITABLE THEORY. Section 10.04 Limited Remedies. (a) Notwithstanding anything to the contrary contained herein, in the event that Service Provider commits an error with respect to, or incorrectly performs or fails to perform, any Service, and Service Provider, in the ordinary course of its business, would have corrected such error or performed or re-performed a similar service for itself, then at Service Recipient's request, to the extent practicable to do so, Service Provider shall use commercially reasonable efforts to correct such error, re-perform or perform such Service. In providing such correction, re-performance or performance, Service Provider shall act with the same degree of care used in correcting such error, re-performing or performing a similar service for itself, and with priority equal to that provided for similar services to itself, at no cost to Service Recipient. Notwithstanding the foregoing, Service Provider shall have no obligation to recreate any lost or destroyed data, but will provide such data to Service Recipient to the extent the same is re-created through such error correction, performance or re-performance of Services. (b) In addition to the limited remedies set forth in Section 10.4(a), Service Recipient may propose that additional efforts be undertaken, as Additional Services, to cure the effects of errors or other failures regarding the Services, or to recreate lost or damaged data, provided that such request is not unduly burdensome and does not present any material adverse risks to Service Provider. Service Provider will not unreasonably withhold its approval of any Work Order to provide such Additional Services. (c) Except as set forth above or in Section 11.01, Service Provider will not be liable in connection with the Services, except to the extent arising from its gross negligence or willful misconduct. ARTICLE XI INDEMNIFICATION Section 11.01 By Service Provider. Service Provider shall indemnify and hold harmless Service Recipient and its Affiliates, directors and officers (collectively, "Service Recipient Indemnified Parties") from and against all actual out-of-pocket losses, damages, liabilities, claims, costs and expenses (including reasonable attorney's fees and expenses), interest, penalties, taxes, judgments and settlements (collectively, "Losses") incurred by any Service Recipient Indemnified Party by reason of (a) third party claims arising from Service Provider's gross negligence or willful misconduct, or (b) except with respect to the systems licensed pursuant to Section 5.02, infringement of a third party's copyright, trademark or trade secret rights. Section 11.02 By Service Recipient. Service Recipient shall indemnify and hold harmless Service Provider and its Affiliates, directors and officers (collectively, "Service Provider Indemnified Parties") from and against all Losses incurred by any Service Provider Indemnified Parties by reason of third party claims arising from (a) Service Recipient's breach of this Agreement or (b) Service Recipient's receipt or use of the Services, except to the extent that such claims are caused by Service Provider's gross negligence or willful misconduct. Section 11.03 Indemnification Procedures. (a) In the event that any action is commenced by a third party involving a claim for which a party required to provide indemnification hereunder (an "Indemnifying Party") may be liable to a party entitled to indemnification (an "Indemnified Party") hereunder (an "Asserted Liability"), the Indemnified Party shall promptly notify the Indemnifying Party in writing of such Asserted Liability (the "Claim Notice"); provided that no delay on the part of the Indemnified Party in giving any such Claim Notice shall relieve the Indemnifying Party of any indemnification obligation hereunder except to the extent that the Indemnifying Party is prejudiced by such delay. The Indemnifying Party shall have sixty (60) days from its receipt of the Claim Notice (the "Notice Period") to notify the Indemnified Party whether or not the Indemnifying Party desires, at the Indemnifying Party's sole cost and expense and by counsel of its own choosing, to defend against such Asserted Liability. If the Indemnifying Party undertakes to defend against such Asserted Liability, (i) the Indemnifying Party shall use its reasonable best efforts to defend and protect the interests of the Indemnified Party with respect to such Asserted Liability and (ii) the Indemnifying Party shall not, without the prior written consent of the Indemnified Party, consent to any settlement which does not contain an unconditional release of the Indemnified Party from the subject matter of the settlement. Notwithstanding the foregoing, in any event, the Indemnified Party shall have the right to control, pay or settle any Asserted Liability which the Indemnifying Party shall have undertaken to defend so long as the Indemnified Party shall also waive any right to indemnification therefor by the Indemnifying Party. If the Indemnifying Party undertakes to defend against such Asserted Liability, the Indemnified Party shall fully cooperate with the Indemnifying Party and its counsel in the investigation, defense and settlement thereof. (b) If the Indemnifying Party does not undertake within the Notice Period to defend against such Asserted Liability, then the Indemnified Party shall have the right to participate in any such defense at its sole cost and expense, but, in such case, the Indemnified Party shall control the investigation and defense and may settle or take any other actions the Indemnified Party deems reasonably advisable without in any way waiving or otherwise affecting the Indemnified Party's rights to indemnification pursuant to this Agreement. The Indemnified Party and the Indemnifying Party agree to make available to each other, their counsel and other representatives, all information and documents available to them which relate to such claim or demand. The Indemnified Party and the Indemnifying Party also agree to render to each other such assistance and cooperation as may reasonably be required to ensure the proper and adequate defense of such claim or demand. (c) In calculating amounts payable to an Indemnified Party, the amount of any indemnified Losses shall be determined without duplication of any other Loss for which an indemnification claim has been made or could be made under any other representation, warranty, covenant, or agreement and shall be computed net of (i) payments recoverable by the Indemnified Party under any insurance policy with respect to such Losses, (ii) any prior or subsequent recovery by the Indemnified Party from any Person with respect to such Losses and (iii) any tax benefit receivable by the Indemnified Party with respect to such Losses. (d) Notwithstanding any other provision of this Agreement, in no event shall any Indemnified Party be entitled to indemnification pursuant to this Article XI to the extent any Losses were attributable to such Indemnified Party's own gross negligence or willful misconduct. (e) To the extent that Seller makes any payment pursuant to this Article XI in respect of Losses for which Service Recipient or any of its Affiliates have a right to recover against a third party (including an insurance company), Service Provider shall be subrogated to the right of Service Recipient or any of its Affiliates to seek and obtain recovery from such third party; provided, however, that if Service Provider shall be prohibited from such subrogation, Service Recipient or its Affiliates, as applicable, shall seek recovery from such third party on Service Provider's behalf and pay any such recovery to Service Provider. ARTICLE XII MISCELLANEOUS Section 12.01 Audit Rights. Throughout the Term and for seven (7) years thereafter, Service Provider shall maintain accurate and complete financial and operational records related to the Services in accordance with generally accepted accounting principles and any Canadian fiscal laws and shall make such records available for reasonable inspection and audit by Service Recipient or its designees and governmental or regulatory authorities. Service Recipient shall conduct such inspection and audit: (a) no more than once every six (6) month period, during Service Provider's regular business hours, at Service Provider's office where such materials are maintained (if applicable) and upon thirty (30) days' prior written notice from Service Recipient, or (b) more frequently as may required in order to comply with applicable laws. Service Provider shall provide to Service Recipient any assistance it may reasonably require in connection with such audits and inspections. Service Provider may require non-employees of Service Recipient who are directed by Service Recipient to perform any inspection and/or audit to agree, in writing, not to disclose to a third party information reasonably determined by Service Provider to be proprietary or confidential to Service Provider's business. Section 12.02 Assignment. (a) Service Provider may assign this Agreement to any Affiliate of Service Provider, or in connection with a merger, amalgamation, reorganization, sale or other change of control of Service Provider or all or a substantial portion of its IT services organization if the assignee agrees in writing to be subject to the terms and conditions of this Agreement. Service Recipient may assign this Agreement in connection with a merger, amalgamation, reorganization, a sale of all or substantially all of Service Recipient's business or assets, or other change of control, if the assignee agrees in writing to be subject to the terms and conditions of this Agreement. Except as set forth in this Section, neither party may assign this Agreement without the prior, written consent of the other party. (b) Any assignment or transfer in violation of Section 12.02(a) shall be void. Subject to the foregoing, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the Parties and their respective successors and assigns. Section 12.03 Metro Undertaking. Metro expressly undertakes that it shall cause Service Recipient to comply with its obligations under this Agreement. Section 12.04 Relationship of the Parties. Nothing in this Agreement shall be deemed to render any party an agent of any other party and or grant any party any authority to bind any other party, transact any business in the other party's name or on its behalf, or make any promises or representations on behalf of the other party. Each party will perform all of its respective obligations under this Agreement as an independent contractor, and no joint venture, partnership or other relationship shall be created or implied by this Agreement. Section 12.05 Force Majeure. (a) Any failure or omission by either party in the performance of the Services under this Agreement shall not be deemed a breach of this Agreement or create any liability, if the same arises from any cause or causes beyond the reasonable control of such party, including the following, which, for purposes of this Agreement shall be regarded as beyond the control of each of the parties hereto: acts of God, fire, storm, flood, earthquake, governmental regulation or direction, acts of the public enemy, war, terrorism, rebellion, insurrection, riot, invasion, strike or lockout (each a "Force Majeure"). (b) Each party will promptly notify the other, either orally or in writing, upon learning of the occurrence of a Force Majeure, and the parties will use reasonable efforts to identify alternative providers for any impacted Services during the continuance of the Force Majeure. Upon the cessation of the Force Majeure, unless otherwise agreed, the party affected by the Force Majeure will resume its performance with the least practicable delay. Notwithstanding the foregoing, if a party cannot perform any Service under this Agreement for a period of sixty (60) days due to a Force Majeure, either party may terminate its obligations regarding such Service by providing written notice to the other Party. Section 12.06 Governing Law. This Agreement shall be governed by and interpreted and enforced in accordance with the Laws of the State of New York without regard to the conflicts of laws rules thereof (other than Sections 5-1401 and 5-1402 of the New York General Obligations Law). Section 12.07 Entire Agreement. This Agreement, including the Exhibits to this Agreement, as such Exhibits may be amended from time to time, constitutes the entire agreement among the parties relating to the Services and there are no further agreements or understandings, written or oral, among the parties with respect thereto. Section 12.08 Notices. All notices, requests, claims, consents, demands and other communications under this Agreement shall be in writing and shall be deemed given if delivered personally, by facsimile (that is confirmed) or sent by overnight courier (providing proof of delivery) to the Parties at the following addresses (or at such other address for a party as shall be specified by like notice): If to Service Recipient: The Great Atlantic & Pacific Tea Company 5559 Dundas Street West Etobicoke, Ontario M9B 1B1 Facsimile: (416) 234-6693 Attention: Christopher A. Appleton If to Metro or the Purchaser, to: Metro Inc. 11011 Boulevard Maurice-Duplessis Montreal, Quebec H1C 1V6 Attn: L.G. Serge Gadbois Fax: (514) 643-1215 with copies, in the case of notice to Service Recipient, Metro or the Purchaser, to: Metro Inc. Place Carillon 7151, Jean-Talon Street East 4th Floor Anjou, Quebec H1M 3N8 Attn: Simon Rivet Fax: (514) 356-5841 - and to - Ogilvy Renault LLP 1981 McGill College Avenue Suite 1100 Montreal, Quebec H3A 3C1 Attn: Paul Raymond Amar Leclair-Ghosh Fax: (514) 286-5474 If to the Service Provider: The Great Atlantic & Pacific Tea Company, Inc. 2 Paragon Drive Montvale, New Jersey 07645 Attn: Mitchell Goldstein Fax: (201) 571-8715 with copies, in the case of notice to Service Provider, to: Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York 10036 Attn: Patricia Moran, Esq. Fax: (212) 735-2000 All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient thereof if received prior to 5:00 p.m., New York City time, and such day is a Business Day in the place of receipt. Otherwise, any such notice, request or communication shall be deemed not to have been received until the next succeeding Business Day in the place of receipt. Section 12.09 Dispute Resolution. Any dispute, difference, disagreement, controversy or claim arising out of or in connection with this Agreement shall be subject to Section 9.3 of the Purchase Agreement. Section 12.10 Equitable Relief. The parties hereby expressly recognize and acknowledge that irreparable damage would result, no adequate remedy at law would exist and damages would be difficult to determine in the event that any provision of this Agreement is not performed in accordance with its specific terms or otherwise breached. Therefore, in addition to, and not in limitation of, any other remedy available to any party, an aggrieved party under this Agreement shall be entitled to immediate injunctive relief to prevent irreparable harm, without the necessity of proving the inadequacy of money damages as a remedy or the necessity of posting a bond or other security. Such remedies, and any and all other remedies provided for in this Agreement, shall be cumulative in nature and not exclusive and shall be in addition to any other remedies whatsoever which any party may otherwise have. Section 12.11 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby are not affected in any manner materially adverse to a party. Upon such determination that any term or other provisions are invalid, illegal or incapable of being enforced, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions be consummated as originally contemplated to the fullest extent possible. Section 12.12 Interpretation. (a) When a reference is made in this Agreement to an Article, Section or Exhibit, such reference shall be to an Article or Section of, or an Exhibit to, this Agreement unless otherwise indicated. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such term. Any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and references to all attachments thereto and instruments incorporated therein. (b) The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement. Section 12.13 Counterparts. This Agreement may be executed in any number of counterparts, each of which when executed, shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument binding upon all of the parties hereto notwithstanding the fact that all parties are not signatory to the original or the same counterpart. For purposes of this Agreement, facsimile signatures shall be deemed originals, and the parties agree to exchange original signatures as promptly as possible. Section 12.14 Further Cooperation. Each party agrees to cooperate with the others, at any other party's request, to execute any and all documents or instruments, or to obtain any consents, in order to assign, transfer, perfect, record, maintain, enforce or otherwise carry out the intent of the terms of this Agreement. Section 12.15 Amendment and Waiver. This Agreement (including the Exhibits hereto) may not be amended or modified except by a writing signed by an authorized signatory of each party. No waiver by any party or any breach or default hereunder shall be deemed to be a waiver of any preceding or subsequent breach or default. Section 12.16 Duly Authorized Signatories. Each party represents and warrants that its signatory whose signature appears below has been and is on the date of this Agreement duly authorized by all necessary corporate or other appropriate action to execute this Agreement. Section 12.17 Submission to Jurisdiction. Subject to Section 12.09 herein (Dispute Resolution) the parties hereby submit to the exclusive jurisdiction of the federal and provincial courts located in Toronto, Ontario (the "Ontario Courts") for the purpose of an order to compel arbitration, for preliminary relief in aid of arbitration or for a preliminary injunction to maintain the status quo or prevent irreparable harm prior to the appointment of the arbitrators, and to the non-exclusive jurisdiction of the Ontario Courts for the enforcement of any arbitral award issued hereunder. Section 12.18 Descriptive Headings. The descriptive headings of the several articles and sections of this Agreement are inserted for reference only and shall not limit or otherwise affect the meaning hereof. Section 12.19 No Third Party Beneficiaries. Nothing in this Agreement shall convey any rights upon any person or entity, which is not a party or a permitted assignee of a party to this Agreement. [Signature Page Follows] IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be executed on its behalf on the day and year first above written. THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. By: /s/ Mitchell P. Goldstein ----------------------------- Name: Mitchell P. Goldstein Title: Executive Vice President, Chief Financial Officer and Secretary THE GREAT ATLANTIC & PACIFIC TEA COMPANY By: /s/ Christopher Appleton ----------------------------- Name: Christopher Appleton Title: Secretary METRO INC. By: /s/ Pierre H. Lessard ----------------------------- Name: Pierre H. Lessard Title: President and Chief Executive Officer By: /s/ Eric Richer La Fleche ----------------------------- Name: Eric Richer La Fleche Title: Executive Vice-President and Chief Operating Officer - ---------------------- (1) Note: These procedures will be substantially similar to what has been made available in the data room. EX-10 8 ex1041investoragreement.txt EX. 10.41 INVESTOR AGREEMENT A&P LUX./METRO Exhibit 10.41 Execution Copy -------------- =============================================================================== INVESTOR AGREEMENT by and among THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. A&P LUXEMBOURG S.a.r.l and METRO INC. Dated as of August 15, 2005 =============================================================================== The term "Confidential" indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. INVESTOR AGREEMENT THIS INVESTOR AGREEMENT is made and entered into and effective as of the 15th day of August, 2005, by and among The Great Atlantic & Pacific Tea Company, Inc., a Maryland corporation ("A&P"), A&P Luxembourg S.a.r.l., a Luxembourg societe a responsabilite limitee (the "Investor" and, together with A&P, the "A&P Parties"), and Metro Inc., a Quebec corporation (the "Company"). RECITALS WHEREAS, pursuant to a stock purchase agreement dated as of July 19, 2005 by and among A&P, the Investor, the Company and 4296711 Canada Inc., a Canadian corporation and a wholly owned subsidiary of the Company, (the "Stock Purchase Agreement"), the