-----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, Gh/mRS+OeN6YXd3Wf7kqWULuleOnHqn5+mtdSrin5wZZHsfMSL5KCYz7b5yT8nPB RIKcgUuYniLOo/Wm4rKkhA== 0000043300-08-000057.txt : 20080721 0000043300-08-000057.hdr.sgml : 20080721 20080721161127 ACCESSION NUMBER: 0000043300-08-000057 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20080614 FILED AS OF DATE: 20080721 DATE AS OF CHANGE: 20080721 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: 08961410 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 f10q12008.txt FORM 10-Q FOR QUARTER ENDED JUNE 14, 2008 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 the quarterly period ended June 14, 2008 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] (Do not check if smaller reporting company) Smaller reporting company [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X] As of July 15, 2008 the Registrant had a total of 57,641,586 shares of common stock - $1 par value outstanding. 1 PART I - FINANCIAL INFORMATION ITEM 1 - Financial Statements The Great Atlantic & Pacific Tea Company, Inc. Consolidated Statements of Operations (Dollars in thousands, except share and per share amounts) (Unaudited)
16 Weeks Ended ------------------------------------ June 14, 2008 June 16, 2007 --------------- --------------- Sales $ 2,922,665 $ 1,679,169 Cost of merchandise sold (2,039,079) (1,156,187) --------------- ---------------- Gross margin 883,586 522,982 Store operating, general and administrative expense (881,495) (529,356) --------------- ---------------- Income (loss) from operations 2,091 (6,374) Loss on sale of Canadian operations - (281) Gain on sale of Metro, Inc. - 78,388 Nonoperating income 48,597 - Interest expense (45,949) (19,713) Interest and dividend income 410 4,666 Equity in earnings of Metro, Inc. - 7,869 --------------- ---------------- Income from continuing operations before income taxes 5,149 64,555 Provision for income taxes (1,384) (3,149) ---------------- ----------------- Income from continuing operations 3,765 61,406 Discontinued operations: Loss from operations of discontinued businesses, net of tax benefit of $0 for both the 16 weeks ended June 14, 2008 and the 16 weeks ended June 16, 2007, respectively (4,163) (79,780) Gain (loss) on disposal of discontinued operations, net of tax benefit of $0 For both the 16 weeks ended June 14, 2008 and June 16, 2007, respectively 2,639 (46,768) --------------- ---------------- Loss from discontinued operations (1,524) (126,548) --------------- ---------------- Net income (loss) $ 2,241 $ (65,142) =============== ================ Net income (loss) per share - basic: Continuing operations $ 0.08 $ 1.47 Discontinued operations (0.03) (3.03) --------------- ----------------- Net income (loss) per share - basic $ 0.05 $ (1.56) =============== ================ Net (loss) income per share - diluted: Continuing operations $ (0.48) $ 1.45 Discontinued operations (0.03) (2.99) --------------- ---------------- Net loss per share - diluted $ (0.51) $ (1.54) =============== ================ Weighted average number of common shares outstanding Basic 49,786,027 41,801,381 =============== ================ Diluted 48,156,654 42,259,837 =============== ================
See Notes to Quarterly Report 2 The Great Atlantic & Pacific Tea Company, Inc. Consolidated Statements of Stockholders' Equity and Comprehensive (Loss) Income (Dollars in thousands) (Unaudited)
Common Stock Additional --------------------------- Paid-in Retained Shares Amount Capital Earnings ------------ ----------- ----------- ---------- 16 Week Period Ended June 14, 2008 - ---------------------------------- Balance at beginning of period 57,100,955 $ 57,101 $ 447,103 $ 16,423 Net income 2,241 Other comprehensive loss Conversion features related to convertible debt 18,241 Stock options exercised 104,536 104 2,071 Other share based awards 435,600 436 4,410 ------------ ----------- ----------- ---------- Balance at end of period 57,641,091 $ 57,641 $ 471,825 $ 18,664 ============ =========== =========== ========== 16 Week Period Ended June 16, 2007 - ---------------------------------- Balance at February 24, 2007, as previously reported 41,589,195 $ 41,589 $ 212,868 $ 153,325 Impact of the adoption of change in measurement date under FAS 158 (643) Cumulative impact of the adoption of FIN 48 24,421 ------------ ----------- ----------- ---------- Balance at beginning of period, as adjusted 41,589,195 41,589 212,868 177,103 Net loss (65,142) Other comprehensive income Stock options exercised 324,431 325 5,299 Tax benefit on stock options 1,701 Other share based awards 2,821 ------------ ----------- ----------- ---------- Balance at end of period 41,913,626 $ 41,914 $ 222,689 $ 111,961 ============ =========== =========== ==========
Accumulated Other Total Comprehensive Call Stockholders' (Loss) Income Options Equity ----------------- --------- --------------- 16 Week Period Ended June 14, 2008 - ---------------------------------- Balance at beginning of period $ (28,975) $ (73,509) $ 418,143 Net income 2,241 Other comprehensive loss (340) (340) Conversion features related to convertible debt 18,241 Stock options exercised 2,175 Other share based awards 4,846 ----------------- --------- --------------- Balance at end of period $ (29,315) $ (73,509) $ 445,306 ================= ========= =============== 16 Week Period Ended June 16, 2007 - ---------------------------------- Balance at February 24, 2007, as previously reported $ 22,888 $ - $ 430,670 Impact of the adoption of change n measurement date under FAS 158 (643) Cumulative impact of the adoption of FIN 48 24,421 ----------------- --------- --------------- Balance at beginning of period, as adjusted 22,888 - 454,448 Net loss (65,142) Other comprehensive income 137,408 137,408 Stock options exercised 5,624 Tax benefit on stock options 1,701 Other share based awards 2,821 ----------------- --------- --------------- Balance at end of period $ 160,296 $ - $ 536,860 ================= ========= ===============
See Notes to Quarterly Report 3 The Great Atlantic & Pacific Tea Company, Inc. Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) (Dollars in thousands) (Unaudited) Comprehensive Income (Loss) - ---------------------------
16 Weeks Ended ----------------------------------- June 14, 2008 June 16, 2007 ------------- ------------- Net income (loss) $ 2,241 $ (65,142) --------- ----------- Foreign currency translation adjustment - 16,045 Net unrealized gain on investment securities, net of tax - 121,740 Net unrealized gain on marketable securities, net of tax - 22 Pension and other post-retirement benefits, net of tax (340) (399) --------- ----------- Other comprehensive (loss) income, net of tax (340) 137,408 --------- ----------- Total comprehensive income $ 1,901 $ 72,266 ========= ===========
Accumulated Other Comprehensive (Loss) Income Balances - ------------------------------------------------------
Net Net Pension Unrealized Unrealized & Other Accumulated Foreign Gain on (Loss) Income Post- Other Currency Investment on Marketable retirement Comprehensive Translation Securities Securities Benefits (Loss) Income ------------- ------------- ------------- ---------------- -------------- Balance at February 23, 2008 $ - $ - $ - $ (28,975) $ (28,975) Current period change - - - (340) (340) ----------- --------- ----------- ----------- ----------- Balance at June 14, 2008 $ - $ - $ - $ (29,315) $ (29,315) =========== ========= =========== =========== =========== Balance at February 24, 2007 $ 9,710 $ - $ (22) $ 13,200 $ 22,888 Current period change 16,045 121,740 22 (399) 137,408 ----------- --------- ----------- ----------- ----------- Balance at June 16, 2007 $ 25,755 $ 121,740 $ - $ 12,801 $ 160,296 =========== ========= =========== =========== ===========
See Notes to Quarterly Report 4 The Great Atlantic & Pacific Tea Company, Inc. Consolidated Balance Sheets (Dollars in thousands except share amounts)
June 14, 2008 February 23, 2008 ------------- ----------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 129,053 $ 100,733 Restricted cash 3,781 3,713 Restricted marketable securities 7,119 6,796 Accounts receivable, net of allowance for doubtful accounts of $9,693 and $6,152 at June 14, 2008 and February 23, 2008, respectively 176,594 173,203 Inventories 522,632 505,012 Prepaid expenses and other current assets 98,630 94,969 ------------- -------------- Total current assets 937,809 884,426 ------------- -------------- Non-current assets: Property: Property owned, net 1,718,131 1,751,440 Property leased under capital leases, net 143,693 149,363 ------------- -------------- Property, net 1,861,824 1,900,803 Goodwill 447,682 387,546 Intangible assets, net 231,240 234,086 Other assets 249,348 241,057 ------------- -------------- Total assets $ 3,727,903 $ 3,647,918 ============= ============== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 17,473 $ 11,875 Current portion of obligations under capital leases 11,608 11,344 Current portion of other financial liabilities - 44,539 Accounts payable 268,934 216,703 Book overdrafts 53,640 36,435 Accrued salaries, wages and benefits 139,519 169,552 Accrued taxes 48,619 46,156 Other accruals 248,951 230,733 ------------- -------------- Total current liabilities 788,744 767,337 ------------- -------------- Non-current liabilities: Long-term debt 843,594 758,886 Long-term obligations under capital leases 154,254 157,430 Long-term real estate liabilities 346,128 346,110 Deferred real estate income 79,669 81,110 Other financial liabilities 112,216 180,250 Other non-current liabilities 957,992 938,652 ------------- -------------- Total liabilities 3,282,597 3,229,775 ------------- -------------- 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 - 57,641,091 and 57,100,955 shares at June 14, 2008 and February 23, 2008, respectively 57,641 57,101 Call options (73,509) (73,509) Additional paid-in capital 471,825 447,103 Accumulated other comprehensive loss (29,315) (28,975) Retained earnings 18,664 16,423 ------------- -------------- Total stockholders' equity 445,306 418,143 ------------- -------------- Total liabilities and stockholders' equity $ 3,727,903 $ 3,647,918 ============= ==============
See Notes to Quarterly Report 5 The Great Atlantic & Pacific Tea Company, Inc. Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited)
16 Weeks Ended ------------------------------------- June 14, 2008 June 16, 2007 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 2,241 $ (65,142) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Asset disposition initiatives (1,785) 152 Depreciation and amortization 80,027 56,349 (Gain) loss on disposal of owned property and write-down of property, net (532) 1,161 (Gain) loss on disposal of discontinued operations (2,639) 46,768 Other property impairments 781 451 Loss on sale of Canadian operations - 281 Nonoperating income (48,597) - Other share based awards 4,846 2,821 Equity in earnings of Metro, Inc. - (7,869) Gain on sale of shares of Metro, Inc. - (78,388) Other changes in assets and liabilities: (Increase) decrease in receivables (3,246) 27,880 (Increase) decrease in inventories (16,531) 29,009 Increase in prepaid expenses and other current assets (14,654) (7,244) Increase in other assets (6,423) (8,415) Increase (decrease) in accounts payable 46,993 (11,933) (Decrease) increase in accrued salaries, wages and benefits, and taxes (27,595) 7,262 Increase (decrease) in other accruals 13,612 (6,842) (Decrease) increase in other non-current liabilities (35,925) 40,734 Other operating activities, net 4,012 596 ----------- ------------ Net cash (used in) provided by operating activities (5,415) 27,631 ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property (29,690) (50,916) Proceeds from disposal of property 3,131 3,070 Disposal related expenditures for sale of Canadian operations - (281) Increase in restricted cash (68) (142,911) Proceeds from the sale of shares of Metro, Inc. - 203,492 Proceeds from maturities of marketable securities 957 20,446 ----------- ------------ Net cash (used in) provided by investing activities (25,670) 32,900 ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds under revolving lines of credit 497,361 295,100 Principal payments on revolving lines of credit (416,261) (325,100) Proceeds under line of credit 54,457 - Principal payments on line of credit (48,951) (31,933) Settlement of Series A warrants (45,735) - Long-term real estate liabilities - 2,165 Principal payments on capital leases (2,393) (1,549) Increase in book overdrafts 17,205 1,498 Deferred financing fees 1,551 (36) Tax benefit on stock options - 1,701 Proceeds from stock options exercised 2,175 5,624 ----------- ------------ Net cash provided by (used in) financing activities 59,409 (52,530) Effect of exchange rate changes on cash and cash equivalents (4) 7 ----------- ------------ Net increase in cash and cash equivalents 28,320 8,008 Cash and cash equivalents at beginning of period 100,733 86,194 ----------- ------------ Cash and cash equivalents at end of period $ 129,053 $ 94,202 =========== ============ SUPPLEMENTAL DISCOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 31,281 $ 19,858 =========== ============ Cash paid during the year for income taxes $ 1,494 $ 1,608 =========== ============