Company has purchased all of the issued and outstanding shares of The Great Atlantic and Pacific Tea Company, a Nova Scotia unlimited liability Company from the Investor; WHEREAS, pursuant to the Stock Purchase Agreement, the Company has issued to the Investor 18,076,645 Class A Subordinate Shares of the Company (the "Consideration Shares"); WHEREAS, the Parties wish to enter into this Agreement to provide for certain mutual rights and obligations in respect of the Investor's investment in the Company; and WHEREAS, as a significant shareholder of the Company, the A&P Parties will have certain rights under this Agreement to participate on the Board of Directors and the committees thereof, and the Company will value the significant expertise and management experience that the Investor Designees of the A&P Parties will bring to these roles. NOW, THEREFORE, in consideration of the foregoing, the representations, warranties, covenants and agreements set forth in this Agreement, and other good and valuable consideration, the adequacy and receipt of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE 1 DEFINITIONS 1.1 Definitions Capitalized terms used in this Agreement shall have the meanings set forth in this Agreement. In addition, for purposes of this Agreement, the following terms, when used in this Agreement, shall have the meanings assigned to them in this Section 1.1. "1933 Act" means the United States Securities Act 1933, as amended. "1934 Act" means the Unites States Securities Exchange Act of 1934, as amended. "A&P" shall have the meaning set forth in the first paragraph of this Agreement. "A&P Parties" shall have the meaning set forth in the first paragraph of this Agreement. "A&P Indemnified Parties" shall have the meaning set forth in Section 7.5. "Action" mans any action, cause of action, demand, claim, charge, prosecution, complaint, investigation, suit, litigation, assessment, reassessment, grievance, arbitration, hearing or other proceeding, whether civil, criminal or administrative, at Law or in equity, by or before any Governmental Entity. "Affiliate" means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, a specified Person. A Person shall be deemed to control another Person if such first Person possesses, directly or indirectly, the power to direct, or cause the direction of, the management and policies of such other Person, whether through the ownership of voting securities, by contract or otherwise. "Agreement" means this Investor Agreement, as the same may be amended or supplemented. "Alternative Sale" shall have the meaning set forth in Section 4.18. "Asserted Liability" shall have the meaning set forth in Section 7.8. "Board of Directors" means the board of directors of the Company. "Business Day" means any day other than a Saturday, a Sunday or a day on which banks are required to be closed in New York, New York or Toronto, Ontario or Montreal, Quebec. "Canadian Securities Authorities" means the British Columbia Securities Commission, Alberta Securities Commission, Saskatchewan Financial Services Commission, Securities Division, The Manitoba Securities Commission, Ontario Securities Commission, Autorite des marches financiers (Quebec), Justice Securities Administration (New Brunswick), Nova Scotia Securities Commission, Registrar of Securities (Prince Edward Island), Securities Commission of Newfoundland and Labrador, and any of their successors. "Canadian Securities Laws" means the securities legislation of each of the provinces and territories of Canada, as amended from time to time, and the rules, regulations, blanket orders and orders having application to the Company and forms made or promulgated under such legislation and the policies and instruments of one or more of the Canadian Securities Authorities. "Claim Notice" shall have the meaning set forth in Section 7.8. "Company" shall have the meaning set forth in the first paragraph of this Agreement. "Company Indemnified Parties" shall have the meaning set forth in Section 7.6. "Consideration Shares" shall have the meaning set forth in the Recitals to this Agreement. "Contract" means any contract, agreement, commitment, franchise, indenture, lease, purchase order or license, including amendments thereto. "Demand Qualification" means the qualification of Qualifiable Securities by the Company pursuant to Section 4.1. "GAAP" means generally accepted accounting principles in Canada, as in effect from time to time. "Governmental Entity" means any Canadian federal, provincial, municipal or local government, or any other governmental, regulatory or administrative authority, or any agency, board, department, commission, court, tribunal or instrumentality thereof. "Indemnified Party" shall have the meaning set forth in Section 7.8. "Indemnifying Party" shall have the meaning set forth in Section 7.8. "Investor" shall have the meaning set forth in the first paragraph of this Agreement. "Investor Designees" shall have the meaning set forth in Section 2.1. "Law" means any statute, code, rule, regulation, order, ordinance, judgment, decree or other pronouncement of any Governmental Entity having the effect of law. "Losses" shall have the meaning set forth in Section 7.1. "Material Adverse Effect" means any change or event that, individually or in the aggregate, has had, or would reasonably be expected to have, a material adverse effect on the business or results of operations or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole, other than any change or event relating to or arising out of: (i) general economic conditions (including changes or events in the financial, banking, currency and capital markets) in the Province of Quebec, Canada; (ii) conditions generally affecting the industries in which any of the Company and its Subsidiaries operate, other than any such conditions that have a materially disproportionate adverse effect on the Company and its Subsidiaries, taken as a whole; (iii) changes in Law or in GAAP; (iv) any actions taken, or failures to take action, or such other changes or events, in each case, to which the Investor has consented in writing; (v) the commencement or material worsening of a war or armed hostilities or other national or international calamity involving Canada or the United States whether or not pursuant to the declaration of a national emergency or war, or the occurrence of any military or terrorist attack upon Canada or the United States, or any of their respective territories, possessions or diplomatic or consular offices or upon any military installation, equipment or personnel of Canada or the United States or (vi) the announcement of, or the taking of any action contemplated by, the Share Purchase Agreement and the transactions contemplated thereby, including by reason of the identity of the A&P Parties. "Non-Canadian Opportunities" shall have the meaning set forth in Section 2.6. "Notice Period" shall have the meaning set forth in Section 7.8. "Offer" shall have the meaning set forth in Section . "Offer Period" shall have the meaning set forth in Section 3.2. "Offered Shares" shall have the meaning set forth in Section 3.2. "Other Holders" means any party, other than the A&P Parties, to which the Company grants registration rights or qualification rights. "Percentage Ownership of the Investor" means, at any applicable time, the percentage of the issued and outstanding Shares represented by the number of Shares beneficially held by A&P and its Affiliates (other than any Affiliate that is directly or indirectly a shareholder of A&P), including the Investor, in each case on an undiluted basis. The Percentage Ownership of the Investor will be calculated in accordance with the following: (a) Subject to clauses (b) and (c), no effect will be given to any changes in the number of issued and outstanding Shares after the date of this Agreement that would have the effect of reducing the Percentage Ownership of the Investor. (b) If the Percentage Ownership of the Investor would, but for the application of clause (a), be reduced below ten percent (10%) or five percent (5%), as the case may be, clause (a) will, subject to clause (c), continue to have application to such calculation for a period of five (5) years from the date of such reduction, following which clause (a) will cease to have such application unless, prior to the expiration of such five (5) year period, A&P and its Affiliates (other than any Affiliate that is directly or indirectly a shareholder of A&P) increase the Percentage Ownership of the Investor (calculated without the application of clause (a)) to such applicable percentage, in which case clause (a) will again have application as if it had never ceased to have application. (c) If A&P and its Affiliates (other than any Affiliate that is directly or indirectly a shareholder of A&P) during the five (5) year period referred to in clause (b) sell more than twenty-five percent (25%) of the Shares they held at the beginning of that period, clause (a) will cease to have application. "Person" means an association, a corporation, an individual, a partnership, a limited partnership, a limited liability company, an unlimited liability company, a trust or any other entity or organization, including a Governmental Entity. "Piggy-Back Qualification" means the qualification of Qualifiable Securities by the Company pursuant to Section 4.2. "Qualifiable Securities" means (i) the Shares held by A&P and its Affiliates, including the Investor, (ii) any Shares or other securities issued or issuable pursuant to or with respect to the Shares held by A&P and its Affiliates, including the Investor, upon any stock split, subdivision, redivision, reduction, consolidation, stock dividend, recapitalization or other change, and (iii) any securities issued in reclassification or replacement of or exchange for any of the securities referred to in clauses (i) or (ii) above. "Qualifying Jurisdictions" means each of the provinces and territories of Canada. "Receipt Date" means the date on which a final receipt or an equivalent document is issued in respect of a prospectus by or on behalf of one of the securities authorities in the Qualifying Jurisdictions. "Sale Period" shall have the meaning set forth in Section 3.2. "Shares" means the Class A Subordinate Shares in the capital of the Company. "Stock Purchase Agreement" shall have the meaning set forth in the Recitals to this Agreement. "Underwriter's Cutback" means the right of the underwriters to exclude Qualifiable Securities in an underwritten offering pursuant to Section 4.9. "Violation" shall have the meaning set forth in Section 7.1. ARTICLE 2 GOVERNANCE 2.1 Investor Designees to Board of Directors and Committees The Investor shall be entitled to designate candidates for election or appointment to the Board of Directors and for appointment to committees of the Board of Directors (the "Investor Designees") as follows: (a) if the Percentage Ownership of the Investor is ten percent (10%) or more, the Investor shall be entitled to two (2) Investor Designees on the Board of Directors and one (1) of such Investor Designees shall, at the discretion of the Investor, serve on each committee of the Board of Directors. (b) if the Percentage Ownership of the Investor is less than ten percent (10%), the Investor shall be entitled to one (1) Investor Designee on the Board of Directors and such Investor Designee shall, at the discretion of the Investor, serve on each of two (2) committees of the Board of Directors selected by the Investor. 2.2 Qualifications of Investor Designees Each Investor Designee shall be an individual who: (a) is qualified to act as a director under the Companies Act (Quebec) and under Canadian Securities Laws; (b) meets the reasonable competencies and expectations of directors established from time to time by the Corporate Governance Committee of the Company; and (c) with respect to each Investor Designee who will serve on any committee of the Board of Directors, is considered to be independent under Canadian Securities Laws where such independence is required under Canadian Securities Laws. 2.3 Election or Appointment of Investor Designees The Company shall solicit proxies from its shareholders to vote in favour of, and shall otherwise use its best efforts to achieve, the election and re-election from time to time of each of the Investor Designees to the position of director on the Board of Directors. The initial Investor Designees shall be appointed or elected to the Board of Directors as soon as possible, provided that the Company shall not be required to call a special meeting of shareholders for such purpose, but may first solicit proxies to vote in favour of the election of such initial Investor Designees at the next annual general meeting of the Company (to be held in January 2006) or any special meeting of shareholders otherwise called by the Company prior to the next annual general meeting. Until such initial Investor Designees are elected to the Board: (a) such initial Investor Designees shall have the right to attend, as observers, all in person and telephonic meetings of the Board of Directors (and participate in all conference calls or informal meetings of the Board of Directors) and all in person and telephonic meetings of committees of the Board of Directors, and to receive copies of all materials distributed to members of the Board of Directors and such committees, as applicable, provided that such Investor Designees agree to be subject to the same confidentiality, loyalty, fiduciary and other similar duties to which members of the Board of Directors are subject under applicable Law (subject to Section 2.6) to the extent that they so participate prior to their election or appointment to the Board of Directors; and (b) to the extent any vacancies arise on the Board of Directors, the Board of Directors will appoint up to two (2) Investor Designees to fill such vacancies. 2.4 Vacancies In the event of a vacancy among the Investor Designees resulting from the death, incapacity, resignation or removal of such individual, such vacancy shall be filled by another Investor Designee as directed by the Investor. 2.5 A&P Obligation to Support Election Subject to compliance by the Company with its obligations in Section 2.3, A&P and its Affiliates (other than any Affiliate that is directly or indirectly a shareholder of A&P), including the Investor, shall from time to time recommend to shareholders that they vote in favour of, and vote all of the Shares they own in favour of, the election of the nominees to the Board of Directors listed in each of the Company's proxy circulars. 2.6 Corporate Opportunities The Company acknowledges that the Investor Designees may be directors or officers of A&P and its Affiliates who will owe fiduciary duties to A&P and its Affiliates. The Company also acknowledges and agrees that any corporate opportunities that come to the attention of any of the Investor Designees from time to time shall not be considered corporate opportunities belonging to the Company, and such Investor Designees shall have no fiduciary or other obligations to provide or make available such corporate opportunities to or for the benefit of the Company, to the extent that such corporate opportunities relate to any geographic area outside of Canada ("Non-Canadian Opportunities"). The A&P Parties acknowledge that the Investor Designees may be asked to be absent from any portion of a meeting of the Board of Directors or any committee to the extent that Non-Canadian Opportunities are to be discussed during such portion of the meeting, and that information relating to Non-Canadian Opportunities may be omitted from Board of Directors and committee materials distributed to the Investor Designees. 2.7 Equity Accounting by A&P The Company will cooperate with A&P and its Affiliates and at the reasonable request of A&P do such other things and make such further assurances as will assist A&P and its Affiliates to account for their investment in the Company using the equity accounting method under United States generally accepted accounting principles, provided that such requested cooperation would not impair in any material respect the management of the Company, and it is not the intention of the parties that such requested cooperation would impair the powers of the Board of Directors or the rights of other stakeholders of the Company. 2.8 GAAP Reconciliation The Company will support the reasonable accounting requirements of the A&P Parties, including by providing to the A&P Parties audited consolidated financial information of the Company prepared in a manner consistent with generally accepted accounting principles in the United States and in Germany, as in effect from time to time. A&P will reimburse the Company for its reasonable out-of-pocket costs in complying with this Section 2.8 to the extent that the Company cannot reasonably carry out the necessary work using its own personnel. ARTICLE 3 ACQUISITIONS AND TRANSFERS OF SHARES 3.1 Standstill For a period of five (5) years from the date of this Agreement, without the prior written approval of the Company, A&P and its Affiliates (other than any Affiliate that is directly or indirectly a shareholder of A&P) will not, acting alone or in concert with each other, increase, directly or indirectly, the aggregate ownership interest of A&P and such Affiliates in the Shares to twenty percent (20%) or more of all issued and outstanding Shares. A&P and its Affiliates shall be deemed not to contravene this Section to the extent that any increase in such aggregate percentage ownership interest results from or is affected by any reduction in the number of issued and outstanding Shares. Without limiting the generality of the preceding sentence and for the avoidance of doubt, A&P and its Affiliates will contravene this Section only to the extent that any increase in such aggregate percentage ownership interest results from A&P and its Affiliates (other than any Affiliate that is directly or indirectly a shareholder of A&P) acquiring additional Shares other than from the Company. 