See Notes to Quarterly Report 6 The Great Atlantic & Pacific Tea Company, Inc. Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share amounts) (Unaudited) 1. Basis of Presentation The accompanying Consolidated Statements of Operations for the 16 weeks ended June 14, 2008 and June 16, 2007, Consolidated Statements of Stockholders' Equity and Comprehensive (Loss) Income, and Consolidated Statements of Cash Flows for the 16 weeks ended June 14, 2008 and June 16, 2007, and the Consolidated Balance Sheets at June 14, 2008 and February 23, 2008 of The Great Atlantic & Pacific Tea Company, Inc. ("We," "Our," "Us" or "Our Company") 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 2007 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 subsidiaries. All intercompany accounts and transactions have been eliminated. As discussed in Note 8 - Discontinued Operations, the criteria necessary to classify the operations for the Midwest and the Greater New Orleans area as discontinued were satisfied in fiscal 2007 and as such, have been reclassified in our Consolidated Statements of Operations for the 16 weeks ended June 14, 2008 and June 16, 2007. Certain reclassifications have been made to prior year amounts to conform to current year presentation. 2. Impact of New Accounting Pronouncements In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007 (our year ending February 28, 2009). In February 2008, the FASB also issued Staff Position No. 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements that Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13" ("FSP FAS 157-1"). FSP FAS 157-1 excludes FASB Statement No. 13, "Accounting for Leases" ("SFAS 13"), as well as other accounting pronouncements that address fair value measurements on lease classification or measurement under Statement 13, from the scope of SFAS 157. FSP FAS 157-1 is effective upon the initial adoption of SFAS 157. In addition, in February 2008, the FASB issued FASB Staff Position No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP FAS 157-2"). FSP FAS 157-2 delays the effective date of SFAS 157 for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. FSP FAS 157-2 states that a measurement is recurring if it happens at least annually and defines nonfinancial assets and nonfinancial liabilities as all assets and liabilities other 7 than those meeting the definition of a financial asset or financial liability in FASB Statement No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." FSP FAS 157-2 is effective upon issuance. Our Company adopted SFAS No. 157 as of February 24, 2008, with the exception of the application of the statement to nonrecurring nonfinancial assets and nonfinancial liabilities. Refer to Note 6 - Fair Value Measurements for further discussion. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities--including an amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. The provisions of SFAS 159 are effective for fiscal years beginning after November 15, 2007 (our year ending February 28, 2009). The adoption of the provisions of SFAS 159 had no effect on our Company's consolidated financial statements. In March 2008, the FASB issued Statement of Financial Accounting Standard No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 amends and expands the disclosure requirements of FASB Statement No. 133 with the intent to provide users of financial statement with an enhanced understanding of (i.) how and why an entity uses derivative instruments, (ii.) how derivative instruments and the related hedged items are accounted for under FASB Statement No. 133 and its related interpretations, and (iii.) how derivative instruments and related hedged items affect and entity's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for years and interim periods beginning after November 15, 2008 (our year ended February 27, 2010). The effect of adopting SFAS 161 is not expected to have a significant effect on our reported financial position or earnings. In April 2008, the FASB issued FSP 142-3, Determining the Useful Life of Intangible Assets ("FSP 142-3"). FSP 142-3 amends the factors to be considered in determining the useful life of intangible assets. Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value. FSP 142-3 is effective for fiscal years beginning after December 15, 2008 (our year ended February 27, 2010). Our Company is currently assessing the impact of FSP 142-3 on our consolidated financial statements. In May 2008, the FASB issued Statement No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles ("GAAP") for nongovernmental entities. Prior to the issuance of SFAS 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants ("AICPA") Statement on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SAS 69 has been criticized because it is directed to the auditor rather than the entity. SFAS 162 addresses these issues by establishing that the GAAP hierarchy should be directed to entities because it is the entity, not its auditor, that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. It is only effective for nongovernmental entities; therefore, the 8 GAAP hierarchy will remain in SAS 69 for state and local governmental entities and federal governmental entities. We have evaluated the provisions of SFAS 162 and the guidance will not have an impact on our Company's financial condition or results of operations. In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments that May be Settled in Cash Upon Conversion ("FSP APB 14-1"). FSP APB 14-1 requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuer's nonconvertible debt borrowing rate. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 (our year ended February 27, 2010), and interim periods within those fiscal years; however, early adoption is not permitted. Retrospective application to all periods presented is required except for instruments that were not outstanding during any of the periods that will be presented in the annual financial statements for the period of adoption but were outstanding during an earlier period. We are currently assessing the impact of adopting FSP APB 14-1 on our financial condition and results of operations. 3. Acquisition of Pathmark Stores, Inc. On December 3, 2007, our Company completed the acquisition of 100% of Pathmark for $1.4 billion in cash, stock, assumed or retired debt, warrants and options, in a transaction accounted for under SFAS No. 141 "Business Combinations" ("SFAS 141"). Pathmark is a regional supermarket chain with supermarkets in the New York, New Jersey and Philadelphia metropolitan areas. Consent Agreement - ----------------- On November 27, 2007, our Company announced that the Federal Trade Commission ("FTC") accepted a proposed consent agreement relating to our acquisition of Pathmark. The terms of the consent agreement required the divestiture of six stores located in the state of New York which were subsequently sold for a gain of $19.4 million in fiscal 2007. Included in the Consolidated Statements of Operations for the 16 weeks ended June 14, 2008 and June 16, 2007 are the sales and operating results of the five A&P stores that were divested. The sixth divested store was a Pathmark location and accordingly the results of operations of that store were not included in our results of operations. The results of the five A&P store operations are as follows:
16 weeks ended ------------------------------- June 14, 2008 June 16, 2007 ------------- ------------- Sales $ - $ 34,057 =========== ============ Income from operations $ - $ 343 =========== ============
Preliminary Purchase Price Allocation - ------------------------------------- The application of purchase accounting under SFAS 141 requires that the purchase price paid is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values on the transaction date. The allocation of the purchase price and its impact on the Consolidated Statements of Operations may differ depending on the final fair values assigned to amortizing assets and 9 liabilities and their related actual remaining useful lives. Identified intangible assets, which are included in the consolidated balance sheets, consisted of the following:
At June 14, 2008 --------------------------------- Weighted Average Gross Amortization Carrying Accumulated Period (years) Amount Amortization -------------- ----------- --------------- Loyalty card customer relationships 7 $ 19,200 $ 1,477 In-store advertiser relationships 20 14,720 396 Pharmacy payor relationships 13 75,000 3,107 Pathmark trade name Indefinite 127,300 - ----------- --------------- Total $ 236,220 $ 4,980 =========== ==============
Amortization of intangible assets for the 16 weeks ended June 14, 2008 was approximately $2.8 million. The following table summarizes the estimated future amortization expense: 2008 $ 6,402 2009 9,248 2010 9,248 2011 9,248 2012 9,248 Thereafter 60,546
We have determined that the Pathmark trade name has an indefinite life, and accordingly, is not subject to amortization. The allocation of the purchase price to assets which will not be amortized may also impact classification on the balance sheet depending on the final fair values assigned. Under the purchase method of accounting, the assets and liabilities of Pathmark were recorded at their respective fair values at the date of acquisition. Simultaneously, we recorded a preliminary amount to goodwill of $380.0 million. During the first quarter of fiscal 2008, we increased our preliminary amount of goodwill from $380.0 million to $440.1 million at June 14, 2008. This increase primarily related to a Pathmark transportation agreement which is unfavorable to market based upon information which existed as of the acquisition. We are performing additional analyses of this information which may result in future adjustments. Based upon the information received to date, we recorded an adjustment of approximately $59.0 million to our preliminary amount of goodwill. This adjustment also resulted in a $2.2 million reduction of operating expense in the first quarter of fiscal 2008 relating to prior year. We have preliminarily valued property, net, intangible assets, and certain other assets and liabilities. As this transaction was completed subsequent to our third quarter ended December 1, 2007, the values of certain assets and liabilities are based on preliminary valuations and are subject to adjustment as additional information is obtained. Changes to the valuation of property may result in adjustments to the fair value of certain identifiable intangible assets acquired, and when finalized, material adjustments to goodwill may result. 10 The following table summarizes the preliminary estimated fair values of the Pathmark assets acquired and liabilities assumed at the date of acquisition: Current assets $ 352.4 Goodwill 440.1 Intangible assets 236.2 Property, net* 1,200.5 Other assets 148.7 --------- Total assets acquired $ 2,377.9 Current liabilities (325.2) Long-term debt (1.2) Long-term obligations under capital leases (130.5) Long-term financing liabilities (64.1) Deferred taxes** (58.6) Other non-current liabilities (385.8) --------- Total liabilities assumed $ (965.4) --------- Net assets acquired $ 1,412.5 =========
* In fiscal 2007, we acquired net favorable lease rights relating to the acquisition of Pathmark in the amount of $457.0 million which is included in Property, net and other non-current liabilities in our Consolidated Balance Sheet at June 14, 2008. The Company's net favorable lease rights are amortized on a straight-line basis until the end of the lease options but not more than 25 years. The weighted average life remaining of the net favorable lease rights at June 14, 2008 is 21.3 years. Amortization expense related to the net favorable lease rights is $7.0 million for the 16 weeks ended June 14, 2008. ** The estimated fair values reflect recognition of a significant portion of A&P's net deferred tax assets, including net operating loss carry forwards, which existed at the date of acquisition. The preliminary amount of goodwill and intangibles are approximately $440.1 million and $236.2 million, respectively, resulting from the Pathmark acquisition. The goodwill is not deductible for tax purposes. Due to the recent nature of the acquisition we have not determined the reporting units to which the goodwill related to the Pathmark acquisition will be allocated. 4. Earnings Per Share Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average shares outstanding for the reporting period. Diluted earnings (loss) per share reflects the potential dilution, using the treasury stock method, and assumes that the convertible debt, stock options, restricted stock, warrants, and other potentially dilutive financial instruments were converted into common stock upon issuance, if dilutive. Weighted average common shares of 1,030,969 and nil for the 16 weeks ended June 14, 2008 and June 16, 2007, respectively, related to options outstanding under our Company's stock award plan were excluded from the computation of diluted earnings per share as the effect would be antidilutive. Weighted average common shares of 10,000 for the 16 weeks ended June 14, 2008 related to restricted stock units outstanding under our Company's stock option plans were excluded from the computation of diluted earnings per share as the effect would be antidilutive. Weighted average common shares of 4,969,401 for the 16 weeks ended June 14, 2008 related to warrants outstanding under our Company's stock award plan were excluded from the computation of diluted earnings per share as the effect would be antidilutive. 11 Weighted average common shares of 11,278,988 for the 16 weeks ended June 14, 2008 related to convertible debt outstanding were excluded from the computation of diluted earnings per share as the effect would be antidilutive. Weighted average common shares of 8,134,002 for the 16 weeks ended June 14, 2008 related to the share lending agreement were excluded from the computation of earning per share. The following table sets forth the calculation of basic and diluted earnings per share:
16 Weeks Ended 16 Weeks Ended June 14, 2008 June 16, 2007 --------------- --------------- Income (loss) from continuing operations $ 3,765 $ (65,142) Adjustments on Convertible Warrants (27,119) - --------------- --------------- Loss from continuing operations-diluted $ (23,354) $ (65,142) =============== ================ Weighted average common shares outstanding 57,606,833 41,801,381 Restricted stock options 313,196 - Share lending agreement (8,134,002) - --------------- --------------- Common shares outstanding-basic 49,786,027 41,801,381 Effect of dilutive securities: Options to purchase common stock 243,721 458,456 Convertible warrants (1,873,094) - --------------- --------------- Common shares outstanding-diluted 48,156,654 42,259,837 ============== ===============
5. Cash, Cash Equivalents, Restricted Cash and Restricted Marketable Securities At June 14, 2008 and February 23, 2008, we had $3.8 million and $3.7 million, respectively, in restricted cash which represented monies held in escrow for services which our Company is required to perform in connection with the sale of our real estate properties. At June 14, 2008 and February 23, 2008, our restricted marketable securities of $18.2 million and $19.4 million, respectively, were held by Bank of America in the Columbia Fund. On December 6, 2007, Bank of America froze the Columbia Fund as a result of the increased risk in subprime asset backed securities. During the first quarter of fiscal 2008, we received distributions from the Columbia Fund in the amount of $1.0 million at an amount less than 100% of the net asset value of the fund resulting in realized losses of $0.03 million. In addition, we recorded a realized loss of $0.3 million based on the ending net asset value of the Columbia Fund as the decline in net asset value is considered other than temporary at June 14, 2008 and will not be recovered in future distributions from the fund. Effective March 13, 2007, in accordance with SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," we record changes in the fair value of Metro, Inc. as unrealized gains or losses, net of tax, as a component of accumulated other comprehensive loss in our Consolidated Balance Sheets based on the close price of Metro, Inc. at the end of our reporting period. 12 The following is a summary of cash, cash equivalents, restricted cash, and restricted marketable securities as of June 14, 2008 and February 23, 2008:
At June 14, 2008 ----------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Costs Gains Losses Value ------------- ------------- ------------- ------------- Classified as: - ------------- Cash $ 126,995 $ - $ - $ 126,995 Cash equivalents: Money market funds 2,058 - - 2,058 ----------- ----------- ----------- ----------- Total cash and cash equivalents 129,053 - - 129,053 ----------- ----------- ----------- ----------- Restricted cash 3,781 - - 3,781 Restricted marketable securities 7,119 - - 7,119 Restricted marketable securities included in other assets 11,071 - - 11,071 ----------- ----------- ----------- ----------- Total cash, cash equivalents, restricted cash and restricted marketable securities $ 151,024 $ - $ - $ 151,024 =========== =========== =========== =========== Securities available-for-sale: - ------------------------------ Maturing within one year $ 7,119 $ 7,119 =========== =========== Maturing greater than one year $ 11,071 $ 11,071 =========== =========== At February 23, 2008 ----------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Costs Gains Losses Value ------------- ------------- ------------- ------------- Classified as: - ------------- Cash $ 98,382 $ - $ - $ 98,382 Cash equivalents: Money market funds 2,351 - - 2,351 ----------- ----------- ----------- ----------- Total cash and cash equivalents 100,733 - - 100,733 ----------- ----------- ----------- ----------- Restricted cash 3,713 - - 3,713 Restricted marketable securities 6,796 - - 6,796 Restricted marketable securities included in other assets 12,622 - - 12,622 ----------- ----------- ----------- ----------- Total cash, cash equivalents, restricted cash and restricted marketable securities $ 123,864 $ - $ - $ 123,864 =========== =========== =========== =========== Securities available-for-sale: - ------------------------------ Maturing within one year $ 6,796 $ 6,796 =========== =========== Maturing greater than one year $ 12,622 $ 12,622 =========== ===========
Gross realized losses on sales of investments were $0.03 million for the 16 weeks ended June 14, 2008 and gross realized gains on sales of investments were $78.5 million for the 16 weeks ended June 16, 2007. 13 6. Fair Value Measurements SFAS 157 defines and establishes a framework for measuring fair value and expands related disclosures. This Statement applies to all assets and liabilities that are being measured and reported on a fair value basis. Our Company adopted SFAS 157 for our financial assets and financial liabilities beginning in fiscal 2008. As discussed in Note 2 - Impact of New Accounting Pronouncements, SFAS 157-2 deferred the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities recorded at fair value on a nonrecurring basis to fiscal years beginning after November 15, 2008 (our year ended February 27, 2010). SFAS 157 establishes a three-tier fair value hierarchy, which classifies the inputs used in measuring fair value. These tiers include: Level 1 - Quoted prices in active markets for identical assets or liabilities. Our Company's Level 1 assets and liabilities include cash equivalents that are traded in an active exchange market. Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Our Company's Level 2 liabilities primarily include freestanding derivatives (conversion features and financing warrants) and warrants whose value is determined using the Black Scholes pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Level 3 - Unobservable inputs that are supported by little or no market activity and that are financial instruments whose value is determined using pricing models, discounted cash flows, or similar methodologies, as well as instruments for which the determination of fair value requires significant judgment or estimation. Our Company's Level 3 assets include restricted marketable securities for which there is limited market activity. A financial asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of June 14, 2008:
Fair Value Measurements at June 14, 2008 Using ---------------------------------------------- Significant Quoted Prices Other Significant Total Carrying in Active Observable Unobservable Value at Markets Inputs Inputs June 14, 2008 (Level 1) (Level 2) (Level 3) ----------------- ------------- ------------- ------------- Assets: Cash equivalents $ 2,058 $ 2,058 $ - $ - Restricted marketable securities 18,190 - - 18,190 ----------------- ------------- ------------- ------------- Total $ 20,248 $ 2,058 $ - $ 18,190 ================= ============= ============= =============
14
Fair Value Measurements at June 14, 2008 Using ---------------------------------------------- Significant Quoted Prices Other Significant Total Carrying in Active Observable Unobservable Value at Markets Inputs Inputs June 14, 2008 (Level 1) (Level 2) (Level 3) ----------------- ------------- ------------- ------------- Liabilities: Conversion feature of 5.125% Convertible Senior Notes $ 8,533 $ - $ 8,533 $ - Conversion feature of 6.75% Convertible Senior Notes - - - - Financing warrants 24,699 - 24,699 - Warrant Series B 78,983 - 78,983 - ----------------- ------------- ------------- ------------- Total $ 112,215 $ - $ 112,215 $ - ================= ============= ============= =============
Level 3 Valuation Techniques: - ---------------------------- Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial assets include our restricted marketable securities for which there is limited market activity such that the determination of fair value requires significant judgment or estimation. At June 14, 2008, these securities were valued primarily using broker pricing models that incorporate transaction details such as contractual terms, maturity, timing and amount of future cash inflows, as well as assumptions about liquidity. The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period February 24, 2008 to June 14, 2008:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) ------------------------------- Restricted Marketable Securities ------------- Beginning Balance $ 19,418 Total realized and unrealized losses included in: Earnings (1) (290) Comprehensive income - Settlements (938) Transfers in and/or out of Level 3 - ------------- Ending Balance $ 18,190 ============= Losses recorded in Earnings attributable to the change in unrealized losses relating to Level 3 assets still held at June 14, 2008 $ (262) =============
(1) Amounts are recorded in Store operating, general and administrative expense in the Consolidated Statements of Operations. 15 As discussed in Note 5 - Cash, Cash Equivalents, Restricted Cash and Restricted Marketable Securities, on June 14, 2008, we had $18.2 million invested in a short-term fixed income fund held by Bank of America (the "Columbia Fund"). Due to market liquidity conditions, cash redemptions from the Columbia Fund were restricted. As a result of this restriction on cash redemptions, we did not consider the Columbia Fund to be traded in an active market with observable pricing on February 24, 2008 and these amounts were categorized as Level 3. 7. Valuation of Long-Lived Assets In accordance with SFAS 144, "Accounting for the Impairment or Disposal of 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 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 7 year U.S. Treasury risk-free rate. During the 16 weeks ended June 14, 2008 and June 16, 2007, we recorded impairment losses on long-lived assets of $0.8 million and $50.2 million, respectively, as follows: 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 16 weeks ended June 14, 2008 and June 16, 2007, we recorded impairment losses on property, plant and equipment of $0.8 million and $0.5 million, respectively, related to stores that were or will be closed or converted in the normal course of business. This amount was included in "Store operating, general and administrative expense" in our Consolidated Statements of Operations. Impairments related to our discontinued operations - -------------------------------------------------- During the 16 weeks ended June 16, 2007, we recorded impairment losses of $49.7 million related to stores closed as a result of our exit of the Greater New Orleans and Midwest markets as discussed in Note 8 - Discontinued Operations. This amount was included in our Consolidated Statements of Operations under the caption "Gain (loss) on disposal of discontinued operations, net of tax". The effects of changes in estimates of useful lives were not material to ongoing depreciation expense. 8. Discontinued Operations We have had multiple transactions throughout the years which met the criteria for discontinued operations. These events are described based on the year the transaction was initiated. 2007 Events - ----------- On May 30, 2007, our Company announced advanced negotiations for the sale of our non-core stores located within the Greater New Orleans area, including inventory related to these stores. Our Company ceased sales operations in all stores not sold as of November 1, 2007. Planned sale transactions for these stores have been completed resulting in a loss on disposal of $16.5 million. 16 On April 24, 2007, based upon unsatisfactory operating trends and the need to devote resources to our expanding Northeast core business, our Company announced negotiations for the sale of our non-core stores within our Midwest operations, including inventory related to these stores. Our Company ceased sales operations in all stores not sold as of July 7, 2007. Planned sale transactions for these stores have been completed resulting in a loss on disposal of $34.3 million. 2005 Event - ---------- During the first quarter of fiscal 2005, we announced plans for a major strategic restructuring that would consolidate efforts in the Midwest. Thus, we initiated efforts to close a total of 35 stores in the Midwest. All of which were closed as of February 25, 2006. 2003 Events - ----------- During fiscal 2003, we adopted a formal plan to exit the Wisconsin markets through the sale and/or disposal of these assets. In February 2003, we announced the sale of a portion of our non-core assets, including seven stores in Madison, Wisconsin and 23 stores in Milwaukee, Wisconsin. Also in 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. Summarized below are the operating results for these discontinued businesses, which are included in our Consolidated Statements of Operations, under the captions "Loss from operations of discontinued businesses, net of tax" and "Gain (loss) on disposal of discontinued businesses, net of tax" for the 16 weeks ended June 14, 2008 and June 16, 2007.