3.2 Right of First Opportunity (a) Except as provided in Section 3.2(h), A&P will not, and will cause the Investor and its other Affiliates (other than any Affiliate that is directly or indirectly a shareholder of A&P) not to, transfer, directly or indirectly, in a single transaction or series of related transactions, twenty-five percent (25%) or more of the Shares held by them without first offering to sell to the Company or a third party designated by the Company, by notice in writing given to the Company, a specified number of such Shares (the "Offered Shares") at a specified price and on specified terms and conditions (the "Offer") in accordance with the procedures set forth in this Section 3.2. (b) The Offer shall be sent to the Company and shall be open for acceptance by the Company or a third party designated by the Company for ten (10) Business Days (the "Offer Period") from the receipt of the Offer by the Company. (c) The Company or a third party designated by the Company, as the case may be, shall be obliged at its sole option to either: (i) accept the Offer; or (ii) reject the Offer; by delivering notice to the Investor within, but not after the expiration of, the Offer Period. If the Company or a third party designated by the Company does not accept the Offer, the Company and such third party shall be deemed to have rejected the Offer. Notwithstanding the time allowed by the Offer Period, the Company shall use it reasonable best efforts to deliver such notice to the Investor as soon as possible. (d) If the Company or a third party designated by the Company accepts the Offer prior to the expiration of the Offer Period, the Investor shall sell to the Company or a third party designated by the Company, as the case may be, and the Company shall purchase from the Investor, or cause a third party designated by the Company, as the case may be, to purchase from the Investor all of the Offered Shares in accordance with the Offer and this Agreement. (e) If the Company or a third party designated by the Company, as the case may be, rejects or is deemed to reject the Offer, the Investor shall be free for a period of three (3) months from the end of the Offer Period ( the "Sale Period") to sell all or any portion of the Offered Shares to any Person or Persons, in one or more transactions, on terms and conditions no more favourable to the Investor than as provided in the Offer and at a price that is no less than ninety percent (90%) of the price specified in the Offer. (f) Subject to the following sentence, if the Company, or a third party designated by the Company which deals at non-arm's length with the Company for the purposes of the Income Tax Act (Canada), is the purchaser of the Offered Shares, the Company or such third party will gross up the proceeds of sale so that the Company or such third party, and not the Investor, bears the burden of any withholding tax, and otherwise will fully indemnify the Investor to the extent the after-tax proceeds of such sale to the Investor are less than they would have been on a notional sale to a third party, dealing at arm's length with the Investor and the Company, on equivalent terms. The Investor will provide the Company at least four (4) days prior to the end of the Offer Period with information sufficient to allow the Company to evaluate the scope of its potential liability pursuant to this Section 3.2(f), failing which the Company and any third party will be relieved of the obligations pursuant to this Section 3.2(f) to the extent that the Company or such third party is materially prejudiced by such failure and could not reasonably have been expected to be aware of the tax that would be covered by the gross-up and indemnity provided by this Section 3.2(f). (g) To the extent the Offered Shares remain unsold at the end of the Sale Period, their transfer will once again become subject to this Section 3.2. (h) Notwithstanding anything to the contrary in this Section 3.2, A&P and its Affiliates, including the Investor, may sell, assign, transfer, encumber, pledge or hypothecate Shares: (i) to an Affiliate of A&P, provided that such Affiliate agrees in writing to be bound by the terms and conditions of this Agreement; (ii) *[CONFIDENTIAL]* (iii) as a dividend or other distribution to shareholders of A&P, provided that such dividend or other distribution will not subject the Company to any obligations under the 1933 Act or the 1934 Act; and (iv) pursuant to any financing agreements or facilities of A&P or its Affiliates, provided that the creditor(s) under such agreements or facilities agree(s) in writing to be bound by the terms and conditions of this Agreement to the extent that such creditor(s) realize upon their security in such Shares; provided that, in each case, any such sale, assignment, transfer, encumbrance, pledge or hypothecation is in compliance with all applicable securities Laws. 3.3 Covenant of the Company to Maintain Reporting Issuer Status The Company shall maintain its status as a reporting issuer in good standing and not in default of any requirement under the Canadian Securities Laws in each Qualifying Jurisdiction other than the Yukon Territories, the Northwest Territories and Nunavut. The term "Confidential" indicates material that has been omitted and for which confidential treatment has been requested. All such omitted material has been filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. ARTICLE 4 QUALIFICATION RIGHTS 4.1 Demand Qualification Subject to the limits set out in Sections 4.3 and 4.4, if the Company receives a written request from an A&P Party that the Company file a prospectus under Canadian Securities Laws qualifying for distribution of all or any portion of the Qualifiable Securities, the Company will, subject to the Underwriter's Cutback, as soon as practicable and in any event within 90 days following the date of receipt of the written request referred above, prepare and file in the Qualifying Jurisdictions a prospectus in order to qualify the distribution of all of the Qualifiable Securities of the A&P Parties specified in their respective requests and use its reasonable best efforts to receive a final receipt or equivalent document in respect of such prospectus. The A&P Parties will not initiate a request for a Demand Qualification within one hundred and twenty (120) days of the Receipt Date in respect of a prospectus qualifying an offering of Shares by the Company, provided that the A&P Parties were provided with the opportunity to participate in a Piggy-Back Qualification in accordance with this Agreement in connection with such offering. 4.2 Piggy-Back Qualification If the Company proposes to file a preliminary prospectus under any Canadian Securities Laws in connection with the sale of any Shares or other equity securities (or securities convertible into equity securities) in connection with the public offering of such securities (including the public sale of securities held by shareholders other than the A&P Parties), the Company will, at all such times, give the A&P Parties at least ten (10) Business Days' written notice of such filing. Upon the written request of an A&P Party, given within five (5) Business Days after receipt of such notice by the A&P Parties, the Company will, subject to the Underwriter's Cutback, use its reasonable best efforts to cause all of the Qualifiable Securities that the A&P Parties have requested to be included in the filing to be included in and sold pursuant to the prospectus. 4.3 Number of Demand Qualifications During the term of this Agreement, the Company is obligated to effect only one (1) Demand Qualification provided that, notwithstanding the foregoing: (a) if as a result of an Underwriter's Cutback the A&P Parties are not allowed to include in any such qualification ninety percent (90%) or more of the Qualifiable Securities requested by the A&P Parties to be registered or qualified, then such qualification shall not count as a Demand Qualification; (b) if, in response to a request for a Demand Qualification the Company is not entitled to use a short form prospectus at the time of the request due to the Company's failure to comply with its filing obligations under Canadian Securities Laws the A&P Parties shall be entitled to one (1) additional Demand Qualification for each such failure; and (c) if, for any reason, the distribution of the Qualifiable Securities requested by the A&P Parties is not completed except to the extent of an Underwriter's Cutback (subject to Section 4.3(a) above) or a receipt in respect of the final prospectus in respect of such distribution is not obtained, then such qualification shall not count as a Demand Qualification. 4.4 Exceptions to Qualification Rights The Company: (a) may defer a Demand Qualification for a period of not more than 90 days, but only if the Company furnishes to the A&P Parties requesting the qualification a certificate signed by the Chief Executive Officer of the Company stating that, in the good faith judgment of the Board of Directors, effecting the qualification would materially impede the ability of the Company to consummate a significant transaction, including a material financing, acquisition, corporate reorganization or merger or other material transaction involving the Company (the 90-day deferral period shall begin on the date that such certificate is sent to the A&P Parties); and (b) may defer a Demand Qualification if the Board of Directors determines in good faith that such qualification would require the disclosure of material information that the Company has a bona fide business purpose for preserving as confidential, until the earlier of: (i) 10 days following the date upon which such material information is disclosed to the public or ceases to be material; and (ii) 90 days after the date of the request of the A&P Parties, provided the Company has not deferred a filing in reliance on this Section 4.4 during the previous 12-month period. 4.5 Expenses (a) Subject to Sections 4.5(b) and (c), the Company will bear all expenses relating to the qualification of Qualifiable Securities pursuant to the terms of this Agreement, excluding underwriting commissions, and all registration, filing, printing, accounting and translation fees, incurred in connection with all Demand Qualifications and Piggy-Back Qualifications. The A&P Parties will bear the costs of their own legal and accounting advisors. (b) The Company is not required to pay for any expenses pursuant to Section 4.5(a) of any Demand Qualification if the qualification request is subsequently withdrawn at any time at the request of the A&P Parties unless: (i) the A&P Parties agree to forfeit their right to any further Demand Qualification; (ii) at the time of any such withdrawal, the A&P Parties have learned of a material adverse change in the condition, business or prospects of the Company (other than a change in market demand for the Shares or in the market price of the Shares) from that known to A&P Parties at the time of their request, that makes the proposed offering unreasonable in the good faith judgment of the A&P Parties (in which case the withdrawn qualification is deemed not to be a Demand Qualification for purposes of Section 4.3); or (iii) the qualification request is withdrawn at the request of the A&P Parties in response to an Underwriter's Cutback. (c) All underwriting discounts and selling commissions relating to Qualifiable Securities included in any Demand Qualification or Piggy-Back Qualification pursuant to this Agreement, will be borne and paid by the A&P Parties. 4.6 Underwriting in Demand Qualification If the A&P Parties intend to distribute the Qualifiable Securities covered by their request for a Demand Qualification by means of an underwriting, they will so advise the Company as part of their request for such qualification. The A&P Parties will (together with the Company as required under this Agreement) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the A&P Parties. The Company will also take all such other actions as the A&P Parties or the underwriters reasonably request in order to expedite or facilitate the disposition of Qualifiable Securities (including the participation of senior management in so-called "road shows" and similar events). 4.7 Underwriting in Piggy-Back Qualification In connection with any offering pursuant to a Piggy-Back Qualification involving an underwriting of Shares being issued by the Company, the Company will include in such underwriting any Qualifiable Securities that the A&P Parties wish to include, but only if the A&P Parties accept the terms of the underwriting agreed to by the Company. To the extent the A&P Parties participate in such underwritten Piggy-Back Qualification offering, the A&P Parties shall be party to the underwriting agreement relating to such registration and may, at the A&P Parties' option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of the underwriters of such qualification shall also be made to and for the benefit of each the A&P Parties and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of the A&P Parties. 4.8 Limitations on Representations and Warranties and on Liability Unless otherwise agreed by the A&P Parties, the A&P Parties shall not be required, in connection with any underwriting agreement entered into pursuant to Section 4.6 or Section 4.7, to make any representations or warranties or provide indemnification except as they relate to the A&P Parties' ownership of Shares and authority to enter into the underwriting agreement and to the A&P Parties' intended method of distribution. The liability of the A&P Parties in connection with such underwriting agreement shall be limited to an amount equal to the net proceeds received by the A&P Parties from the offering (after deduction of all underwriters' discounts and commissions paid by the A&P Parties in connection with the offering). 4.9 Underwriter's Cutback If the underwriter for the offering in connection with: (a) a Demand Qualification advises the A&P Parties in writing that marketing factors require a limitation of the number of Shares to be underwritten, then the A&P Parties will so advise the Company, and the Company shall be required to include in the qualification only the number of Shares that the underwriter believes marketing factors allow; or (b) a Piggy-Back Qualification advises the Company in writing that marketing factors require a limitation of the number of Shares to be underwritten, the Company shall be required to include in the qualification only the number of Shares that the underwriter believes marketing factors allow, provided that in no event will the Qualifiable Securities held by the A&P Parties be reduced below twenty-five percent (25%) of the total number of Shares to be sold. 4.10 Allocation of Cutback (a) If the number of Shares to be included in a Demand Qualification is subject to an Underwriter's Cutback, the Shares that would otherwise be included will be reduced in the following order: (i) first, all Shares held by shareholders other than the A&P Parties will be excluded from the offering to the extent necessary; and (ii) second, if further limitation is required, the Qualifiable Securities held by the A&P Parties will be excluded to the extent necessary. (b) If the number of Shares to be included in a Piggy-Back Qualification is subject to an Underwriter's Cutback, the Shares that would otherwise be included will be reduced in the following order: (i) first, all Shares other than those to be issued by the Company and the Qualifiable Securities held by the A&P Parties will be excluded to the extent necessary; and (ii) second, if further limitation is required, the Shares to be issued by the Company and, subject to the twenty-five percent (25%) limitation set forth in Section 4.9(b), the Qualifiable Securities held by the A&P Parties will be excluded pro rata from the offering to the extent necessary. 4.11 Holdback Agreements (a) In connection with a qualification, the A&P Parties agree, if so requested by the managing underwriter in a written notice this Section 4.11(a), not to effect (except as part of such underwritten offering in accordance with the provisions of this Agreement or pursuant to an exempt transaction so long as any purchaser in such exempt transaction agrees in writing to be bound by any such holdback) any sale, distribution, short sale, loan, grant of options for the purchase of, or other disposition of, any Qualifiable Securities for such period as such managing underwriter reasonably requests, such period in no event to end more than 90 days after the effective date of such offering. In addition, the A&P Parties agree to execute and deliver to any managing underwriter (or, in the case of any offering that is not underwritten, an investment banker or agent registered under applicable securities laws) in connection with a qualification of Qualifiable Securities under Securities Laws in which the A&P Parties participate in any lock-up letter requested by such managing underwriter of the A&P Parties and in form and substance reasonably satisfactory to the A&P Parties. The A&P Parties further agree that the Company may or may instruct its transfer agent, if applicable, to place stop transfer notations in its records to enforce the provisions of this Section 4.11(a). (b) After receipt of notice of a request for a Demand Qualification pursuant to this Agreement, the Company shall not initiate, without the consent of the A&P Parties, a qualification of any of its securities for its own account until one hundred and twenty (120) days after such Demand Qualification has become effective or such Demand Qualification has been terminated. 4.12 Obligations of the Company on a Demand Qualification If the Company is required under this Agreement to effect a Demand Qualification, the Company will: (a) as expeditiously as reasonably possible, prepare and file with the Canadian Securities Authorities in the Qualifying Jurisdictions a preliminary prospectus and a final prospectus with respect to such Qualifiable Securities and use, subject to the other provisions of this Agreement, its reasonable best efforts to obtain a receipt in respect of the final prospectus and, upon the request of the A&P Parties, keep such prospectus effective until such time at which the A&P Parties have informed the Company in writing that the distribution of their Shares has been completed; (b) without limiting the generality of the foregoing, use its reasonable best efforts to resolve any regulatory comments and satisfy any regulatory deficiencies in respect of the preliminary prospectus and, as soon as reasonably practicable after such comments or deficiencies have been resolved or satisfied, prepare and file, and use its reasonable best efforts to obtain a receipt or similar document in the Qualifying Jurisdictions for, the final prospectus, and take all other steps and proceedings necessary in order to qualify the distribution of the Qualifiable Securities to the public as freely tradable securities in the Qualifying Jurisdictions; (c) permit the A&P Parties to participate in the preparation of such preliminary prospectus and final prospectus (including making available for inspection by the A&P Parties and any lawyers, accountants or other agents retained by the A&P Parties, all financial and other records, pertinent corporate documents and all other information reasonably requested in connection therewith) and give to the A&P Parties, the underwriters, if any, and their respective counsel and accountants, advance draft copies of each such prospectus filed with the applicable Canadian Securities Authorities at least one (1) Business Day prior to the filing thereof with the applicable Canadian Securities Authorities, and any amendments and supplements thereto, promptly as they become available, and give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of the A&P Parties and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Canadian Securities Laws; (d) ensure that the prospectus contains the disclosure required by, and conforms in all material respects to the requirements of, the applicable provisions of Canadian Securities Laws and furnish to the A&P Parties copies of each of the preliminary prospectus and final prospectus and such other documents as they may reasonably request to facilitate the disposition of Qualifiable Securities by it; (e) prepare and file with the securities regulatory authorities in the Qualifying Jurisdictions any amendments and supplements to the prospectus that may be necessary to comply with Canadian Securities Laws with respect to the distribution of all securities qualified by such prospectus; (f) in the case of an underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the lead underwriter of such offering; (g) furnish, at the request of the A&P Parties, on the date that the applicable Qualifiable Securities are delivered to the underwriters for sale in connection with an offering pursuant to this Agreement, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the Receipt Date: (A) an opinion or opinions, dated such date, of counsel representing the Company for the purposes of such offering, in form and substance as is customarily given by company counsel to the underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the A&P Parties; and (B) a letter dated such date, from the auditors of the Company, in form and substance as is customarily given by auditors to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the A&P Parties, but only if the A&P Parties have made such representations and furnished such undertakings as such auditors reasonably require in providing such letter; and (h) keep the A&P Parties reasonably advised of the status of such qualification. 4.13 Furnish Information The obligations of the Company to take any action pursuant to this Agreement in respect of Qualifiable Securities is conditional upon the A&P Parties furnishing to the Company such information regarding themselves, the Qualifiable Securities and the intended method of disposition of such securities, as is required to effect the qualification of the Qualifiable Securities. 4.14 No Obligation to Complete Offering The Company is under no obligation to complete any offering of its securities it proposes to make in connection with a Piggy-Back Qualification and will incur no liability to the A&P Parties for its failure to do so. 4.15 No Prior Registration Rights The Company represents and warrants to the A&P Parties that no qualification or registration rights relating to securities of the Company have been granted by the Company prior to, or are being granted concurrently with, the execution of this Agreement. 4.16 Limitations on Subsequent Qualifiable Rights From and after the date of this Agreement, the Company will not, without the prior written consent of the A&P Parties, enter into any agreement with any Other Holder of any securities of the Company relating to qualification or registration rights unless such agreement includes: (a) to the extent such agreement would allow such Other Holder to include such securities in any prospectus filed under this Agreement, a provision that such Other Holder may include such securities in any such prospectus only to the extent that the inclusion of its securities will not reduce the amount of the Qualifiable Securities of the A&P Parties that would otherwise be included; (b) a provision that permits the A&P Parties to include in any qualification or registration of the Other Holder and in any underwriting involved with it, Qualifiable Securities in priority to the sellers of securities in such qualification or registration based on the number of Shares and that stipulates that the allocation of the Underwriter's Cutback shall also give priority to Qualifiable Securities of the A&P Parties over securities of such Other Holders; and (c) a provision requiring that any such qualification or registration of securities is subject to the underwriting requirements described in this Agreement. 4.17 Amending or Supplementing Prospectuses Whenever a distribution under a prospectus qualifying Qualifiable Securities pursuant to this Agreement has not been completed and the Company determines that, based upon advice of counsel, such prospectus requires amendment or supplementing, the Company will notify the A&P Parties of such fact and will promptly cause such prospectus to be amended or supplemented, as the case may be, and will notify the A&P Parties when such amendment or supplement has been filed. The A&P Parties will not sell any Qualifiable Securities until such latter notice is provided. If the Board of Directors determines in its reasonable discretion that it would not be in the best interests of the Company to so amend or supplement the prospectus or registration statement at such time, the Company is entitled to delay the filing of such amendment or supplement for a period not to exceed 60 days. 4.18 Consultation with the Company Notwithstanding any other provision of this Article 4, before exercising their rights to require a Demand Qualification under this Agreement the A&P Parties will first consult with the Company and discuss whether there are any other methods or procedures reasonably available to the A&P Parties at that time that would enable the A&P Parties to sell the Qualifiable Securities that they wish to dispose of at that time in compliance with Canadian Securities Laws for net proceeds comparable to those that the A&P Parties would expect to receive pursuant to a qualified public offering of such Qualifiable Securities pursuant to a Demand Qualification (an "Alternative Sale"). If the A&P Parties, acting on the advice of their financial, legal and other advisors, are satisfied that, in their reasonable discretion, an Alternative Sale would be at least as advantageous to the A&P Parties in all respects (including pricing, net proceeds, terms and timing) as a transaction pursuant to a Demand Qualification, the A&P Parties will not pursue a Demand Qualification at that time. For the avoidance of doubt, the pursuit or completion by the A&P Parties of such an Alternative Sale would not constitute an exercise by the A&P Parties of its right to require a Demand Qualification. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the A&P Parties as of the date of this Agreement as follows: 5.1 Corporate Status The Company is duly incorporated and validly existing under the Laws of its governing jurisdiction and (a) has all requisite corporate power and authority to carry on its business as it is now being conducted and (b) is duly qualified to do business in each of the jurisdictions in which the ownership, operation or leasing of its properties and assets or the conduct of its business requires it to be so qualified, except where the failure to be so qualified would not have a Material Adverse Effect or materially impair the Company's ability to perform its obligations under this Agreement or consummate the transactions contemplated hereby. 5.2 Authorization The Company has all the requisite corporate power and authority to enter into, and to perform its obligations under, this Agreement. The execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors and no other corporate proceedings of the Company, including approval of the shareholders of the Company, are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Company, and (assuming due authorization, execution and delivery by the A&P Parties) this Agreement constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar Laws relating to or affecting creditors' rights generally or by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at Law). 5.3 No Conflict The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not (a) violate any applicable Law to which any of the Company or its Affiliates are subject, (b) materially conflict with, result in a material violation or material breach of, or constitute a material default under, result in the acceleration of, create in any party the right to accelerate, terminate or cancel any Contract to which the Company or its Affiliates is a party or by which the Company or its Affiliates is bound or to which the assets of the Company or its Affiliates are subject, or (c) violate the charter, bylaws or other organizational documents of any of the Company or its Affiliates, other than, in the case of clauses (b) and (c) above, any such violations, defaults, conflicts, breaches, accelerations or rights that would not materially impair the Company's ability to perform its obligations under this Agreement or consummate the transactions contemplated hereby. 5.4 Disclaimer of Warranties Notwithstanding any provision of this Agreement to the contrary, the Company makes no representations or warranties to the A&P Parties or any other Person in connection with this Agreement, except as specifically set forth in this Article 5 and the Share Purchase Agreement. All other representations and warranties, whether express or implied, are disclaimed by the Company. ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF THE A&P PARTIES The A&P Parties jointly and severally represent and warrant to the Company as of the date of this Agreement as follows: 6.1 Corporate Status A&P is duly incorporated and validly existing under the Laws of the State of Maryland. The Investor is duly incorporated and validly existing under the Laws of Luxembourg. Each of the A&P Parties (a) has all requisite corporate power and authority to carry on its business as it is now being conducted and (b) is duly qualified to do business in each of the jurisdictions in which the ownership, operation or leasing of its properties and assets or the conduct of its business requires it to be so qualified, except where the failure to be so qualified would not materially impair the A&P Parties' ability to perform their obligations under this Agreement or consummate the transactions contemplated hereby. 6.2 Authorization Each of the A&P Parties has all requisite corporate power and authority to enter into, and perform its obligations under, this Agreement. The execution and delivery of this Agreement by the A&P Parties and the consummation by the A&P Parties of the transactions contemplated hereby have been duly and validly authorized by the board of directors (or equivalent body) of each of the A&P Parties and no other corporate proceedings of the A&P Parties, including approval of the shareholders of A&P, are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by each of the A&P Parties, and (assuming due authorization, execution and delivery by the Company) this Agreement constitutes a valid and binding obligation of each of the A&P Parties, enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar Laws relating to or affecting creditors' rights generally or by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at Law). 6.3 No Conflict The execution, delivery and performance of this Agreement by the A&P Parties and the consummation by the A&P Parties of the transactions contemplated hereby will not (a) violate any applicable Law to which either of the A&P Parties is subject, (b) materially conflict with, result in a material violation or material breach of, or constitute a material default under, result in the acceleration of or create in any party the right to accelerate, terminate or cancel any material Contract to which either of the A&P Parties is a party or by which either of the A&P Parties is bound or to which the assets of either of the A&P Parties are subject, or (c) violate the charter, bylaws or other organizational documents of either of the A&P Parties, other than, in the case of clauses (b) and (c) above, any such violations, defaults, conflicts, breaches, accelerations or rights that would not materially impair the A&P Parties' ability to perform their obligations under this Agreement or consummate the transactions contemplated hereby. 6.4 Disclaimer of Warranties Notwithstanding any provision of this Agreement to the contrary, the A&P Parties make no representations or warranties to the Company or any other Person in connection with this Agreement, except as specifically set forth in this Article 6 and the Share Purchase Agreement. All other representations and warranties, whether express or implied, are disclaimed by the A&P Parties. ARTICLE 7 INDEMNIFICATION 7.1 Indemnification by Company on Demand Qualifications and Piggy-Back Qualifications (a) If any Qualifiable Securities are included in a prospectus under this Agreement, the Company will indemnify and hold harmless the A&P Parties, the officers, directors, Affiliates, agents and employees of the A&P Parties, any underwriter (within the meaning of Canadian Securities Laws) for the A&P Parties and each person, if any, that controls the A&P Parties or underwriter (within the meaning of Canadian Securities Laws), against any losses (other than loss of profit), claims, damages, liabilities (joint or several), actions, settlements or actions (collectively, "Losses") to which they may become subject under Canadian Securities Laws or any other laws, insofar as such Losses arise out of or are based upon any of the following statements, omissions or violations (each a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such prospectus (including any preliminary prospectus or final prospectus) or any amendments or supplements to them; (ii) the omission or alleged omission to state in such prospectus (including any preliminary prospectus or final prospectus) a material fact required to be stated in it or necessary to make the statements in it, in light of the circumstances in which they were made, not misleading; or (iii) any violation or alleged violation by the Company of any Canadian Securities Laws in connection with any matter relating to such prospectus. (b) The Company will reimburse each such A&P Party, officer, director, Affiliate, agent, employee, underwriter or controlling person for any legal or other out-of-pocket expenses reasonably incurred by them in connection with investigating or defending any such Losses. (c) The Company is not liable under the indemnity contained in this Section 7.1: (i) in respect of amounts paid in settlement of any Losses to the extent such settlement is effected without the consent of the Company (which consent may not be unreasonably withheld or delayed); (ii) to the extent that it arises out of or is based upon a Violation that occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such qualification by or on behalf of the A&P Party, underwriter or controlling person; or (iii) in the case of a sale effected directly by an A&P Party of Qualifiable Securities (including a sale of such Qualifiable Securities through any underwriter retained by such A&P Party to engage in a distribution solely on behalf of such A&P Party), where: (A) such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus; and (B) an A&P Party failed to deliver a copy of the final or amended prospectus at or prior to the confirmation of the sale of the Qualifiable Securities to the Person asserting any such Losses in any case in which such delivery is required by Canadian Securities Laws. 7.2 Indemnification by the A&P Parties on Demand Qualifications and Piggy-Back Qualifications (a) To the extent that the A&P Parties include any Qualifiable Securities under any prospectus pursuant to this Agreement, the A&P Parties will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the prospectus, each Person, if any, who controls the Company within the meaning of Canadian Securities Laws, each employee, agent, and any underwriter for the Company, against any Losses to which the Company or any such director, officer, employee, agent, underwriter or controlling person may become subject, under Canadian Securities Laws or other laws, insofar as such Losses arise out of or are based upon any Violation, in each case only to the extent that such Violation occurs in reliance upon and in conformity with written information furnished by or on behalf of the A&P Parties expressly for use in connection with such qualification. (b) The A&P Parties will reimburse the Company or any such director, officer, agent, underwriter or controlling person for any legal or other out-of-pocket expenses reasonably incurred by them in connection with investigating or defending any such Losses. (c) The liability of the A&P Parties under this indemnity is limited to the amount of net proceeds (after deduction of all underwriters' discounts and commissions paid by the A&P Parties in connection with the qualification in question) received by the A&P Parties in the offering giving rise to the Violation. (d) The A&P Parties are not liable under the indemnity contained in this Section 7.2: (i) in respect of amounts paid in settlement of any such Losses to the extent such settlement is effected without the consent of the A&P Parties (which consent may not be unreasonably withheld or delayed); (ii) in the case of a sale effected directly by the Company of its Shares (including a sale of such Shares through any underwriter retained by the Company to engage in a distribution solely on behalf of the Company), where: (A) such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus; and (B) the Company failed to deliver a copy of the final or amended prospectus at or prior to the confirmation of the sale of the securities to the Person asserting any such Losses in any case in which such delivery is required by Canadian Securities Laws. 7.3 Contribution If any indemnification provided for in Section 7.1 or 7.2 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any Losses referred to in this Agreement, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party under this Agreement, will contribute to the amount paid or payable by such Indemnified Party as a result of such Losses in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions that resulted in such Losses, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party is to be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. 7.4 Survival (a) The representations and warranties contained herein shall survive indefinitely. (b) All covenants and agreements contained herein shall survive in accordance with their terms. 7.5 Indemnification by the Company with Respect to Representations, Warranties and Covenants The Company shall indemnify and hold harmless the A&P Parties, their Affiliates and their respective directors and officers (collectively, the "A&P Indemnified Parties") from and against any (i) Losses incurred by any A&P Indemnified Party resulting from any breach of any of the representations or warranties of the Company, and (ii) Losses incurred by any A&P Indemnified Party resulting from any breach in any material respect of any of the covenants or agreements of the Company in this Agreement. 7.6 Indemnification by the A&P Parties with Respect to Representations, Warranties and Covenants The A&P Parties shall jointly and severally indemnify and hold harmless the Company, its Affiliates and their respective directors and officers (collectively, the "Company Indemnified Parties"), from and against any (i) Losses incurred by any Company Indemnified Party resulting from any breach of any of the representations or warranties of the A&P Parties, and (ii) Losses incurred by any Company Indemnified Party resulting from any breach in any material respect of any of the covenants or agreements of the A&P Parties in this Agreement. 7.7 Exclusive Remedy The rights of indemnity set forth in this Article 7 are the sole and exclusive remedies of each party in respect of any misrepresentation, incorrectness in or breach of any representation or warranty, or breach of covenant, by any other party under this Agreement. The parties agree that if a claim for indemnification is made by one party in accordance with this Article 7, and there has been a refusal by the party against which such claim has been made to make payment or otherwise provide satisfaction in respect of such claim, then a legal proceeding is the appropriate means to seek a remedy for such refusal. This Article 7 shall remain in full force and effect in all circumstances and shall not be terminated by any breach (fundamental, negligent or otherwise) by any party of its representations, warranties or covenants under this Agreement or by any termination or rescission of this Agreement by any party. 7.8 Indemnification Procedures (a) In the event that any Action is commenced by a third party involving a claim for which a party required to provide indemnification under this Agreement (an "Indemnifying Party") may be liable to a party entitled to indemnification (an "Indemnified Party") hereunder (an "Asserted Liability"), the Indemnified Party shall promptly notify the Indemnifying Party in writing of such Asserted Liability (the "Claim Notice"); provided that no delay on the part of the Indemnified Party in giving any such Claim Notice shall relieve the Indemnifying Party of any indemnification obligation hereunder except to the extent that the Indemnifying Party is prejudiced by such delay. The Indemnifying Party shall have 30 days from its receipt of the Claim Notice (the "Notice Period") to notify the Indemnified Party whether or not the Indemnifying Party desires, at the Indemnifying Party's sole cost and expense and by counsel of its own choosing, to defend against such Asserted Liability. If the Indemnifying Party undertakes to defend against such Asserted Liability, (i) the Indemnifying Party shall use its reasonable best efforts to defend and protect the interests of the Indemnified Party with respect to such Asserted Liability and (ii) the Indemnifying Party shall not, without the prior written consent of the Indemnified Party, consent to any settlement which does not contain an unconditional release of the Indemnified Party from the subject matter of the settlement or that contains an admission of liability or wrongdoing. The Indemnified Party shall have the right to participate in the defence against any Asserted Liability at its own expense. Notwithstanding the foregoing, in any event, the Indemnified Party shall have the right to control, pay or settle any Asserted Liability which the Indemnifying Party shall have undertaken to defend so long as the Indemnified Party shall also waive any right to indemnification therefor by the Indemnifying Party. If the Indemnifying Party undertakes to defend against such Asserted Liability, the Indemnified Party shall fully render to the Indemnifying Party and its counsel such assistance and cooperation as may be required to ensure the proper and adequate defence and settlement of such claim or demand. (b) If the Indemnifying Party does not undertake within the Notice Period to defend against such Asserted Liability, then the Indemnified Party shall have the right to participate in any such defence and the Indemnifying Party shall bear the reasonable costs and expenses of the Indemnified Party of such defence. In such case, the Indemnified Party shall control the investigation and defence and may settle or take any other actions the Indemnified Party deems reasonably advisable without in any way waiving or otherwise affecting the Indemnified Party's rights to indemnification pursuant to this Agreement. The Indemnified Party and the Indemnifying Party agree to make available to each other, their counsel and other representatives, all information and documents available to them which relate to such claim or demand. The Indemnified Party and the Indemnifying Party also agree to render to each other such assistance and cooperation as may reasonably be required to ensure the proper and adequate defence and settlement of such claim or demand. (c) In calculating amounts payable to an Indemnified Party, the amount of any indemnified Losses shall be determined without duplication of any other Loss for which an indemnification claim has been made or could be made under any other representation, warranty, covenant, or agreement and shall be computed net of (i) payments recoverable by the Indemnified Party under any insurance policy with respect to such Losses, (ii) any prior or subsequent recovery by the Indemnified Party from any Person with respect to such Losses and (iii) any tax benefit receivable by the Indemnified Party with respect to such Losses. (d) To the extent that an Indemnifying Party makes any payment pursuant to this Article 7 in respect of Losses for which an Indemnified Party or any of its Affiliates have a right to recover against a third party (including an insurance company), the Indemnifying Party shall be subrogated to the right of the Indemnified Party or any of its Affiliates to seek and obtain recovery from such third party; provided, however, that if the Indemnifying Party shall be prohibited from such subrogation, Purchaser or its Affiliates, as applicable, shall seek recovery from such third party on the Indemnifying Party's behalf and pay any such recovery to Indemnifying Party. ARTICLE 8 TERMINATION 8.1 Termination of Agreement This Agreement shall terminate upon: (a) the written agreement of the parties; or (b) the Percentage Ownership of the Investor being less than five percent (5%). The termination of this Agreement shall have no effect upon any rights of any party under this Agreement to the extent those rights arose prior to the date of such termination. ARTICLE 9 MISCELLANEOUS 9.1 Assignment; Binding Effect This Agreement and the rights hereunder are not assignable unless such assignment is consented to in writing by each of the Company and the A&P Parties, provided, however, that each of the A&P Parties, may without such consent assign, directly or indirectly, its rights (but not its obligations) hereunder to any of its Affiliates, provided that no such assignment shall relieve the A&P Parties of their obligations hereunder. Subject to the foregoing, this Agreement and all the provisions hereof shall be binding upon and shall inure to the benefit of the parties and their respective successors and permitted assigns. 