For the 16 weeks ended ---------------------------------------- June 14, 2008 June 16, 2007 ------------------ ---------------- Loss from operations of discontinued businesses Sales $ - $ 422,327 ============== ============== Loss from operations of discontinued businesses, before tax (4,163) (79,780) Tax benefit - - -------------- -------------- Loss from operations of discontinued operations, net of tax $ (4,163) $ (79,780) =============== =============== Gain (loss) on disposal of discontinued operations Property impairments $ - $ (49,703) Gain on sale of fixed assets 2,639 2,935 -------------- -------------- Gain (loss) on disposal of discontinued operations, before tax 2,639 (46,768) Tax benefit - - -------------- -------------- Gain (loss) on disposal of discontinued operations, net of tax $ 2,639 $ (46,768) ============== ===============
17 Summarized below is a reconciliation of the liabilities related to restructuring obligations resulting from these activities, pursuant to SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" and SFAS No. 112, "Employers' Accounting for Postemployment Benefits."
For the 16 weeks ended June 14, 2008 -------------------------------------------------------------------------------------- Balance at Interest Balance at 2/23/2008 Accretion (1) Adjustments(2) Utilization(3) 6/14/2008 --------------- --------------- --------------- -------------- ---------------- 2007 Events - ----------- Occupancy $ 62,873 $ 2,876 $ 914 $ (8,827) $ 57,836 Severance 58,520 - - (1,073) 57,447 --------------- -------------- --------------- -------------- ---------- 2007 events total 121,393 2,876 914 (9,900) 115,283 2005 Event - ---------- Occupancy 66,882 993 (906) (3,048) 63,921 2003 Events - ----------- Occupancy 21,579 407 (1,559) (1,228) 19,199 --------------- -------------- --------------- -------------- ---------- Fiscal 2008 total $ 209,854 $ 4,276 $ (1,551) $ (14,176) $ 198,403 =============== ============== =============== =============== ========== Fiscal 2007 -------------------------------------------------------------------------------------- Balance at Interest Balance at 2/24/2007 Accretion (1) Adjustments(2) Utilization(3) 2/23/2008 --------------- --------------- --------------- -------------- ---------------- 2007 Events - ----------- Occupancy $ - $ 2,865 $ 81,234 $ (21,226) $ 62,873 Severance - - 81,642 (23,122) 58,520 --------------- -------------- --------------- -------------- ----------- 2007 events total - 2,865 162,876 (44,348) 121,393 2005 Event - ---------- Occupancy 83,111 3,457 (7,117) (12,569) 66,882 2003 Events - ----------- Occupancy 22,262 1,269 1,141 (3,093) 21,579 --------------- -------------- --------------- -------------- ---------- Fiscal 2007 total $ 105,373 $ 7,591 $ 156,900 $ (60,010) $ 209,854 =============== ============== =============== ================= ==========
(1) The additions to occupancy and severance represents 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. Interest accretion is recorded as a component of "Loss from operations of discontinued business" on the Consolidated Statements of Operations. (2) At each balance sheet date, we assess the adequacy of the balance of the remaining liability to determine if any adjustments are required as a result of changes in circumstances and/or estimates. Adjustments are recorded as a component of "Loss from operations of discontinued business" on the Consolidated Statements of Operations. For the 16 weeks ended June 14, 2008 ------------------------------------ The charge to occupancy for the 2007 events represents adjustments for additional occupancy related costs for our properties of $0.9 million due to changes in our estimation of such future costs. We also recorded adjustments for a reduction in occupancy related costs of $0.9 million and $1.6 million for the 2005 event and the 2003 events, respectively, due to changes in our estimation of such future costs. 18 Fiscal 2007 ----------- The charge to occupancy for the 2007 events represents charges related to the closures of 39 stores in fiscal 2007 in conjunction with our decision to close and/or sell stores in the Midwest and the Greater New Orleans area. The charge to severance and benefits of $81.6 million for the 2007 events related to (i.) individual severings and retention incentives that were accrued as earned of $24.6 million as a result of the sale or closing of these facilities and (ii.) future obligations for early withdrawal from multi-employer union pension plans of $57.0 million. During fiscal 2007, we also recorded adjustments for the 2005 event for a reduction in occupancy related costs for our properties of $7.1 million due to (i.) changes in our estimation of such future costs of $6.4 million and (ii.) a new sublease agreement for one property of $0.7 million. We recorded adjustments for the 2003 events for additional occupancy related costs for our properties of $1.1 million due to changes in our estimation of such future costs. (3) Occupancy utilization represents payments made during those periods for rent, common area maintenance and real estate taxes. Severance utilization represents payments made to terminated employees during the period. Summarized below are the payments made to date from the time of the original charge and expected future payments related to these events:
2007 2005 2003 Events Event Events -------------- --------------- ------------- Total severance payments made to date $ 24,195 $ 2,650 $ 22,528 Expected future severance payments 57,447 - - -------------- --------------- ------------- Total severance payments expected to be incurred 81,642 2,650 $ 22,528 -------------- --------------- ------------- Total occupancy payments made to date 30,053 39,220 27,554 Expected future occupancy payments, excluding interest accretion 57,836 63,921 19,199 Total occupancy payments expected to be incurred, -------------- --------------- ------------- excluding interest accretion 87,889 103,141 46,753 -------------- --------------- ------------- Total severance and occupancy payments made to date 54,248 41,870 50,082 Expected future severance and occupancy payments, excluding interest accretion 115,283 63,921 19,199 Total severance and occupancy payments - - - expected to be incurred, excluding interest accretion $ 169,531 $ 105,791 $ 69,281 =============== ============= ============
Payments to date were primarily for occupancy related costs such as rent, common area maintenance, real estate taxes, lease termination costs, severance, and benefits. The remaining obligation relates to expected future payments under long term leases and expected future payments for early withdrawal from multi-employer union pension plans. The expected completion dates for the 2007, 2005, and 2003 events are 2026, 2022, and 2022, respectively. Summarized below are the amounts included in our balance sheet captions on our Company's Consolidated Balance Sheets related to these events:
June 14, 2008 ----------------------------------------------------------------- 2007 2005 2003 Events Event Events Total --------------- --------------- --------------- --------------- Accrued salaries, wages and benefits $ 440 $ - $ - $ 440 Other accruals $ 23,684 $ 10,485 $ 2,791 $ 36,960 Other non-current liabilities $ 91,159 $ 53,436 $ 16,408 $ 161,003
19
February 23, 2008 ----------------------------------------------------------------- 2007 2005 2003 Events Event Events Total --------------- --------------- --------------- --------------- Accrued salaries, wages and benefits $ 1,513 $ - $ - $ 1,513 Other accruals $ 24,733 $ 10,985 $ 3,241 $ 38,959 Other non-current liabilities $ 95,147 $ 55,897 $ 18,338 $ 169,382
We evaluated the reserve balances as of June 14, 2008 based on current information and have concluded that they are adequate to cover future costs. We will continue to monitor the status of the vacant and subsidized properties, severance and benefits, and pension withdrawal liabilities, and adjustments to the reserve balances may be recorded in the future, if necessary. 9. Asset Disposition Initiatives In addition to the events described in Note 8 - Discontinued Operations, there were restructuring transactions which were not primarily related to our discontinued operations businesses. These events are referred to based on the year the transaction was initiated, as described below. Restructuring charges relate principally to employee severance and occupancy costs resulting from the closure of facilities and other workforce reductions attributable to our efforts to reduce costs. The costs of these reductions have been and will be funded through cash from operations. Occupancy costs represent facility consolidation and lease termination costs associated with our decision to consolidate and close duplicative or excess warehouse and office facilities, unproductive and excess facilities and the continued softening of real estate markets, which resulted in lower than expected sublease income. 2005 Event - --------- During fiscal 2005, our Company sold our U.S. distribution operations and some warehouse facilities and related assets to C&S Wholesale Grocers, Inc. The Asset Purchase Agreement included the assignment of our leases in Central Islip, New York and Baltimore, Maryland, and a warranty deed for our owned facilities in Dunmore, Pennsylvania. 2001 Event - ---------- During the third quarter of fiscal 2001, 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. 1998 Event - ---------- 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. 20 Summarized below is a reconciliation of the liabilities related to restructuring obligations resulting from these activities, pursuant to SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" and SFAS No. 112, "Employers' Accounting for Postemployment Benefits."