9.2 Merger, Etc. Upon any merger, amalgamation, consolidation, arrangement or other reorganization involving the Company in which the A&P Parties receive, in exchange for their Qualifiable Securities, securities of any other entity, the rights of the A&P Parties under this Agreement remain in effect except that such rights relate to the securities received by the A&P Parties upon such exchange. 9.3 Guarantee A&P hereby agrees to be jointly and severally liable with the Investor for any failure of the Investor to discharge its obligations under this Agreement and for the fulfillment of the representations, warranties and other obligations of the Investor to the Company under this Agreement. 9.4 Choice of Law This Agreement shall be governed by and interpreted and enforced in accordance with the Laws of the Province of Ontario and the laws of Canada applicable therein without regard to the conflicts of laws rules thereof. 9.5 Dispute Resolution Any Dispute (as such term is defined in the Stock Purchase Agreement) regarding the negotiation, existence, validity, interpretation, performance, breach or termination of this Agreement shall be resolved in accordance with Section 9.3 of the Stock Purchase Agreement. 9.6 Notices All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (a) when received if delivered personally, (b) when sent by cable, telecopy, telegram or facsimile (which is confirmed by the intended recipient), and (c) when sent by overnight courier service or when mailed by certified or registered mail, return receipt requested, with postage prepaid to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): If to the Company, to: Metro Inc. 11011 Boulevard Maurice-Duplessis Montreal, Quebec H1C 1V6 Attn: L.G. Serge Gadbois Fax: (514) 643-1215 with copies, in the case of notice to the Company, to: Metro Inc. Place Carillon 7151, Jean-Talon Street East 4th Floor Anjou, Quebec H1M 3N8 Attn: Simon Rivet Fax: (514) 356-5841 - and - Ogilvy Renault LLP 1981 McGill College Avenue Suite 1100 Montreal, Quebec H3A 3C1 Attn: Paul Raymond Amar Leclair-Chosh Fax: (514) 286-5474 If to A&P, to: The Great Atlantic & Pacific Tea Company, Inc. 2 Paragon Drive Montvale, New Jersey 07645 Attn: Mitchell Goldstein Fax: (201) 571-8715 If to the Investor, to: A&P Luxembourg S.a.r.l. 5, rue Guillaume Kroll L-1882 Luxembourg Attn: Gerard Bequer Fax: +(352) 48 18 28 34 60 with a copy, in the case of notice to the Investor, to: The Great Atlantic & Pacific Tea Company, Inc. 2 Paragon Drive Montvale, New Jersey 07645 Attn: Mitchell Goldstein Fax: (201) 571-8715 and with copies, in the case of notice to either A&P Party, to: Skadden Arps Slate Meagher and Flom LLP Four Times Square New York, NY 10036 Attn: Patricia Moran Fax: (917) 777-2466 and to: Osler Hoskin & Harcourt LLP Box 50, 1 First Canadian Place Toronto, ON M5X 1B8 Attn: Terrence R. Burgoyne Fax: (416) 862-6666 9.7 Headings The headings contained in this Agreement are inserted for convenience only and shall not be considered in interpreting or construing any of the provisions contained in this Agreement. 9.8 Entire Agreement This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings between the parties with respect to such subject matter. 9.9 Interpretation (a) When a reference is made in this Agreement to an Article or Section such reference shall be to an Article or Section of this Agreement unless otherwise indicated. (b) Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." (c) When a reference in this Agreement is made to a "party" or "parties," such reference shall be to a party or parties to this Agreement unless otherwise indicated. (d) Unless the context requires otherwise, the terms "hereof," "herein," "hereby," "hereto" and derivative or similar words in this Agreement refer to this entire Agreement. (e) Unless the context requires otherwise, words in this Agreement using the singular or plural number also include the plural or singular number, respectively, and the use of any gender herein shall be deemed to include the other genders. (f) References in this Agreement to "dollars" or "$" are to Canadian dollars unless otherwise indicated. (g) Except as otherwise specifically provided herein, where any action is required to be taken on a particular day and such day is not a Business Day and, as a result, such action cannot be taken on such day, then this Agreement shall be deemed to provide that such action shall be taken on the first Business Day after such day. (h) This Agreement was prepared jointly by the parties and no rule that it be construed against the drafter will have any application in its construction or interpretation. 9.10 Waiver and Amendment This Agreement may be amended, modified or supplemented only by a written mutual agreement executed and delivered by each of the A&P Parties and the Company. Except as otherwise provided in this Agreement, any failure of any party to comply with any obligation, covenant, agreement or condition herein may be waived by the party entitled to the benefits thereof only by a written instrument signed by the party granting such waiver, but such waiver or failure to insist upon strict compliance with such obligations, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. 9.11 Counterparts; Facsimile Signatures This Agreement may be executed in any number of counterparts, each of which when executed, shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument binding upon all of the parties notwithstanding the fact that all of the parties are not signatory to the original or the same counterpart. For purposes of this Agreement, facsimile signatures shall be deemed originals. 9.12 Third-Party Beneficiaries This Agreement is for the sole benefit of the parties and their successors and permitted assigns and nothing herein express or implied shall give or be construed to give to any Person, other than the parties and such successors and permitted assigns, any legal or equitable rights hereunder. 9.13 Specific Performance The parties agree that if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached, irreparable damage would occur, no adequate remedy at Law would exist and damages would be difficult to determine, and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at Law or in equity. 9.14 Language The parties confirm that it is their wish that this Agreement, as well as any other documents relating to this Agreement, including notices, schedules and authorizations, have been and shall be drawn up in the English language only. Les signataires confirment leur volonte que la presente convention, de meme que tous les documents s'y rattachant, y compris tout avis, annexe et autorisation, soient rediges en anglais seulement. 9.15 Severability If any provision of this Agreement or the application of any such provision to any Person or circumstance shall be held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision hereof. The parties shall engage in good faith negotiations to replace any provision which is declared invalid, illegal or unenforceable with a valid, legal and enforceable provision, the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provision which it replaces. [Remainder of this page intentionally left blank] WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed the day and year first above written. THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. By: /s/ Mitchell P. Goldstein Name: Mitchell P. Goldstein Title: Executive Vice-President and Chief Financial Officer A&P LUXEMBOURG S.a r.l. By: /s/ Mitchell P. Goldstein Name: Mitchell P. Goldstein Title: Manager By: /s/ Gerard Becquer Name: Gerard Becquer Title: Manager METRO INC. By: /s/ Pierre H. Lessard Name: Pierre H. Lessard Title: President and Chief Executive Officer By: /s/ Eric Richer La Fleche Name: Eric Richer La Fleche Title: Executive Vice-President and Chief Operating Officer EX-10 9 ex1042lettercredit.txt EX. 10.42 LETTER OF CREDIT AGREEMENT Exhibit 10.42 LETTER OF CREDIT AGREEMENT dated as of October 14, 2005 between THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. BANK OF AMERICA, N.A. as Issuing Bank ___________________________ TABLE OF CONTENTS Page 1. Definitions............................................................1 1.01 Defined Terms....................................................1 1.02 Terms Generally..................................................7 2. Letters of Credit......................................................8 2.01 Issuance of Letters of Credit....................................8 2.02 Reimbursement of Drawings........................................8 2.03 Notice of Drawings...............................................8 2.04 Interest on Overdue Amounts......................................8 2.05 Procedures for Issuance..........................................9 2.06 Unconditional Obligations........................................9 2.07 Letter of Credit Fees...........................................10 2.08 Nature of Fees..................................................10 2.09 Termination or Reduction of Commitment..........................11 2.10 Maintenance of Loan Account; Statements of Account..............11 2.11 Increased Costs.................................................11 2.12 Payments........................................................12 2.13 Taxes...........................................................12 3. Representations and Warranties........................................13 3.01 Organization; Powers............................................13 3.02 Authorization; Enforceability...................................14 3.03 Governmental Approvals; No Conflicts............................14 3.04 Litigation......................................................14 3.05 Compliance with Loans and Agreement; No Default.................14 3.06 Security Documents..............................................14 3.07 Federal Reserve Regulations.....................................15 3.08 Solvency........................................................15 3.09 Taxes...........................................................15 3.10 Disclosure......................................................15 4. Conditions............................................................16 4.01 Closing Date....................................................16 4.02 Conditions Precedent to Each Letter of Credit...................17 5. Affirmative Covenants.................................................17 5.01 Financial Statements and Other Information......................17 5.02 Existence; Conduct of Business..................................18 5.03 Compliance with Laws............................................18 5.04 Use of Letters of Credit........................................18 5.05 Cash Collateralization of Letter of Credit Outstandings.........19 5.06 Taxes and Indebtedness..........................................19 (i) 5.07 Further Assurances..............................................19 6. Covenants.............................................................19 6.01 Liens, Collateral Dispositions..................................19 6.02 Fundamental Changes.............................................19 7. Events of Default.....................................................20 7.01 Events of Default...............................................20 7.02 Remedies on Default.............................................22 8. Miscellaneous.........................................................22 8.01 Notices.........................................................22 8.02 Waivers; Amendments.............................................22 8.03 Expenses; Indemnity; Damage Waiver..............................23 8.04 Successors and Assigns..........................................24 8.05 Survival........................................................25 8.06 Counterparts; Integration.......................................25 8.07 Severability....................................................25 8.08 Right of Setoff.................................................26 8.09 Governing Law; Jurisdiction; Consent to Service of Process......26 8.10 WAIVER OF JURY TRIAL............................................26 8.11 Headings........................................................27 8.12 Interest Rate Limitation........................................27 8.13 Waivers.........................................................27 (ii) LETTER OF CREDIT AGREEMENT (this "Agreement"), dated as of October 14, 2005 by and between: THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., a Maryland corporation ("the Company"), having a place of business at 2 Paragon Drive, Montvale, New Jersey 07645; and BANK OF AMERICA, N.A., as Issuing Bank, a national banking association having a place of business at 100 Federal Street, Boston, Massachusetts 02110; in consideration of the mutual covenants herein contained and benefits to be derived herefrom. 1. DEFINITIONS. 1.01 Defined Terms. As used in this Agreement, the following terms have the meanings specified below: "Account" means each of the Cash Collateral Account and the Additional Collateral Account. "Additional Collateral" means those investments specified on Schedule 1 hereto. "Additional Collateral Account" means that certain account now or hereafter established by the Company with Bank of America, N.A. or any of its Affiliates under the sole and exclusive dominion and control of the Issuing Bank designated as the "A&P Letter of Credit Additional Collateral Account" containing investments constituting Additional Collateral, and in which account the Issuing Bank has been granted a Lien pursuant to the Pledge and Security Agreement. "Affiliate" means with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified or is a director or officer of such Person; provided, that Metro Inc. and the Subsidiaries and stakeholders (other than the Company and its Affiliates) of Metro Inc. shall not be deemed to be Affiliates of the Company and its Subsidiaries. "Agreement" means this Letter of Credit Agreement, as modified, amended, supplemented or restated, and in effect from time to time. "Applicable Advance Rate" means as to each investment constituting Additional Collateral, the percentage specified on Schedule 1 hereto. "Applicable Law" means as to any Person: (i) all laws, statutes, rules, regulations, orders, or other requirements having the force of law and (ii) all court orders and injunctions, and/or similar rulings, in each instance ((i) and (ii)) of or by any Governmental Authority, or court, or tribunal which has jurisdiction over such Person, or any property of such Person, or of any other Person for whose conduct such Person would be responsible. 1 "Availability" means, at any time of determination, the lesser of (i) $200,000,000, and (ii) an amount equal to the difference between (a) the sum of (1) 100% of the Cash and Cash Equivalents on deposit in the Cash Collateral Account and (2) as to each item of Additional Collateral on deposit in the Additional Collateral Account, the amount of such Additional Collateral multiplied by the Applicable Advance Rate and (b) the aggregate Letter of Credit Outstandings. "Bank of America" means Bank of America, N.A. "Board" means the Board of Governors of the Federal Reserve System of the United States of America. "Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banks in Boston, Massachusetts, Charlotte, North Carolina, or New York, New York are authorized or required by law to remain closed. "Cash and Cash Equivalents" means (i) cash, (ii) investments in money market funds maintained by Bank of America, N.A. or any of its Affiliates, (iii) investments in certificates of deposit maturing within one year from the date of acquisition, banker's acceptances, and overnight bank deposits, in each case issued by or created by, or with, Bank of America, N.A. or any of its Affiliates, (iv) investments in deposit accounts in the ordinary course of business with Bank of America, N.A. or any of its Affiliates and (v) investments in any mutual fund that invests solely in United States treasury obligations and which is quoted in the Wall Street Journal. "Cash Collateral Account" means that certain account numbered 24900531 established by the Company with Banc of America Securities LLC under the sole and exclusive dominion and control of the Issuing Bank designated as the "A&P Letter of Credit Cash Collateral Account" containing investments constituting Cash and Cash Equivalents, in which account the Issuing Bank has been granted a Lien pursuant to the Pledge and Security Agreement. "Change in Control" means, at any time, (a) the board of directors of the Company shall cease to consist of a majority of the Continuing Directors, (b) any person or group (within the meaning of Sections 13(d) and 14(d) of the Securities and Exchange Act of 1934, as amended) other than a Permitted Holder shall acquire a majority of the voting power represented by the Company's outstanding capital stock entitled to vote in the election of directors of the Company. "Change in Law" means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by the Issuing Bank (or by the Issuing Bank's holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. "Charges" has the meaning provided therefor in Section 8.12. "Closing Date" means the date on which the conditions specified in Section 4.02 are satisfied or waived. 2 "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Collateral" means any and all "Collateral" as defined in the Pledge and Security Agreement. "Commercial Letter of Credit" means any Letter of Credit issued for the purpose of providing the primary payment mechanism in connection with the purchase of any materials, goods or services by the Company or any Subsidiary Credit Party in the ordinary course of business of the Company or such Subsidiary Credit Party. "Commitment" means $200,000,000 or such lesser amount on account of a reduction thereof in accordance with the provisions of Section 2.09 hereof. "Continuing Directors" means directors of the Company who are in office on the Closing Date and each other director, who's nomination for election to the Board of Directors of the Company is recommended by a majority of the then Continuing Directors or a Permitted Holder. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. The terms "Controlling" and "Controlled" have meanings correlative thereto. "Credit Documents" means this Agreement, the Letters of Credit, each letter of credit application, and the Pledge and Security Agreement, and any other instrument or agreement now or hereafter executed and delivered in connection herewith or therewith, each as amended and in effect from time to time. "Credit Request" means a request by the Company for the issuance of a Letter of Credit in accordance with Section 2.05. "Default" means any event or condition that constitutes an Event of Default or that upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "dollars" or "$" refers to lawful money of the United States of America. "Event of Default" has the meaning assigned to such term in Section 7.01. An "Event of Default" shall be deemed to have occurred and to be continuing unless and until the Event of Default has been duly waived in writing by the Issuing Bank. "Excluded Taxes" means, with respect to the Issuing Bank or any other recipient of any payment to be made by or on account of any obligation of the Company or any Subsidiary Credit Party hereunder, (a) income or franchise Taxes imposed on (or measured by) its gross or net income by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located, and (b) any branch profits Taxes imposed by the United States of America or any similar Tax imposed by any other jurisdiction in which the Company or such Subsidiary Credit Party is located. 3 "Federal Funds Effective Rate" means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by Bank of America from three Federal funds brokers of recognized standing selected by it. "GAAP" means generally accepted accounting principles of the United States of America, consistently applied. "Governmental Authority" means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "Indemnified Taxes" means Taxes other than Excluded Taxes. "Indemnitee" has the meaning provided therefor in Section 0(b). "Issuing Bank" means Bank of America or its Affiliates, in their capacities as the issuers of Letters of Credit hereunder. "L/C Disbursement" means a payment made by the Issuing Bank pursuant to a Letter of Credit. "Letter of Credit" shall mean a letter of credit that is (i) issued pursuant to this Agreement for the account of the Company or any Subsidiary Credit Party, (ii) a Standby Letter of Credit or Commercial Letter of Credit, (iii) issued for purposes for which the Company or any Subsidiary Credit Party has historically obtained letters of credit, or for any other purpose that is reasonably acceptable to the Issuing Bank, and (iv) in form reasonably satisfactory to the Issuing Bank. "Letter of Credit Fees" shall mean the fees payable in respect of Letters of Credit pursuant to Section 2.07. "Letter of Credit Outstandings" shall mean, at any time, the sum of (a) with respect to Letters of Credit outstanding at such time, the aggregate maximum amount that then is or at any time thereafter may become available for drawing or payment thereunder plus (b) all amounts theretofore drawn or paid under Letters of Credit for which the Issuing Bank has not then been reimbursed. "Lien" means, with respect to any asset, any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset. "Margin Stock" has the meaning assigned to such term in Regulation U. 4 "Material Adverse Effect" means a material adverse effect on (a) the business, assets, liabilities (actual or contingent), operations or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole, (b) the ability of the Company or any Subsidiary Credit Party to perform any material obligation or to pay any Obligations under this Agreement or any of the other Credit Documents, or (c) the validity or enforceability of this Agreement or any of the other Credit Documents or any of the material rights or remedies of the Issuing Bank hereunder or thereunder. "Material Indebtedness" means indebtedness of any one or more of the Company and its Subsidiaries in an aggregate principal amount exceeding $10,000,000. "Maximum Rate" has the meaning provided therefor in Section 8.12. "Obligations" means the due and punctual payment by the Company and each Subsidiary Credit Party of (i) each payment required to be made by the Company or any Subsidiary Credit Party under this Agreement in respect of any Letter of Credit, when and as due, including payments in respect of reimbursement of disbursements and interest thereon (including all interest that accrues after the commencement of any case or proceeding by or against the Company or any Subsidiary Credit Party under any federal or state bankruptcy, insolvency, receivership or similar law, whether or not allowed in such case or proceeding) and (ii) all other monetary obligations, including fees, costs, expenses and indemnities, whether primary, secondary, direct, contingent, fixed or otherwise, of the Company or any Subsidiary Credit Party to the Issuing Bank under this Agreement and the other Credit Documents. "Organizational Document" means, relative to any Person, its limited partnership agreement, its certificate of incorporation, formation or limited partnership, its operating agreement, its by-laws and all shareholder or equity holder agreements, voting trusts and similar arrangements to which such Person is a party or which is applicable to its capital stock or its limited partnership agreement. "Other Taxes" means any and all current or future stamp or documentary Taxes or any other excise or property Taxes, charges or similar levies arising from any payment made under any Credit Document or from the execution, delivery or enforcement of, or otherwise with respect to, any Credit Document. "Permitted Holder" means (i) Tengelmann Warenhandelsgesellschaft or (ii) any Affiliate of Tengelmann Warenhandelsgesellschaft. "Person" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. "Pledge and Security Agreement" means the Pledge and Security Agreement, dated the date hereof, between the Company and the Issuing Bank, as amended and in effect from time to time. "Prime Rate" shall mean, for any day, the higher of (a) the variable annual rate of interest then most recently announced by Bank of America at its head office in Charlotte, North Carolina 5 as its "Prime Rate" and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1% (0.50%) per annum. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate being charged to any customer. If for any reason any Issuing Bank shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of any Issuing Bank to obtain sufficient quotations thereof in accordance with the terms hereof, the Prime Rate shall be determined without regard to clause (b) of the first sentence of this definition, until the circumstances giving rise to such inability no longer exist. Any change in the Prime Rate due to a change in Bank of America's Prime Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in Bank of America's Prime Rate or the Federal Funds Effective Rate, respectively. "Regulation U" means Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation X" means Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Related Parties" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "Responsible Officer" means the Company's Chief Executive Officer, Chief Financial Officer or Treasurer. "Security Documents" means the Pledge and Security Agreement and any and all other financing statements, control agreements or other documents delivered, in connection therewith. "Solvent" means, with respect to any Person on a particular date, that on such date (a) at fair valuations, all of the properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (b) the present fair saleable value of the properties and assets of such Person is not less than the amount that would be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its properties and assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts beyond such Person's ability to pay as such debts mature, and (e) such Person is not engaged in a business or a transaction, and is not about to engage in a business or transaction, for which such Person's properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged. "Specified Default" means the occurrence of any Event of Default specified in Sections 7.01(a), (b), (f), (g) or (h) hereof. "Standby Letter of Credit" means any Letter of Credit other than a Commercial Letter of Credit. 6 "Subsidiary" means, with respect to any Person (the "parent") at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent's Consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, Controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Subsidiary Credit Party" means each Subsidiary of the Company for whose account a Letter of Credit is issued by the Issuing Bank. "Taxes" means any and all current or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "Termination Date" shall mean the earliest to occur of (i) October 14, 2006 or (ii) the date of the occurrence of any Event of Default pursuant to Section 7.01(f), 7.01(g) or 7.01(h), or (iii) the date on which the Commitment of the Issuing Bank is terminated pursuant to clause (i) of the final paragraph of Section 7.01 or Section 2.09 hereof. "Transfer Notice" has the meaning set forth in Section 2.16 hereof. 1.02 Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (i) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (ii) any reference herein to any Person shall be construed to include such Person's successors and assigns, (iii) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, and (iv) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement. 7 2. LETTERS OF CREDIT. 2.01 Issuance of Letters of Credit. (a) Upon the terms and subject to the conditions herein set forth, the Company may request the Issuing Bank, at any time and from time to time after the date hereof and prior to the Termination Date, to issue, and subject to the terms and conditions contained herein, the Issuing Bank shall issue, for the account of the Company or any of the Subsidiary Credit Parties one or more Letters of Credit; provided that no Letter of Credit shall be issued if after giving effect to such issuance (i) the aggregate Letter of Credit Outstandings shall exceed the Commitment, or (ii) Availability would be less than zero. (b) Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one (1) year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one (1) year after such renewal or extension) and (ii) unless cash collateralized or otherwise credit supported to the reasonable satisfaction of the Issuing Bank, the date that is one (1) Business Days prior to October 14, 2006. Each Letter of Credit may, upon the request of the Company include a provision whereby such Letter of Credit shall be renewed automatically for additional consecutive periods of twelve (12) months or less unless the Issuing Bank notifies the beneficiary thereof at least thirty (30) days prior to the then-applicable expiration date that such Letter of Credit will not be renewed; provided, however, that no Letter of Credit shall be renewed or extended on or after the occurrence of the Termination Date. 2.02 Reimbursement of Drawings. Drafts drawn under each Letter of Credit shall be reimbursed by the Company or the applicable Subsidiary Credit Party in dollars by paying to the Issuing Bank an amount equal to such drawing prior to the close of business, Boston time, on the Business Day immediately following the day that the Issuing Bank delivers notice of such drawing, provided such notice is delivered to the Company before 11:00 a.m., Boston time. In the event notice of a drawing is delivered by the Issuing Bank to the Company after 11:00 a.m., Boston time, such drafts shall be reimbursed by the Company or the applicable Subsidiary Credit Party prior to the close of business, Boston time, on the second Business Day immediately following the day on which the Issuing Bank delivers notice of such drawing to the Company. 2.03 Notice of Drawings. The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall promptly notify the Company by telephone (confirmed by telecopy) of such demand for payment and whether the Issuing Bank has made or will make payment thereunder, provided that any failure to give or delay in giving such notice shall not relieve the Company of its obligation to reimburse the Issuing Bank with respect to any such payment. 2.04 Interest on Overdue Amounts. If the Issuing Bank shall make any L/C Disbursement, then, unless the Company or a Subsidiary Credit Party shall reimburse the Issuing Bank in full on the date such payment is made, the unpaid amount thereof shall bear interest, for each day from and including the date such payment is made to and including the date that the 8 Company or a Subsidiary Credit Party reimburses the Issuing Bank therefor, at the rate per annum equal to the Prime Rate plus fifteen basis points (0.15%) through the date upon which the Company or the applicable Subsidiary Credit Party is obligated to reimburse such drawing pursuant to Section 2.02 hereof, and thereafter at the rate per annum equal to the Prime Rate plus two percent (2.00%). Interest shall be calculated on the basis of a 360 day year and actual days elapsed. 2.05 Procedures for Issuance. Whenever the Company or a Subsidiary Credit Party desires that the Issuing Bank issue a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), the Company, through a Responsible Officer, shall give to the Issuing Bank at least two (2) Business Days' prior written notice (which may be by electronic means), or such shorter period as may be agreed upon in writing by the Issuing Bank and the Company, specifying the date on which the proposed Letter of Credit is to be issued, amended, renewed or extended (which shall be a Business Day), the stated amount of the Letter of Credit so requested, the expiration date of such Letter of Credit, the name and address of the beneficiary thereof, and the provisions thereof. If requested by the Issuing Bank, the Company and the applicable Subsidiary Credit Party shall also submit a letter of credit application on the Issuing Bank's standard form in connection with any request for the issuance, amendment, renewal or extension of a Letter of Credit (which application may be delivered electronically). In the event of an inconsistency between any such letter of credit application and this Agreement, the terms of this Agreement shall control. 2.06 Unconditional Obligations. The obligations of the Company and the Subsidiary Credit Parties to reimburse the Issuing Bank for any L/C Disbursement shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation: (i) any lack of validity or enforceability of any Letter of Credit; (ii) the existence of any claim, setoff, defense or other right which the Company or any Subsidiary Credit Party may have at any time against a beneficiary of any Letter of Credit or against the Issuing Bank, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction; (iii) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) payment by the Issuing Bank of any Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Letter of Credit; (v) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Company's or the Subsidiary Credit Parties' obligations hereunder; or (vi) the fact that any Event of Default shall have occurred and be continuing. Neither the Issuing Bank nor any of its Affiliates shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Issuing Bank, provided that the foregoing provisions of this Section 2.06 shall not be construed to excuse the 9 Issuing Bank from liability to the Company or any Subsidiary Credit Party to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Company and the Subsidiary Credit Parties to the extent permitted by Applicable Law) suffered by the Company that are caused by the Issuing Bank's failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of gross negligence or willful misconduct on the part of the Issuing Bank (as finally determined by a court of competent jurisdiction), the Issuing Bank shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented that appear on their face to be in compliance with the terms of a Letter of Credit, the Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit. 2.07 Letter of Credit Fees. (a) The Company and the Subsidiary Credit Parties shall pay the Issuing Bank on the first day of each calendar quarter, in arrears, a fee (each, a "Letter of Credit Fee") equal to the 0.15% per annum (on the basis of actual number of days elapsed in a year of 360 days) of the average daily face amount of the Letters of Credit outstanding during the immediately preceding calendar quarter. (b) Upon the occurrence of a Specified Default the Letter of Credit Fees shall be increased by an amount equal to two percent (2.00%) per annum. (c) The Company and the Subsidiary Credit Parties shall pay to the Issuing Bank, in addition to all Letter of Credit Fees otherwise provided for hereunder, such other reasonable fees and charges in connection with the issuance, negotiation, settlement, extension, amendment and processing of each Letter of Credit issued by the Issuing Bank as are customarily imposed by the Issuing Bank from time to time in connection with letter of credit transactions. 2.08 Nature of Fees All fees shall be paid on the dates due, in immediately available funds, to the Issuing Bank as provided herein. All fees shall be fully earned on the date when due (or on the Closing Date if specifically indicated as such) and shall not be refundable under any circumstances. 2.09 Termination or Reduction of Commitment. Upon at least three (3) Business Days' prior written notice to the Issuing Bank the Company may, at any time, in whole permanently terminate, or from time to time in part permanently reduce, the Commitment. Each such reduction shall be in the principal amount of $5,000,000 or any integral multiple of $1,000,000 in excess thereof. Each such reduction or 10 termination shall be irrevocable when given. No reduction in the Commitment shall result in the Commitment being less than the then Letter of Credit Outstandings. 2.10 Maintenance of Loan Account; Statements of Account. (a) The Issuing Bank shall maintain an account on its books in the name of the Company (the "Loan Account") which will reflect all Letter of Credit Outstandings, L/C Disbursements, fees and interest that have become payable as herein set forth. (b) After the end of each calendar month, the Issuing Bank shall send to the Company a statement accounting for the transactions occurring among and between the Issuing Bank and the Company during that month. The monthly statements shall, absent manifest error, be final, conclusive and binding on the Company and each Subsidiary Credit Party, unless otherwise objected to in writing by the Company within fifteen (15) days after receipt of the monthly statement. 2.11 Increased Costs. (a) If any Change in Law shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, the Issuing Bank; or (ii) impose on the Issuing Bank any other condition affecting this Agreement or any Letter of Credit; and the result of any of the foregoing shall be to increase the cost to the Issuing Bank of issuing or maintaining any Letter of Credit by an amount deemed material by the Issuing Bank or to reduce the amount of any sum received or receivable by the Issuing Bank hereunder by an amount deemed material by the Issuing Bank, then the Company and the Subsidiary Credit Parties will pay to the Issuing Bank, such additional amount or amounts as will compensate the Issuing Bank for such additional costs incurred or reduction suffered. (b) If the Issuing Bank reasonably determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on the Issuing Bank's capital or on the capital of the Issuing Bank's holding company, if any, as a consequence of this Agreement or the Letters of Credit issued by the Issuing Bank, to a level below that which the Issuing Bank or the Issuing Bank's holding company could have achieved but for such Change in Law (taking into consideration the Issuing Bank's policies and the policies of the Issuing Bank's holding company with respect to capital adequacy), then from time to time the Company and the Subsidiary Credit Parties will pay to the Issuing Bank such additional amount or amounts as will compensate the Issuing Bank or the Issuing Bank's holding company for any such reduction suffered deemed to be material by the Issuing Bank. (c) A certificate of the Issuing Bank setting forth the amount or amounts necessary to compensate the Issuing Bank or its holding company, as the case may be, as 11 specified in paragraph (a) or (b) of this Section and setting forth in reasonable detail the manner in which such amount or amounts were determined shall be delivered to the Company and shall be conclusive absent manifest error. The Company and the Subsidiary Credit Parties shall pay the Issuing Bank the amount shown as due on any such certificate within ten (10) Business Days after receipt thereof. (d) Delay on the part of the Issuing Bank to demand compensation pursuant to this Section shall not constitute a waiver of the Issuing Bank's right to demand such compensation. 2.12 Payments The Company and each Subsidiary Credit Party shall make each payment required to be made by it hereunder or under any other Credit Document (whether of interest, fees or reimbursement of drawings under Letters of Credit, or of amounts payable under Sections 2.10 or 2.13, or otherwise) prior to the close of business, Boston time, on the date when due, in immediately available funds, without setoff or counterclaim. Any amounts received after such time on any date may, in the discretion of the Issuing Bank, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Issuing Bank at its offices at 100 Federal Street, Boston, Massachusetts. If any payment under any Credit Document shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments under each Credit Document shall be made in dollars. Upon the occurrence of an Event of Default, the Issuing Bank, without the request of the Company or any Subsidiary Credit Party, may apply any amounts in any Account towards any payment due under this Agreement. 2.13 Taxes (a) Any and all payments by or on account of any obligation of the Company or the Subsidiary Credit Parties hereunder or under any other Credit Document shall be made free and clear of and without deduction for any Indemnified Taxes, provided that if the Company or a Subsidiary Credit Party shall be required to deduct any Indemnified Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions for Indemnified Taxes (including deductions for Indemnified Taxes applicable to additional sums payable under this Section) the Issuing Bank receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Company and the Subsidiary Credit Parties shall make such deductions, and (iii) the Company and the Subsidiary Credit Parties shall pay the full amount deducted to the relevant Governmental Authority in accordance with Applicable Law. (b) In addition, the Company and the Subsidiary Credit Parties shall pay any Other Taxes to the relevant Governmental Authority in accordance with Applicable Law. (c) The Company and the Subsidiary Credit Parties shall indemnify the Issuing Bank, within ten (10) Business Days after written demand therefor, for the full amount of 12 any Indemnified Taxes or Other Taxes paid by the Issuing Bank on or with respect to any payment by or on account of any obligation of the Company or any Subsidiary Credit Party hereunder or under any other Credit Document (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto. A certificate as to the amount of such payment or liability delivered to the Company by the Issuing Bank setting forth in reasonable detail the manner in which such amount was determined, shall be conclusive absent manifest error. (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Company or a Subsidiary Credit Party to a Governmental Authority, the Company shall deliver to the Issuing Bank the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Issuing Bank. (e) The Issuing Bank agrees that upon the occurrence of any circumstances entitling such party to indemnification or additional amounts pursuant hereto, such party shall use reasonable efforts to take any action (including designating a new lending office and signing any prescribed forms or other documentation appropriate in the circumstances) if such action would reduce or eliminate any Tax (including penalties or interest, as applicable) with respect to which such indemnification or additional amounts may thereafter accrue. (f) If the Issuing Bank reasonably determines that it has actually realized, by reason of a refund, deduction or credit of any Taxes paid or reimbursed by the Company or any Subsidiary Credit Party pursuant to subsection (a) or (c) above in respect of payments under the Credit Documents, a current monetary benefit that it would otherwise not have obtained and that would result in the total payments under this Section 2.13 exceeding the amount needed to make the Issuing Bank whole, the Issuing Bank shall pay to the Company, with reasonable promptness following the date upon which it actually realizes such benefit, an amount equal to the lesser of the amount of such benefit or the amount of such excess, in each case net of all out-of-pocket expenses incurred in securing such refund, deduction or credit. 3. REPRESENTATIONS AND WARRANTIES The Company and each Subsidiary Credit Party represents and warrants to the Issuing Bank that: 3.01 Organization; Powers. The Company and each Subsidiary Credit Party is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, and has all requisite power and authority to carry on its business as now conducted. 3.02 Authorization; Enforceability. The transactions contemplated hereby and by the other Credit Documents to be entered into by the Company and each Subsidiary Credit Party are within the Company's and such Subsidiary Credit Party's corporate limited partnership, limited liability company and other powers and have been duly authorized by all necessary action. This Agreement has been duly executed and delivered by the Company and constitutes, and each 13 other Credit Document to which the Company or any Subsidiary Credit Party is a party, when executed and delivered by the Company or such Subsidiary Credit Party will constitute, a legal, valid and binding obligation of the Company and each such Subsidiary Credit Party (as the case may be), enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. 3.03 Governmental Approvals; No Conflicts. The transactions to be entered into and contemplated by the Credit Documents (a) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except for such as have been obtained or made and are in full force and effect, (b) will not violate any Applicable Law or the Organizational Documents of the Company or any Subsidiary Credit Party or any order of any Governmental Authority, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon the Company or any Subsidiary Credit Party or its assets, or give rise to a right thereunder to require any payment to be made by the Company or any Subsidiary Credit Party, and (d) will not result in the creation or imposition of any Lien on any asset of any the Company or any Subsidiary Credit Party, except Liens created under the Credit Documents. 3.04 Litigation. (a) There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary Credit Party (i) that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect, or (ii) that involve the Collateral or any of the Credit Documents. 3.05 Compliance with Laws and Agreements; No Default. The Company and each Subsidiary Credit Party is in compliance with all Applicable Laws and the terms of all Material Indebtedness and all material agreements, except where failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. 3.06 Security Documents. The Security Documents shall create in favor of the Issuing Bank a legal, valid and enforceable security interest in the Collateral, and the Security Documents, if properly filed, or upon other action required for perfection, shall constitute the creation of a fully perfected first priority Lien on, and security interest in, all right, title and interest of the Company thereunder in such Collateral prior and superior in right to any other Person. 3.07 Federal Reserve Regulations(a) Neither the Company nor any Subsidiary Credit Party is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of buying or carrying Margin Stock. (b) No part of the proceeds of any Letter of Credit will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, (i) to buy or carry Margin Stock or to extend credit to others for the purpose of buying or carrying Margin Stock or to refund indebtedness originally incurred for such purpose or (ii) for any purpose that entails a 14 violation of, or that is inconsistent with, the provisions of the Regulations of the Board, including Regulation U or X. 3.08 Solvency. To the best of the knowledge of the Company, as of the Closing Date, after giving effect to the transactions contemplated hereby, the Company and each Subsidiary Credit Party is, and will be, Solvent. 3.09 Taxes. The Company and each Subsidiary Credit Party has timely filed, or caused to be filed, all federal and state Tax returns and reports required to have been filed and has paid, or caused to be paid, all Taxes required to have been paid by it, except (a) Taxes that are being contested in good faith by appropriate proceedings, for which such Person has set aside on its books adequate reserves, or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect. 3.10 Disclosure. The Company has disclosed to the Issuing Bank all agreements, instruments and corporate or other restrictions to which the Company or any Subsidiary Credit Party is subject, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. None of any of the reports, financial statements, certificates or other information furnished by or on behalf of any the Company or any Subsidiary Credit Party to the Issuing Bank in connection with the negotiation of this Agreement or any other Credit Document or delivered hereunder or thereunder (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, the Company represents and warrants only that such information was prepared in good faith based on assumptions believed by the Company to be reasonable at the time such projections were prepared. 4. CONDITIONS 4.01 Closing Date. The obligation of the Issuing Bank to issue each Letter of Credit, on and after the Closing Date, is subject to the following conditions precedent: (a) The Issuing Bank (or its counsel) shall have received from each party hereto either (i) a counterpart of this Agreement and all other Credit Documents (including, without limitation, the Pledge and Security Agreement) signed on behalf of such party or (ii) written evidence satisfactory to the Issuing Bank (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement and all other Credit Documents. (b) The Issuing Bank shall have received a favorable written opinion of counsel to the Company covering such matters relating to the Company and the Subsidiary Credit Parties, the Credit Documents or the transactions contemplated thereby as the Issuing Bank shall reasonably request. (c) The Issuing Bank shall have received such documents and certificates as the Issuing Bank or its counsel may reasonably request relating to the organization, 15 existence and good standing of the Company and each Subsidiary Credit Party, the authorization of the transactions contemplated by the Credit Documents and any other legal matters relating to the Company and the Subsidiary Credit Partys, the Credit Documents or the transactions contemplated thereby, all in form and substance reasonably satisfactory to the Issuing Bank and its counsel. (d) All necessary consents and approvals to the transactions contemplated hereby shall have been obtained and shall be satisfactory to the Issuing Bank. (e) The Issuing Bank shall be reasonably satisfied that any financial statements delivered to them fairly present the business and financial condition of the Company and its Subsidiaries, and since the date of the end of the Company's most recently ended fiscal year, except as disclosed in the Company's publicly available reports filed on or before the date hereof pursuant to the Securities Exchange Act of 1934, as amended, no change, occurrence or development has occurred that, in the Issuing Bank's reasonable opinion, has a Material Adverse Effect. (f) There shall not be any action, suit, investigation, litigation, or proceeding pending or threatened in any court or before any arbitrator or governmental instrumentality that in the Issuing Bank's reasonable judgment could reasonably be expected to have a Material Adverse Effect. (g) All fees due at or immediately after the Closing Date and all costs and expenses incurred by the Issuing Bank in connection with the establishment of the credit facility contemplated hereby (including the fees and expenses of counsel to the Issuing Bank) shall have been paid in full. (h) The consummation of the transactions contemplated hereby shall not violate any Applicable Law. (i) The Company shall have established the Accounts with the Issuing Bank and the Issuing Bank shall have a perfected first priority security interest in such Accounts and all Cash and Cash Equivalents and Additional Collateral on deposit therein. (j) There shall have been delivered to the Issuing Bank such additional instruments and documents as the Issuing Bank or counsel to the Issuing Bank reasonably may require or request. 4.02 Conditions Precedent to Each Letter of Credit. In addition to those conditions described in Section 4.01, the obligation of the Issuing Bank to issue each Letter of Credit, is subject to the following conditions precedent: (a) Notice. The Issuing Bank shall have received a notice with respect to such issuance as required by Section 2.05. 16 (b) Representations and Warranties. All representations and warranties contained in this Agreement and the other Credit Documents or otherwise made in writing in connection herewith or therewith shall be true and correct in all material respects on and as of the date of each issuance of each Letter of Credit hereunder with the same effect as if made on and as of such date, other than representations and warranties that relate solely to an earlier date. (c) No Default. On the date of each issuance of each Letter of Credit, and after giving effect thereto, (i) no Default or Event of Default shall have occurred and be continuing, and (ii) Availability shall not be less than zero. The request by the Company for, and the acceptance by the Company and each Subsidiary Credit Party of, each Letter of Credit hereunder shall be deemed to be a representation and warranty by the Company and each Subsidiary Credit Party that the conditions specified in this Section 4.02 have been satisfied at that time. 5. AFFIRMATIVE COVENANTS Until (i) the Commitment has expired or been terminated, and (ii) all Obligations payable hereunder shall have been paid in full, and (iii) all Letters of Credit shall have expired or terminated, the Company and each Subsidiary Credit Party covenants and agrees with the Issuing Bank that: 5.01 Financial Statements and Other Information. The Company will furnish to the Issuing Bank: (a) Within one hundred twenty (120) days after the end of each fiscal year of the Company, the consolidated balance sheet and related statements of operations, and consolidated statements of cash flows as of the end of and for such year for the Company and its Subsidiaries, setting forth in each case, in comparative form, the consolidated figures for the previous fiscal year, audited and reported on by independent public accountants of recognized national standing (without a "going concern" or like qualification or exception and without a qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of the Company and its Subsidiaries on a consolidated basis in accordance with GAAP; (b) Within forty-five (45) days after the end of each of the first three fiscal quarters of the Company, the consolidated balance sheet and related statements of operations, and cash flows the consolidated balance sheet and related statements of operations, and consolidated statements of cash flows for the Company and its Subsidiaries, as of the end of and for such fiscal quarter and the elapsed portion of the fiscal year, setting forth in each case, in comparative form the consolidated figures for the previous fiscal year, certified by the Company's Chief Financial Officer as presenting in all material respects the financial condition and results of operations of the Company and 17 its Subsidiaries on a consolidated basis in accordance with GAAP, subject to year end audit adjustments and the absence of footnotes; (c) at least ten (10) days prior written notice of any change (i) in any the Company's or any Subsidiary Credit Party's corporate name, (ii) in the Company's or any Subsidiary Credit Party's corporate structure or jurisdiction of incorporation or formation, or (iii) in the Company's or any Subsidiary Credit Party's Federal Taxpayer Identification Number or organizational identification number assigned to it by its state of organization. 5.02 Existence; Conduct of Business. The Company will, and will cause each Subsidiary Credit Party to, do or cause to be done all things necessary to comply with its respective Organizational Documents and to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, and privileges material to the conduct of its business, provided that the foregoing shall not prohibit any merger, consolidation, liquidation or dissolution permitted under Section 6.02. 5.03 Compliance with Laws. The Company will, and will cause each Subsidiary Credit Party to, comply with all Applicable Laws, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. 5.04 Use of Letters of Credit. The Letters of Credit issued hereunder will be used only (a) to finance the acquisition of working capital assets of the Company and the Subsidiary Credit Parties in the ordinary course of business, and (b) for general corporate purposes. No part of any Letter of Credit will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations U and X. 5.05 Cash Collateralization of Letter of Credit Outstandings. The Company shall cause the sum of (i) 100% of the Cash and Cash Equivalents on deposit in the Cash Collateral Account and (ii) as to each item of Additional Collateral on deposit in the Additional Collateral Account, the amount of such Additional Collateral multiplied by the Applicable Advance Rate, to be at least equal to the Letter of Credit Outstandings. 5.06 Taxes and Indebtedness. The Company will, and will cause each Subsidiary Credit Party to, pay its Indebtedness and other obligations, including Tax liabilities, before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) such Person has set aside on its books adequate reserves with respect thereto in accordance with GAAP, and (c) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect. 5.07 Further Assurances. The Company will , and will cause each Subsidiary Credit Party to, execute any and all further documents, financing statements, agreements and instruments, and take all such further actions that may be required under any Applicable Law, or which the Issuing Bank may reasonably request, to effectuate the transactions contemplated by the Credit Documents or to grant, preserve, protect or perfect the Liens created or intended to be 18 created by the Pledge and Security Agreement or the validity or priority of any such Lien, all at the expense of the Company and the Subsidiary Credit Parties. 6. COVENANTS Until (i) the Commitment has expired or been terminated, and (ii) all Obligations payable hereunder shall have been paid in full, and (iii) all Letters of Credit shall have expired or terminated, the Company and each Subsidiary Credit Party covenants and agrees with the Issuing Bank that: 6.01 Liens, Collateral Dispositions. The Company and the Subsidiary Credit Parties will not create, incur, assume or permit to exist any Lien on any Collateral or, except as expressly permitted by the Pledge and Security Agreement, sell, transfer, assign or otherwise dispose of any Collateral. 6.02 Fundamental Changes. The Company will not , and will not permit any Subsidiary Credit Party to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default or Event of Default shall have occurred and be continuing, (i) any Subsidiary Credit Party may merge into any other Subsidiary Credit Party or into the Company, and (ii) any Subsidiary Credit Party may liquidate or dissolve voluntarily into the Company. 