For the 16 weeks ended June 14, 2008 ------------------------------------------------------------------------------------ Balance at Interest Balance at 2/23/2008 Accretion (1) Adjustments(2) Utilization(3) 6/14/2008 --------------- --------------- --------------- --------------- -------------- 2005 Event - ---------- Continuing Operations Occupancy $ 1,231 $ 15 $ (91) $ (12) $ 1,143 Severance 1,686 - - (209) 1,477 -------------- -------------- --------------- ----------------- ---------- 2005 event total 2,917 15 (91) (221) 2,620 2001 Event - ---------- Continuing Operations Occupancy 6,755 113 (501) (86) 6,281 Discontinued Operations Occupancy 12,281 219 (166) (467) 11,867 --------------- -------------- --------------- -------------- ---------- 2001 event total 19,036 332 (667) (553) 18,148 1998 Event - ---------- Continuing Operations Occupancy 6,958 108 268 (897) 6,437 Severance 1,000 - - (50) 950 Discontinued Operations Occupancy 1,093 19 (8) (183) 921 --------------- -------------- --------------- -------------- ---------- 1998 event total 9,051 127 260 (1,130) 8,308 --------------- -------------- --------------- -------------- ---------- Fiscal 2008 total $ 31,004 $ 474 $ (498) $ (1,904) $ 29,076 =============== ============== =============== ============== ==========
21
Fiscal 2007 ------------------------------------------------------------------------------------ Balance at Interest Balance at 2/24/2007 Accretion (1) Adjustments(2) Utilization(3) 2/23/2008 --------------- --------------- --------------- --------------- -------------- 2005 Event - ---------- Continuing Operations Occupancy $ 1,453 $ 51 $ 200 $ (473) $ 1,231 Severance 876 - 2,366 (1,556) 1,686 Discontinued Operations Occupancy 3,997 92 (3,197) (892) - --------------- -------------- --------------- -------------- ---------- 2005 event total 6,326 143 (631) (2,921) 2,917 2001 Event - ---------- Continuing Operations Occupancy 7,338 401 10 (994) 6,755 Discontinued Operations Occupancy 13,248 747 - (1,714) 12,281 --------------- -------------- --------------- -------------- ---------- 2001 event total 20,586 1,148 10 (2,708) 19,036 1998 Event - ---------- Continuing Operations Occupancy 9,438 429 (351) (2,558) 6,958 Severance 1,210 - - (210) 1,000 Discontinued Operations Occupancy 1,598 79 - (584) 1,093 1998 event total 12,246 508 (351) (3,352) 9,051 --------------- -------------- --------------- -------------- ---------- Fiscal 2007 total $ 39,158 $ 1,799 $ (972) $ (8,981) $ 31,004 =============== ============== =============== ============== ==========
(1) Represents the interest accretion on future occupancy costs which were recorded at present value at the time of the original charge. These adjustments are recorded to "Store operating, general and administrative expense" for continuing operations and "Loss from operations of discontinued operations" for discontinued operations on our Consolidated Statements of Operations. (2) 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. These adjustments are recorded to "Store operating, general and administrative expense" for continuing operations and "Loss from operations of discontinued operations" as noted for discontinued operations on our Consolidated Statements of Operations. For the 16 weeks ended June 14, 2008 ------------------------------------ For the 16 weeks ended June 14, 2008, we recorded adjustments for a reduction in occupancy related costs of $0.1 million and $0.7 million for the 2005 event and the 2001 event, respectively, due to changes in our estimation of such future costs. We also recorded an adjustment for additional occupancy related costs of $0.3 million for the 1998 event due to changes in our estimation of such future costs. Fiscal 2007 ----------- During fiscal 2007, adjustments to occupancy costs related to changes in our estimation of such future costs. We recorded additions to severance of $2.4 million for the 2005 event for health and welfare benefits for warehouse retirees of $1.7 million and pension withdrawal costs of $0.7 million. 22 (3) Occupancy utilization represents payments made during those periods for rent. Severance and benefits utilization represents payments made to terminated employees during the period. Summarized below are the payments made to date from the time of the original charge and expected future payments related to these events:
2005 2001 1998 Event Event Event Total -------------- ------------- ---------------- ------------- Total severance payments made to date $ 48,142 $ 28,205 $ 30,514 $ 106,861 Expected future severance payments 1,477 - 950 2,427 Total severance payments expected ----------- ---------- ------------- ---------- to be incurred 49,619 28,205 31,464 109,288 ----------- ---------- ------------- ---------- Total occupancy payments made to date 13,789 59,573 113,025 186,387 Expected future occupancy payments, excluding interest accretion 1,143 18,148 7,358 26,649 Total occupancy payments expected to be incurred, excluding interest ----------- ---------- ------------- ---------- accretion 14,932 77,721 120,383 213,036 ----------- ---------- ------------- ---------- Total severance and occupancy payments made to date $ 61,931 $ 87,778 $ 143,539 $ 293,248 Expected future severance and occupancy payments, excluding interest accretion 2,620 18,148 8,308 29,076 Total severance and occupancy payments expected to be incurred, ----------- ---------- ------------- ---------- excluding interest accretion $ 64,551 $ 105,926 $ 151,847 $ 322,324 =========== ========== ============= ==========
Payments to date were primarily for occupancy related costs such as rent, common area maintenance, real estate taxes, lease termination costs, severance, and benefits. The remaining obligation relates to expected future payments under long-term leases and expected future payments for early withdrawal from multi-employer union pension plans. The expected completion dates for the 2005, 2001 and 1998 events are 2021, 2022 and 2020, respectively. Summarized below are the amounts included in our balance sheet captions on our Company's Consolidated Balance Sheets related to these events:
June 14, 2008 --------------------------------------------------------------------- 2005 2001 1998 Event Event Event Total --------------- --------------- ------------- ---------------- Other accruals $ 404 $ 2,760 $ 2,797 $ 5,961 Other non-current liabilities $ 2,216 $ 15,388 $ 5,511 $ 23,115
23
February 23, 2008 --------------------------------------------------------------------- 2005 2001 1998 Event Event Event Total --------------- --------------- --------------- ---------------- Other accruals $ 434 $ 2,754 $ 2,827 $ 6,015 Other non-current liabilities $ 2,483 $ 16,282 $ 6,224 $ 24,989
We evaluated the reserve balances as of June 14, 2008 based on current information and have concluded that they are adequate to cover future costs. We will continue to monitor the status of the vacant and subsidized properties, severance and benefits, and pension withdrawal liabilities, and adjustments to the reserve balances may be recorded in the future, if necessary. 10. Indebtedness and Other Financial Liabilities Series A and B Warrants - ----------------------- As part of the acquisition of Pathmark on December 3, 2007, we issued 4,657,378 and 6,965,858 roll-over stock warrants in exchange for Pathmark's 2005 Series A and Series B warrants, respectively. The number of warrants issued was computed based on the conversion factor of 0.46296. The Series A warrants were exercisable at $18.36 and expired on June 9, 2008 and the Series B warrants are exercisable at $32.40 and expire on June 9, 2015. These warrants were originally valued using the price of A&P common stock of $30.05 per common share, the quoted market price of A&P common stock on November 30, 2007, the last trading day before the transaction closing date. The Tengelmann stockholders have the right to approve any issuance of common stock under these warrants upon exercise (assuming Tengelmann's outstanding interest is at least 25% and subject to liquidity impairments defined within the Tengelmann Stockholder Agreement). In addition, Tengelmann has the ability to exercise a "Put Right" whereby it has the ability to require A&P to purchase A&P stock held by Tengelmann to settle these warrants. Based on the rights provided to Tengelmann, A&P does not have sole discretion to determine whether the payment upon exercise of these warrants will be settled in cash or through issuance of an equivalent portion of A&P shares. Therefore, these warrants are recorded as liabilities and marked-to-market each reporting period based on A&P's current stock price. On May 7, 2008, the 4,657,378 Series A warrants were exercised by Yucaipa Corporate Initiatives Fund I, L.P., Yucaipa American Alliance Fund I, L.P. and Yucaipa American Alliance (Parallel) Fund I, L.P. We opted to settle the Series A warrants in cash totaling $45.7 million rather than issuing additional common shares. Included in "Nonoperating Income" on our Consolidated Statements of Operations for the 16 weeks ended June 14, 2008, is a loss of $1.2 million for the Series A warrants through the settlement date of May 7, 2008 and a gain of $27.1 million for the Series B warrants market value adjustment. The value of the Series B warrants were $79.0 million as of June 14, 2008 and is included in "Other financial liabilities" on our Consolidated Balance Sheets. The following assumptions and estimates were used in the Black-Scholes model:
Series B --------------- Expected life 7.0 years Volatility 51.8% Dividend yield range 0% Risk-free interest rate range 3.95%
24 Public Debt Obligations - ----------------------- On December 18, 2007, we completed a public offering and issued $165 million 5.125% convertible senior notes due 2011 and $255 million 6.75% convertible senior notes due 2012. The 2011 notes are not redeemable at our option at any time. The 2012 notes are redeemable at our option on or after December 15, 2010, at a redemption price of 102.70% and on or after December 15, 2011, at a redemption price of 101.35%. The initial conversion price of the 2011 notes is $36.40 representing a 30.0% premium to the offering price of $28.00 and the initial conversion price of the 2012 notes is $37.80 representing a 35.0% premium to the offering price of $28.00 at maturity, and at our option, the notes are convertible into shares of our stock, cash, or a combination of stock and cash. Concurrent with this offering, we entered into call options and financing warrant transactions with financial institutions that are affiliates of the underwriters of the notes to effectively increase the conversion price of these notes and to reduce the potential dilution upon future conversion. Conversion prices were effectively increased to $46.20 or a 65% premium and $49.00 or a 75% premium for the 2011 and 2012 notes, respectively. As of December 18, 2007, our Company did not have sufficient authorized shares to provide for all potential issuances of common stock. Therefore, in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", our Company accounted for the conversion features as freestanding instruments. The notes were recorded with a discount equal to the value of the conversion features at the transaction date and will be accreted to the par value of the notes over the life of the notes. The value of the conversion features were determined utilizing the Black-Scholes option pricing model and recorded as a long term liability. The portion of the conversion features for which there are not shares available for settlement of conversions is marked to market each balance sheet date. During the 16 weeks ended June 14, 2008, the gain that was recorded in "Nonoperating Income" on our Consolidated Statements of Operations for the conversion features of the 5.125% and 6.75% convertible senior notes was $11.1 million and $5.1 million, respectively. Based on an increase in available shares primarily due to the exercise of our Series A warrants, $3.6 million and $14.7 million for the conversion features of the 5.125% and 6.75% convertible senior notes, respectively, were reclassified to "Additional paid-in-capital" on our Consolidated Statements of Stockholder's Equity and Comprehensive (Loss) Income. The fair value of the conversion features classified as a liability as of June 14, 2008 was $8.5 million and nil for the 5.125% and 6.75% convertible notes, respectively. The following assumptions and estimates were used in the Black-Scholes model:
For the 16 weeks ended June 14, 2008 --------------------- Expected life 3.0 years - 4.5 years Volatility 33.0% Dividend yield range 0% Risk-free interest rate range 3.38% - 3.73%
Financing Warrants - ------------------ Concurrent with the issuance of the convertible senior notes, our Company issued financing warrants in conjunction with the call options recorded as equity in the Consolidated Balance Sheet to effectively increase the conversion price of these notes and reduce the potential dilution upon future conversion. The financing warrants allow holders to purchase common shares at $46.20 with respect to the 5.125% notes and $49.00 with respect to the 6.75% notes. The financing warrants were valued at $36.8 million at the issuance date. At the issuance date our Company did not have sufficient authorized shares to provide all potential issuances of common stock. Therefore, the financing warrants are accounted for as freestanding derivatives, required to be settled in cash until sufficient shares are available and are recorded as a long- 25 term liability in the Consolidated Balance Sheet. The financing warrants are marked to market each reporting period utilizing the Black-Scholes option pricing model and are valued at $24.7 million as of June 14, 2008. During the 16 weeks ended June 14, 2008, we recorded a gain of $6.5 million included in "Nonoperating income" on our Consolidated Statements of Operations. The following assumptions and estimates were used in the Black-Scholes model:
For the 16 weeks ended June 14, 2008 --------------------- Expected life 3.3 years - 4.8 years Volatility 33.0% Dividend yield range 0% Risk-free interest rate range 3.38% - 3.73%
11. Interest Expense Interest expense is comprised of the following:
For the 16 Weeks Ended --------------------------------- June 14, June 16, 2008 2007 --------------- ---------------- Credit Agreement $ 3,414 $ 910 7.75% Notes, due April 15, 2007 - 342 9.125% Senior Notes, due December 15, 2011 360 360 5.125% Convertible Senior Notes, due June 15, 2011 2,595 - 6.750% Convertible Senior Notes, due December 15, 2012 5,282 - 9.375% Notes, due August 1, 2039 5,753 5,753 Capital Lease Obligations and Real Estate Liabilities 17,079 10,240 Amortization of Deferred Financing Fees and Discounts 5,852 293 Other 5,614 1,815 ----------- ----------- Total $ 45,949 $ 19,713 =========== ===========
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. We use our fiscal year end as the measurement date. The components of net pension cost were as follows:
For the 16 Weeks Ended -------------------------------- June 14, June 16, 2008 2007 ----------- --------- Service cost $ 1,534 $ 1,515 Interest cost 7,590 3,734 Expected return on plan assets (9,066) (4,041) Amortization of unrecognized net prior service cost 74 79 Amortization of unrecognized net loss 36 30 Administrative expenses and other - - -------- -------- Net pension cost $ 168 $ 1,317 ======== ========
26 Contributions We previously disclosed in our consolidated financial statements for the year ended February 23, 2008, that we expected to contribute $4.5 million in cash to our defined benefit plans in fiscal 2008. As of June 14, 2008, we contributed approximately $2.2 million to our defined benefit plans. We plan to contribute approximately $2.3 million to our plans during the remainder of fiscal 2008. Postretirement Benefits We provide postretirement health care and life insurance benefits to certain union and non-union employees. We recognize the cost of providing postretirement benefits during employees' active service periods. We use our fiscal year end as the measurement date for our postretirement benefits. The components of net postretirement benefits cost (income) were as follows:
For the 16 Weeks Ended -------------------------------- June 14, June 16, 2008 2007 ------------ ------------- Service cost $ 312 $ 100 Interest cost 705 324 Amortization of gain - (140) Prior service credit (414) (415) --------- --------- Net postretirement benefits cost (income) $ 603 $ (131) ======== =========
13. Stock Based Compensation During the first quarter of fiscal 2008, compensation expense related to share-based incentive plans was $4.9 million, after tax, compared to $2.9 million, after tax, during the first quarter of fiscal 2007. Included in share-based compensation expense recorded during the first quarter of fiscal 2008 and fiscal 2007 was $0.6 million and $0.2 million, respectively, related to expensing of stock options, $4.1 million and $2.5 million, respectively, relating to expensing of restricted stock, and $0.2 million and $0.2 million, respectively, relating to expensing of common stock granted to our Board of Directors at the Annual Meeting of Stockholders. At June 14, 2008, we had two stock-based compensation plans, the 1998 Long Term Incentive and Share Award Plan and the 2004 Non-Employee Director Compensation Plan. The general terms of each plan are reported in our Fiscal 2007 Annual Report on Form 10-K. 27 Stock options - ------------- The following is a summary of the stock option activity during the first quarter ended June 14, 2008:
Weighted Weighted Average Average Remaining Aggregate Exercise Contractual Intrinsic Shares Price Term (years) Value ------------- ------------- ------------ ------------- Outstanding at February 23, 2008 1,827,529 $ 24.21 Granted 128,434 26.07 Canceled or expired (40,863) 30.74 Exercised (104,536) 20.81 -------------- ---------- Outstanding at June 14, 2008 1,810,564 $ 24.39 3.7 $ 7.3 ============= ========== ============= ============= Exercisable at: June 14, 2008 1,582,485 $ 23.88 3.0 $ 7.3 ============= ============= Nonvested at: June 14, 2008 228,079 $ 27.94 9.1 $ - ============= =============
Fair values for each stock option 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. Our stock options have a contractual term of 10 years. The following assumptions were in place for grants that occurred during the 16 weeks ended June 14, 2008 and June 16, 2007:
16 weeks ended 16 weeks ended June 14, 2008 June 16, 2007 ------------------ ----------------- Expected life 7 years 7 years Volatility 52% 54% - 55% Risk-free interest rate 2.96% 4.46% - 4.57%
The weighted average grant date fair value of stock options granted during the first quarter ended June 14, 2008 and June 16, 2007 was $14.64 and $19.47, respectively. As of June 14, 2008, approximately $2.8 million, after tax, of total unrecognized compensation expense related to unvested stock option awards will be recognized over a weighted average period of 3.1 years. The total intrinsic value of options exercised during the first quarter ended June 14, 2008 and June 14, 2007 was $0.5 million and $4.9 million, respectively. The amount of cash received from the exercise of stock options during the first quarter of fiscal 2008 was approximately $2.2 million. 28 Performance Restricted Stock Units - ---------------------------------- The following is a summary of the performance restricted stock units activity during the first quarter ended June 14, 2008:
Weighted Average Grant Date Shares Fair Value -------------- -------------- Nonvested at February 23, 2008 1,905,427 $ 22.60 Granted 424,782 26.07 Canceled or expired (29,536) 27.32 Vested (435,600) 12.47 -------------- ------------- Nonvested at June 14, 2008 1,865,073 $ 25.68 ============= =============
Performance restricted stock units are granted at the fair market value of the Company's common stock at the date of grant, adjusted by an estimated forfeiture rate. During the first quarter of fiscal 2008, fifty percent of our performance restricted units granted in fiscal 2005, vested on February 24, 2008 (the first day of our fiscal year) and the remaining fifty percent will vest on the first day of fiscal 2009, in accordance with and subject to all other terms, conditions, limitations, restrictions and eligibility requirements. No units vested under our 2006 and 2007 grants during the first quarter of fiscal 2008. The total fair value of shares vested during the first quarter ended June 14, 2008 was $12.1 million. No shares vested during the first quarter ended June 16, 2007. Performance restricted stock units issued during fiscal 2008 are earned based on our Company achieving certain operating targets in fiscal 2010 and are 100% vested in fiscal 2010, respectively, upon achievement of those targets. During the first quarter of fiscal 2008 and fiscal 2007, our Company granted 424,782 shares and 488,746 shares of performance restricted stock units to selected employees, respectively, for a total grant date fair value of $11.1 million and $16.2 million, respectively. Approximately $24.4 million of unrecognized fair value compensation expense relating to these performance restricted stock units, and those issued in the previous year are expected to be recognized through fiscal 2011 based on estimates of attaining vesting criteria. 14. Income Taxes The income tax provisions recorded for the 16 weeks ended June 14, 2008 and June 16, 2007 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 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 deferred tax asset to zero. For the 16 weeks ended June 14, 2008, the valuation allowance increased by $46.2 million to reflect the increase in deferred income tax assets 29 recorded relating to the purchase price allocation adjustment discussed in Note 3 - Acquisition of Pathmark Stores, Inc., as well as the generation of additional net operating losses. For the 16 weeks ended June 16, 2007, the valuation allowance decreased by $7.0 million. To the extent that our 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 losses until such time as the certainty of future tax benefits can be reasonably assured. As of June 14, 2008, there have been no material changes to the Company's uncertain tax positions disclosures as discussed in Note 11 of the Company's Fiscal 2007 Annual Report on Form 10-K. The Company does not anticipate that total unrecognized tax benefits will significantly change in the next 12 months. For the 16 weeks ended June 14, 2008 and June 16, 2007, no amounts were recorded for interest and penalties within "Provision for income taxes" in our Consolidated Statements of Operations. Our Company is subject to U.S. federal income tax, as well as income tax in multiple state and foreign jurisdictions. As of June 14, 2008, we were subject to examination in the U.S. federal tax jurisdiction for the 1997 to 2006 tax years and we were also subject to examination in most state jurisdictions for the 1997 to 2006 tax years as well. The effective tax rate on continuing operations of 26.9% for the 16 weeks ended June 14, 2008 varied from the statutory rate of 35% primarily due to the recording of state and local income taxes, recording additional valuation allowance offset by a permanent difference related to nonoperating income from the fair value adjustments related to the conversion features, financing warrants and Series B warrants. The effective tax rate on continuing operations of 4.9% for the 16 weeks ended June 16, 2007 varied from the statutory rate of 35% primarily due to the recording of state and local income taxes and a reduction of our valuation allowance as a result of taxes provided on other comprehensive income and cumulative translation adjustments. As of June 14, 2008 we had $406.0 million in federal NOL carryforwards that expire beginning in 2023, some of which are subject to an annual limitation. Management believes such limitations will not have a material impact on the Company's ability to utilize such losses. At June 14, 2008 and February 23, 2008, we had a net current deferred tax asset which is included in "Prepaid expenses and other current assets" on our Consolidated Balance Sheets of $54.4 million and $64.8 million, respectively, a net non-current deferred tax asset which is included in "Other Assets" on our Consolidated Balance Sheets of $48.4 million and $38.0 million, respectively, and a non-current tax liability for uncertain tax positions which is included in "Other non-current liabilities" on our Consolidated Balance Sheets of $156.3 million and $156.3 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. 