7. EVENTS OF DEFAULT 7.01 Events of Default. If any of the following events ("Events of Default") shall occur: (a) the Company or any Subsidiary Credit Party shall fail to pay any reimbursement obligation in respect of any L/C Disbursement when and as the same shall become due and payable; (b) the Company or any Subsidiary Credit Party shall fail to pay any fee or any other amount (other than an amount referred to in Section 7.01(a)) payable under this Agreement or any other Credit Document, when and as the same shall become due and payable, and such failure shall continue for three Business Days; (c) any representation or warranty made or deemed made by or on behalf of the Company or any Subsidiary Credit Party in or in connection with any Credit Document or in any report, certificate, financial statement or other document furnished pursuant to or in connection with any Credit Document shall prove to have been incorrect in any material respect when made or deemed made; (d) the Company or any Subsidiary Credit Party shall fail to observe or perform any covenant, condition or agreement contained in Sections 5.04, 5.05, 6.01 or 6.02; 19 (e) the Company or any Subsidiary Credit Party shall fail to observe or perform any covenant, condition or agreement contained in this Agreement (other than those specified in Sections 7.01(a), 7.01(b), 7.01(c), or 7.01(d)), and such failure shall continue unremedied for a period of thirty (30) days after notice thereof from the Issuing Bank to the Company; (f) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Company or any Subsidiary Credit Party, their respective debts, or of a substantial part of their respective assets, under any federal or state bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any Subsidiary Credit Party or for a substantial part of their respective assets, and, in any such case, such proceeding or petition shall continue undismissed for sixty (60) days or an order or decree approving or ordering any of the foregoing shall be entered; (g) the Company or any Subsidiary Credit Party shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any federal or state bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause (g) of this Section 7.01, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any Subsidiary Credit Party or for a substantial part of their respective assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing; (h) the Company or any Subsidiary Credit Party shall become unable, admit in writing its inability or fail generally to pay its debts as they become due; (i) the Company shall fail to observe or perform any covenant, condition or agreement contained in the Pledge and Security Agreement; (j) The occurrence of an event of default on the part of the Company or any Subsidiary Credit Party under any Material Indebtedness to which the Company or any Subsidiary Credit Party is a party or any indenture or other agreement relating to any Material Indebtedness of the Company or any Subsidiary Credit Party; (k) (i) any challenge by or on behalf of the Company, any Subsidiary Credit Party or any other Person to the validity of any Credit Document or the applicability or enforceability of any Credit Document strictly in accordance with the subject Credit Document's terms or which seeks to void, avoid, limit, or otherwise adversely affect any security interest created by or in any Credit Document or any payment made pursuant thereto; 20 (ii) any Lien purported to be created under any Security Document shall cease to be, or shall be asserted by the Company or any other Person not to be, a valid and perfected Lien on any Collateral, with the priority required by the applicable Security Document; (l) the determination by the Company or any Subsidiary Credit Party, to suspend the operation of their business in the ordinary course, liquidate all or substantially all of the Company's or such Subsidiary Credit Party's assets or employ an agent or other third party to conduct a program of closings, liquidations or "Going-Out-Of-Business" sales of all or substantially all of the business; or (m) Any Change in Control. then, and in every such event (other than an event with respect to any the Company described in clause (f), (g) or (h) of this Section 7.01), and at any time thereafter during the continuance of such event, the Issuing Bank may by written notice to the Company, take either or both of the following actions, at the same or different times: (i) terminate all or any portion of the Commitment, and thereupon all or such portion of the Commitment shall terminate immediately, and (ii) declare all Obligations then outstanding to be due and payable in whole and thereupon the Obligations so declared to be due and payable shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company and the Subsidiary Credit Parties; and in case of any event with respect to the Company or a Subsidiary Credit Party described in clause (f), (g) or (h) of this Article, the Commitment shall automatically terminate and the Obligations then outstanding, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company and the Subsidiary Credit Parties. 7.02 Remedies on Default In case any one or more of the Events of Default shall have occurred and be continuing, the Issuing Bank may proceed to protect and enforce its rights and remedies under this Agreement or any of the other Credit Documents by suit in equity, action at law or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Agreement and the other Credit Documents or any instrument pursuant to which the Obligations are evidenced, and proceed to enforce the payment thereof or any other legal or equitable right of the Issuing Bank. No remedy herein is intended to be exclusive of any other remedy and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or any other provision of law. 21 8. MISCELLANEOUS 8.01 Notices. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to the Company or any Subsidiary Credit Party to it at 2 Paragon Drive Montvale, New Jersey 07645, Attention: Treasurer (Telecopy No. (201)571-8036), with a copy to General Counsel (Telecopy No. (201) 571-8106); (b) if to the Issuing Bank, to Bank of America, N.A., 40 Broad Street, Boston, Massachusetts 02109, Attention: Alexis MacElhiney (Telecopy No. (617) 434-2615), with a copy to Riemer & Braunstein, LLP, Three Center Plaza, Boston, Massachusetts 02108, Attention: David S. Berman, Esquire (Telecopy No. (617) 880-3456); Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. 8.02 Waivers; Amendments. (a) No failure or delay by the Issuing Bank in exercising any right or power hereunder or under any other Credit Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Issuing Bank hereunder and under the other Credit Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of any Credit Document or consent to any departure by any the Company or any Subsidiary Credit Party therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the issuance of a Letter of Credit shall not be construed as a waiver of any Default or Event of Default, regardless of whether the Issuing Bank may have had notice or knowledge of such Default or Event of Default at the time. (b) Neither this Agreement nor any other Credit Document nor any provision hereof or thereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Company and the Issuing Bank. 8.03 Expenses; Indemnity; Damage Waiver. (a) The Company and the Subsidiary Credit Parties, jointly and severally, shall pay (i) all actual reasonable out-of-pocket expenses incurred by the Issuing Bank and its Affiliates, including the actual reasonable fees, charges and disbursements of counsel for the Issuing Bank, for the preparation and administration of the Credit Documents or any amendments, modifications or waivers of the provisions thereof (whether or not the transactions 22 contemplated hereby or thereby shall be consummated), (ii) all reasonable out-of-pocket expenses incurred by the Issuing Bank in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder, and (iii) all reasonable out-of-pocket expenses incurred by the Issuing Bank, including the reasonable fees, charges and disbursements of any counsel for the Issuing Bank in connection with the enforcement or protection of its rights in connection with the Credit Documents, including its rights under this Section, or in connection with the Letters of Credit issued hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Letters of Credit. (b) The Company and the Subsidiary Credit Parties, jointly and severally, shall indemnify the Issuing Bank and each Related Party of any of the foregoing Persons (each such Person being called an "Indemnitee"), against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the reasonable fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of any Credit Document or any other agreement or instrument contemplated hereby, the performance by the parties to the Credit Documents of their respective obligations thereunder or the consummation of the transactions contemplated by the Credit Documents or any other transactions contemplated hereby, (ii) any Letter of Credit or the use of the proceeds therefrom (including any refusal by the Issuing Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), or (iii) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto, provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses resulted from the gross negligence, willful misconduct or bad faith of such Indemnitee. In connection with any indemnified claim hereunder, the Indemnitees shall be entitled to select a single counsel for themselves (absent conflicts of interest) and the Company and the Subsidiary Credit Parties shall promptly pay the reasonable fees and expenses of such counsel. (c) To the extent permitted by Applicable Law, neither the Company nor any Subsidiary Credit Party shall assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the transactions contemplated by the Credit Documents, any Letter of Credit or the use of the proceeds thereof. The Company and the Subsidiary Credit Parties further agree that no Indemnitee shall have any liability to the Company or any Subsidiary Credit Party, any Person asserting claims by or on behalf of the Company, any Subsidiary Credit Party or any other Person in connection with this Agreement or the other Credit Documents except (i) for breach of the Indemnitee's obligations under this Agreement and the other Credit Documents, or (ii) the Indemnitee's gross negligence, willful misconduct or bad faith. 23 (d) All amounts due under this Section shall be payable promptly after written demand therefor. 8.04 Successors and Assigns(a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit), except that neither the Company nor any the Subsidiary Credit Party may assign or otherwise transfer any of their rights or obligations hereunder without the prior written consent of the Issuing Bank (and any such attempted assignment or transfer without such consent shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit) and, to the extent expressly contemplated hereby, the Related Parties of the Issuing Bank) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) The Issuing bank may at any time assign to one or more banks or financial institutions (each, an "Assignee") all, or a portion of, its rights and obligations under this Agreement and the other Loan Documents; provided that the Company has provided its prior written consent of the Assignee (which consent shall not be unreasonably withheld or delayed) unless an Event of Default has occurred and is continuing (in which case no consent shall be required). Any such assignment and assumption shall be made pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit A hereto. Upon the execution and delivery of an Assignment and Assumption Agreement, the Assignee shall be a party to this Agreement and shall have all the rights and obligations of the Issuing Bank hereunder to the extent of such assignment with no further consent or action by any party. (c) The Issuing Bank may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of the Issuing Bank, including any pledge or assignment to secure obligations to any of the twelve Federal Reserve Banks organized under Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341, and this Section shall not apply to any such pledge or assignment of a security interest, provided that no such pledge or assignment of a security interest shall release the Issuing Bank from any of its obligations hereunder or substitute any such pledgee or assignee for the Issuing Bank as a party hereto. 8.05 Survival. All covenants, agreements, representations and warranties made by the Company and the Subsidiary Credit Parties in the Credit Documents and in the certificates or other instruments delivered in connection with or pursuant to this Agreement or any other Credit Document shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of the Credit Documents and the issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Issuing Bank may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect 24 as long as any Obligations are outstanding and unpaid or any Letter of Credit is outstanding and so long as the Commitment has not expired or terminated. The provisions of Sections 2.13, 2.15 and 8.03 shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Obligations, the expiration or termination of the Letters of Credit and the Commitment or the termination of this Agreement or any provision hereof. 8.06 Counterparts; Integration. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and the other Credit Documents constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all contemporaneous or previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Issuing Bank and the Company and when the Issuing Bank shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. 8.07 Severability. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. 8.08 Right of Setoff. If an Event of Default shall have occurred and be continuing, the Issuing Bank and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations at any time owing by the Issuing Bank or Affiliate or for the credit or the account of the Company and the Subsidiary Credit Parties against any of and all the obligations of the Company and the Subsidiary Credit Parties now or hereafter existing under this Agreement held by the Issuing Bank, irrespective of whether or not the Issuing Bank shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of the Issuing Bank under this Section are in addition to other rights and remedies (including other rights of setoff) that the Issuing Bank may have under the Security Documents or otherwise. 8.09 Governing Law; Jurisdiction; Consent to Service of Process (a) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. (b) The Company and the Subsidiary Credit Parties agree that any suit for the enforcement of this Agreement or any other Credit Document may be brought in any New York state or federal court sitting in the County of New York as the Issuing Bank may elect in its sole discretion and consent to the non-exclusive jurisdiction of such courts. The Company and the Subsidiary Credit Parties hereby waive any objection which they may now or hereafter have to 25 the venue of any such suit or any such court or that such suit is brought in an inconvenient forum. The Company and the Subsidiary Credit Parties agree that any action commenced by any of them asserting any claim or counterclaim arising under or in connection with this Agreement or any other Credit Document shall be brought solely in any New York state or federal court sitting in the County of New York as the Issuing Bank may elect in its sole discretion and consent to the exclusive jurisdiction of such courts with respect to any such action. (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 8.01. Nothing in this Agreement or any other Credit Document will affect the right of any party to this Agreement to serve process in any other manner permitted by law. 26 8.10 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO A JURY IN ANY TRIAL OF ANY CASE OR CONTROVERSY IN WHICH THE COMPANY, ANY SUBSIDIARY CREDIT PARTY, OR THE ISSUING BANK, IS OR BECOMES A PARTY (WHETHER SUCH CASE OR CONTROVERSY IS INITIATED BY OR AGAINST THE COMPANY, ANY SUBSIDIARY CREDIT PARTY OR THE ISSUING BANK, OR IN WHICH THE COMPANY, ANY SUBSIDIARY CREDIT PARTY OR THE ISSUING BANK IS JOINED AS A PARTY LITIGANT), WHICH CASE OR CONTROVERSY ARISES OUT OF OR IS IN RESPECT OF, ANY RELATIONSHIP AMONGST OR BETWEEN THE COMPANY, ANY SUBSIDIARY CREDIT PARTY OR ANY OTHER PERSON AND THE ISSUING BANK. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. 8.11 Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement. 8.12 Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the interest rate, together with all fees, charges and other amounts that are treated as interest on such Letter of Credit or L/C Disbursement under Applicable Law (collectively the "Charges"), shall exceed the maximum lawful rate (the "Maximum Rate") that may be contracted for, charged, taken, received or reserved by the Issuing Bank in accordance with Applicable Law, the rate of interest payable, together with all Charges payable, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to the Issuing Bank in respect of other periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Prime Rate to the date of repayment, shall have been received by the Issuing Bank. 8.13 Waivers. (a) The Obligations are the joint and several obligations of the Company and each Subsidiary Credit Party. The Company and each Subsidiary Credit Party hereby assumes, guarantees, and agrees to discharge all Obligations of all other obligors. In that regard, any Subsidiary Credit Party for whose account a Letter of Credit is to be issued shall, prior to the date of issuance, execute and deliver to the Issuing Banks a joinder to, and assumption of obligations under, this Agreement (in addition to any letter of credit application or other documents required by the Issuing Banks). 27 (b) To the fullest extent permitted by Applicable Law, the obligations of the Company and the Subsidiary Credit Parties hereunder shall not be affected by (i) the failure of the Issuing Bank to assert any claim or demand or to enforce or exercise any right or remedy against any other obligor under the provisions of this Agreement, any other Credit Document or otherwise, (ii) any rescission, waiver, amendment or modification of, or any release from any of the terms or provisions of, this Agreement, any other Credit Document, or any other agreement, including with respect to any other obligor, or (iii) the failure to perfect any security interest in, or the release of, any of the security held by or on behalf of the Issuing Bank. (c) To the fullest extent permitted by Applicable Law, the obligations of the Company and the Subsidiary Credit Parties hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason (other than the indefeasible payment in full in cash of the Obligations), including any claim of waiver, release, surrender, alteration or compromise of any of the Obligations, and shall not be subject to any defense or set-off, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of each obligor hereunder shall not be discharged or impaired or otherwise affected by any default, failure or delay, willful or otherwise, in the performance of the Obligations, or by any other act or omission that may or might in any manner or to any extent vary the risk of any obligor or that would otherwise operate as a discharge of any obligor as a matter of law or equity (other than the indefeasible payment in full in cash of all the Obligations). (d) To the fullest extent permitted by Applicable Law, the Company and the Subsidiary Credit Parties waive any defense based on or arising out of any defense of any other obligor under any Credit Document or the unenforceability of the Obligations or any part thereof from any cause, or the cessation from any cause of the liability of any other obligor under any Credit Document, other than the indefeasible payment in full in cash of all the Obligations. The Issuing Bank may, at its election, foreclose on any security held by it by one or more judicial or nonjudicial sales, accept an assignment of any such security in lieu of foreclosure, compromise or adjust any part of the Obligations, make any other accommodation with any other obligor under any Credit Document, or exercise any other right or remedy available to them against any other obligor, without affecting or impairing in any way the liability of any obligor hereunder except to the extent that all the Obligations have been indefeasibly paid in full in cash. Pursuant to Applicable Law, each obligor waives any defense arising out of any such election even though such election operates, pursuant to Applicable Law, to impair or to extinguish any right of reimbursement or subrogation or other right or remedy of such obligor against any other obligor, as the case may be, or any security. [SIGNATURE PAGES FOLLOW] 28 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as a sealed instrument as of the day and year first above written. THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. By:_________________________ Name: Title: BANK OF AMERICA, N.A. as Issuing Bank By:________________________ Name: Title: Address: 40 Broad Street, 10th Floor Boston, Massachusetts 02109 Attn: Alexis MacElhiney Telephone: (617) 434-3817 Telecopy: (617) 434-2615 29 Schedule 1 Advance ------- Additional Collateral Rate* - --------------------- ----- Mutual Funds (Quoted in WSJ or Barron's) -- U.S. Government Obligations up to 90% -- Corporate/Municipal Bonds up to 80% U.S. Government Obligations up to 90% U.S. Agency Bonds up to 80% State/Municipal Bonds (A or higher) up to 80% Corporate Bonds (BAA or higher) up to 80% Commercial Paper with Agency Ratings of: - --A1/P1 up to 90% - --A2/P2 up to 85% Repurchase Agreements up to 80% Collateralized Mortgage Obligations up to 80% Asset Backed Securities up to 80% Auction Rate Securities up to 80% * Based on current market value. 30 -----END PRIVACY-ENHANCED MESSAGE-----