30 In the fourth quarter of 2007, we acquired Pathmark and we revised our reporting segments to be consistent with the manner in which our chief operating decision maker currently manages the business. Accordingly during the first quarter ended June 14, 2008, we operated under seven reportable segments: North, Central, South, Pathmark, Gourmet, Other and our investment in Metro, Inc. The Other segment includes our Food Basics and Liquor businesses. Our investment in Metro, Inc. represents our economic interest in Metro, Inc. and is required to be reported as an operating segment in accordance with SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" as our investment was greater than 10% of our Company's combined assets of all operating segments and the investment generated operating income during the first quarter of fiscal 2007. The criteria necessary to classify the Midwest and Greater New Orleans areas as discontinued have been satisfied and these operations have been reclassified as such in our Consolidated Statements of Operations for the 16 weeks ended June 14, 2008 and June 16, 2007. Refer to Note 8 - Discontinued Operations for further discussion. Prior year information has been restated to conform to current year presentation. The accounting policies for these segments are the same as those described in the summary of significant accounting policies included in our Fiscal 2007 Annual Report. We measure segment performance based upon segment income (loss). Reconciling amounts between segment income (loss) and income (loss) from operations include corporate-level activity not specifically attributed to a segment, which includes 1) the purchase of all merchandise (including the design and production of private label merchandise sold in our retail stores), 2) real estate management and 3) information technology, finance and other corporate administrative personnel, as well as, other reconciling items primarily attributed to nonrecurring activities. Assets and capital expenditures are not allocated to segments for internal reporting presentations. Interim information on segments is as follows:
For the 16 weeks ended June 14, 2008 ------------------------------------------------------------------------------------- Grocery (1) Meat (2) Produce (3) Other (4) Total --------------- --------------- --------------- --------------- --------------- Sales by Category $ 2,035,849 $ 549,755 $ 337,061 $ - $ 2,922,665 =============== ============== =============== ============== =============== For the 16 weeks ended June 16, 2007 ------------------------------------------------------------------------------------- Grocery (1) Meat (2) Produce (3) Other (4) Total --------------- --------------- --------------- --------------- --------------- Sales by Category $ 1,116,336 $ 328,233 $ 229,845 $ 4,755 $ 1,679,169 =============== ============== =============== ============== ===============
(1) The grocery category includes grocery, frozen foods, dairy, general merchandise/health and beauty aids, liquor and pharmacy. (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. 31
For the 16 weeks ended ------------------------------------------------- June 14, 2008 June 16, 2007 ---------------------- ---------------------- Sales North $ 596,220 $ 584,835 Central 407,241 432,793 South 496,916 500,794 Pathmark 1,254,195 - Gourmet 94,479 88,183 Other 73,614 67,809 Investment in Metro, Inc. - 4,755 ---------------------- ---------------------- Total sales $ 2,922,665 $ 1,679,169 ====================== ====================== Segment income (loss) North $ 28,571 $ 27,951 Central 5,879 6,549 South (3,689) (5,877) Pathmark 25,734 - Gourmet 7,709 5,728 Other 446 (1,301) ---------------------- ---------------------- Total segment income 64,650 33,050 Corporate (48,463) (41,319) Reconciling items * (14,096) 1,895 ---------------------- ---------------------- Income (loss) from operations 2,091 (6,374) Loss on sale of Canadian operations - (281) Gain on sale of Metro, Inc. - 78,388 Nonoperating income 48,597 - Interest expense (45,949) (19,713) Interest and dividend income 410 4,666 Equity earnings in Metro, Inc. - 7,869 ---------------------- ---------------------- Income from continuing operations before income taxes $ 5,149 $ 64,555 ====================== ====================== For the 16 weeks ended ------------------------------------------------- June 14, 2008 June 16, 2007 ---------------------- ---------------------- Segment depreciation and amortization - continuing operations North $ 11,000 $ 11,451 Central 8,688 9,317 South 9,526 10,558 Pathmark 29,379 - Gourmet 3,404 3,187 Other 1,129 1,304 ---------------------- ---------------------- Total segment depreciation and amortization - continuing 63,126 35,817 operations Corporate 16,901 11,895 ---------------------- ---------------------- Total depreciation and amortization - continuing operations 80,027 47,712 Discontinued operations - 8,637 ---------------------- ---------------------- Total company depreciation and amortization $ 80,027 $ 56,349 ====================== ======================
* Reconciling items which are not included in segment income (loss) include LIFO reserve adjustment, stock awards expense, restructuring events, real-estate related activity, integration costs and other nonrecurring adjustments. 32 16. Investment in Metro, Inc. On March 13, 2007, in connection with our agreement to acquire Pathmark Stores, Inc., our Company sold 6,350,000 shares of our holdings in Metro, Inc. for proceeds of approximately $203.5 million resulting in a net gain of $78.4 million. Of the proceeds received, $190 million was held as restricted cash collateralizing letters of credit under our Letter of Credit Agreement and was designated to be used to fund a portion of our acquisition of Pathmark Stores, Inc. On November 26, 2007, also in connection with our agreement to acquire Pathmark Stores, Inc., our Company sold the remaining 11,726,645 shares of our holdings in Metro, Inc. for proceeds of approximately $345.3 million, resulting in a net gain of $103.6 million. The proceeds were held to fund a portion of our acquisition of Pathmark Stores, Inc. As a result of these sales, our Company no longer holds Class A subordinate shares of Metro, Inc. as our investment has been fully liquidated as of the balance sheet date. Through March 13, 2007, we recorded our pro-rata equity earnings relating to our equity investment in Metro, Inc. on about a three-month lag period as permitted by APB 18, "The Equity Method of Accounting for Investments in Common Stock." Thus, during the first quarter ended June 16, 2007, we recorded $7.9 million in equity earnings relating to our equity investment in Metro, Inc. and included this amount in "Equity in earnings of Metro, Inc." on our Consolidated Statements of Operations. In accordance with SFAS 115, we recorded dividend income of $1.3 million based on Metro, Inc.'s dividend declaration on April 17, 2007 and included this amount in "Interest and dividend income" on our Consolidated Statements of Operations for the first quarter ended June 16, 2007. Metro, Inc.'s summarized financial information, derived from its unaudited second quarter ended March 17, 2007 financial statements, is as follows (in millions):
12 Weeks Ended March 17, 2007 -------------- Income statement: Net sales $ 2,096.5 ============= Cost of sales and operating expenses $ 1,967.1 ============= Net income $ 55.0 =============
17. Commitments and Contingencies Lease Assignment - ---------------- On August 14, 2007, Pathmark entered into a leasehold assignment contract for the sale of its leasehold interests in one of its stores to CPS Operating Company LLC, a Delaware limited liability company ("CPS"). Pursuant to the terms of the agreement, Pathmark was to receive $87 million for assigning and transferring to CPS all of Pathmark's interest in the lease and CPS was to have assumed all of the duties and obligations of Pathmark under the lease. CPS deposited $6 million in escrow as a deposit against the purchase price for the lease, which is non-refundable to CPS, except as otherwise expressly provided in the agreement. The assignment of the lease was scheduled to close on December 28, 2007. On December 27, 2007, CPS issued a notice terminating the agreement for reason of a purported breach of the agreement, which, if proven, would require the return of the escrow. We are disputing the validity of CPS's notice of termination as we believe CPS's position is without merit. Because we are challenging the validity of CPS's December 27, 2007 notice of termination, we issued our own notice to CPS on December 31, 2007, asserting CPS's breach of the agreement as a result of their failure to close on December 28, 2007. CPS's 33 breach, if proven, would entitle us to keep the escrow. Both parties have taken legal action to obtain the $6 million deposit held in escrow. LaMarca et al v. The Great Atlantic & Pacific Tea Company, Inc ("Defendants") - ----------------------------------------------------------------------------- On June 24, 2004, a class action complaint was filed in the Supreme Court of the State of New York against The Great Atlantic & Pacific Tea Company, Inc., d/b/a A&P, The Food Emporium, and Waldbaum's alleging violations of the overtime provisions of the New York Labor Law. Three named plaintiffs, Benedetto Lamarca, Dolores Guiddy, and Stephen Tedesco, alleged on behalf of a class that our Company failed to pay overtime wages to full-time hourly employees who were either required or permitted to work more than 40 hours per week. In April 2006, the plaintiffs filed a motion for class certification. In July 2007, the Court granted the plaintiffs' motion and certified the class as follows: All full-time hourly employees of Defendants who were employed in Defendants' supermarket stores located in the State of New York, for any of the period from June 24, 1998 through the date of the commencement of the action, whom Defendants required or permitted to perform work in excess of 40 hours per week without being paid overtime wages. The Court also ruled that the issue of whether to include an "opt-in" or "opt-out" provision is premature and can be decided after discovery has been had. As discovery on the prospective plaintiffs comprising the class has yet to be conducted, neither the number of class participants nor the sufficiency of their respective claims can be determined at this time. Other - ----- 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. 34 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations INTRODUCTION - ------------ The following Management's Discussion and Analysis is intended to help the reader understand the financial position, operating results, and cash flows of The Great Atlantic and Pacific Tea Company, Inc. It should be read in conjunction with our financial statements and the accompanying notes ("Notes"). It discusses matters that Management considers relevant to understanding the business environment, financial position, results of operations and our Company's liquidity and capital resources. These items are presented as follows: o Basis of Presentation - a discussion of our Company's results during the first quarter of fiscal 2008 and fiscal 2007. 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 2008 to assist in understanding the business. o Review of Continuing Operations and Liquidity and Capital Resources -- a discussion of results for the 16 weeks ended June 14, 2008 compared to the 16 weeks ended June 16, 2007; current and expected future liquidity; and the impact of various market risks on our Company. o Critical Accounting Estimates -- a discussion of significant estimates made by Management. o Market Risk - a discussion of the impact of market changes on our consolidated financial statements. BASIS OF PRESENTATION - --------------------- The accompanying consolidated financial statements of The Great Atlantic & Pacific Tea Company, Inc. for the 16 weeks ended June 14, 2008 and June 16, 2007 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 2007 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 and all subsidiaries. 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 8 U.S. states and the District of Columbia. Our Company's business consists strictly of our retail operations, which totaled 446 stores as of June 14, 2008. For the 16 weeks ended June 14, 2008, we operated in seven reportable segments: North, Central, South, Pathmark, Gourmet, Other and our investment in Metro, Inc. The Other segment includes our Discount and Liquor businesses. Our investment in Metro, Inc. represents our economic interest in Metro, Inc. The criteria necessary to classify the Midwest and Greater New Orleans area as discontinued were satisfied in 35 fiscal 2007 and these operations have been reclassified as such in our Consolidated Statements of Operations for the 16 weeks ended June 14, 2008 and June 16, 2007. RECENT ANNOUNCEMENTS - -------------------- On March 7, 2008, our Company entered into a definitive agreement with C&S Wholesale Grocers, Inc. ("C&S") whereby C&S will provide warehousing, logistics, procurement and purchasing services (the "Services") in support of the Company's entire supply chain. This agreement replaces and supersedes three (3) separate wholesale supply agreements under which the parties have been operating. The term of the agreement is ten and one-half (10-1/2) years, which includes a six-month "ramp-up" period during which the parties will transition to the new contractual terms and conditions. The agreement provides that the actual costs of performing the services shall be reimbursed to C&S on an "open-book" or "cost-plus" basis, whereby the parties will negotiate annual budgets that will be reconciled against actual costs on a periodic basis. The parties will also annually negotiate services specifications and performance standards that will govern warehouse operations. The agreement defines the parties' respective responsibilities for the procurement and purchase of merchandise intended for use or resale at the Company's stores, as well as the parties' respective remuneration for warehousing and procurement/purchasing activities. In consideration for the services it provides under the agreement, C&S will be paid an annual fee and will have incentive income opportunities based upon A&P's cost savings and increases in retail sales volume. On May 7, 2008, the 4,657,378 Series A warrants, scheduled to expire on June 9, 2008, were exercised by Yucaipa Corporate Initiatives Fund I, L.P., Yucaipa American Alliance Fund I, L.P. and Yucaipa American Alliance (Parallel) Fund I, L.P. Our Company opted to settle the Series A warrants in cash totaling $45.7 million rather than issuing additional common shares. OPERATING RESULTS - ----------------- A&P's transformation and operating improvement continued moving forward in the first quarter of fiscal 2008. In addition, ongoing strategic, operating, merchandising, store development and cost control initiatives remained underway. Our Company concentrated on effectively completing the comprehensive Pathmark integration plan, as many of the milestones set thus far were achieved. The integration provides our Company with the lead market share position in the Northeast, while also significantly increasing the combined Company's share in the greater Philadelphia area. Additionally, events to achieve a significant portion of the anticipated $150 million integration synergies have been finalized. In late June, our Company announced another critical phase in our strategic transformation mission. As part of our long-standing commitment to improve market share, sales and sustainable profitability, the majority of SuperFresh store locations in the Philadelphia market will be converted to the recently premiered Price Impact format under the Pathmark Sav-A-Center banner. These conversions will take place over the next year and focus on providing customers with an improved value proposition and a one-stop-shopping experience. As such, the majority of the format conversions in this area will be to the new Pathmark Sav-A-Center Price Impact format. Further, the existing Pathmark stores in this market will also be upgraded to the new Price Impact format. A number of SuperFresh locations will remain and retain the Fresh format with significant upgrades. With integration of Pathmark completed and conversion plans underway in the Greater Philadelphia market, A&P now has: 36 o Decisive market share leadership in metropolitan New York and New Jersey, and an improved outlook for the greater share in our Philadelphia markets. o A comprehensive plan in place to achieve all identified synergy savings through consolidation of the Pathmark business. o An improved cost model and solid financial and investment platform. Alongside the conclusion of the strategic transformation, we maintained the ongoing improvement of operating and merchandising execution, which combined with the growing impact of our new Fresh remodels, to drive continued, strong year-over-year sales improvement in our Company's Northeast operations. Accordingly, ongoing improvement from core operations was driven by the continued sales improvement in those markets, more consistent operating discipline and cost controls, and positive results in our Discount operations. During the first quarter, we completed the remodel of A&P Fresh in Holmdel, New Jersey to the updated Fresh format, and began remodeling additional stores. We continue to experience increased volume and customer traffic in our remodeled stores, especially in our Fresh categories. Our Company also debuted the new Price Impact format in our Irvington and Edison Pathmark's with much positive feedback. Both stores have shown significant increased sales and customer traffic. The Discount operations again returned sound results, as they provided customers in certain markets with an excellent value alternative. In combination with the mainstream Fresh stores and Gourmet concept that continued to evolve in New York, this development stream continues to advance the multi-tier marketing strategy initiated in 2005. In summary, strategic accomplishments for the last quarter include the following: o Debuted the new Price Impact format in two Pathmark locations o Completed one Fresh remodel o Continued strong sales trends in core Northeast operating markets o Maintained earnings momentum in our Northeast operations o Improved Pathmark sales trends o Improved contribution from Discount and Gourmet operations. o Completed comprehensive Pathmark integration strategy OUTLOOK - ------- Management's objectives for the remainder of fiscal 2008 are to progress further toward operating profitability in the existing core Northeast business by: continuing operating and merchandising 37 improvements behind established strategies; maintaining cost control and reduction disciplines throughout the business; and ensuring the continuity of Pathmark store operations, with emphasis on customer communication and retention. Chief among the pre-existing corporate and retail strategies in place are the ongoing improvement of merchandising and operating performance, the execution of capital improvement projects for maximum return, and general adherence to cost control disciplines. Key elements are: o Continue development of merchandising, promotion and pricing strategies to drive profitable sales growth. o Execute core market capital plan for conversion of conventional locations to fresh, price impact or discount formats, continue to drive gourmet format development. o Ongoing disposition of closed store leaseholds. The comprehensive plan for the integration of Pathmark operations is designed to achieve: o Continuity of all retail operations during integration process. o Effective execution of the new price impact format in designated locations. o Achievement of significant synergies identified as result of merging the two businesses. o Consumer communication regarding the continuation of both the A&P-operated and Pathmark banners and store formats, and related marketing and promotional efforts. Overall, we will continue to reflect both continuity and change, as management focuses on sustaining the improvement of our operations - and executing a seamless transition of Pathmark operations into the Company, to maintain retail continuity and ensure the capture of all identified financial synergies as scheduled within the first 18 to 24 months of the acquisition. Various factors could cause us to fail to achieve these goals. These include, among others, the following: o Our retail food business and the grocery retailing industry continues to experience fierce competition from mass merchandisers, warehouse clubs, drug stores, convenience stores, discount merchandisers, dollar stores, restaurants, other retail chains, nontraditional competitors and emerging alternative formats in the markets where we have retail operations. Competition with these outlets is based on price, store location, advertising and promotion, product mix, quality and service. Some of these competitors may have greater financial resources, lower merchandise acquisition costs and lower operating expenses than we do, and we may be unable to compete successfully in the future. Price-based competition has also, from time to time, adversely affected our operating margins. Competitors' greater financial strengths enable them to participate in aggressive pricing strategies selling inventory below costs to drive overall increased sales. 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 38 generally and particularly in our principal markets may cause us to reduce our prices in order to gain or maintain our market share of sales, thus reducing margins. o Our in-store pharmacy business is also subject to intense competition. In particular, an adverse trend for drug retailing has been significant growth in mail-order and internet-based prescription processors. Pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceuticals and other healthcare products. In addition, the conversion of various prescription drugs to over-the-counter medications, the withdrawal of certain drugs from the market and changes in third party reimbursement levels for prescription drugs, including changes in Medicare Part D or state Medicaid programs, may have a material adverse effect on our business. Failure to properly adhere to Federal, State and local government rules and regulations, applicable Medicare and Medicaid regulations could result in the imposition of civil as well as criminal penalties. o The retail food and food distribution industries, and the operation of our businesses, specifically in the New York -- New Jersey and Philadelphia regions, are sensitive to a number of economic conditions and other factors such as (i.) food price deflation or inflation, (ii.) softness in local and national economies, (iii.) increases in commodity prices, (iv.) the availability of favorable credit and trade terms, (v.) changes in business plans, operations, results and prospects, (vi.) potential delays in the development, construction or start-up of planned projects, and (vii.) other economic conditions that may affect consumer buying habits. Any one or more of these economic conditions can affect our retail sales, the demand for products we distribute to our retail customers, our operating costs and other aspects of our business. o Acts of war, threats of terror, acts of terror or other criminal activity directed at the grocery or drug store industry, the transportation industry, or computer or communications systems, could increase security costs, adversely affect our operations, or impact consumer behavior and spending as well as customer orders. Other events that give rise to actual or potential food contamination, drug contamination, or food-borne illness could have an adverse effect on our operating results. o We could be adversely affected if consumers lose confidence in the safety and quality of the food supply chain. Adverse publicity about these types of concerns, whether or not valid, could discourage consumers from buying products in our stores. The real or perceived sale of contaminated food products by us could result in a loss of consumer confidence and product liability claims, which could have a material adverse effect on our sales and operations. o Our operations subject us to various laws and regulations relating to the protection of the environment, including those governing the management and disposal of hazardous materials and the cleanup of contaminated sites. Under some environmental laws, such as the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, also known as CERCLA or the Superfund law, and similar state statues, responsibility for the entire cost of cleanup of a contaminated site can be imposed upon any current or former site owners or operators, or upon any party who sent waste to the site, regardless of the lawfulness of the original activities that led to the contamination. From time to time we have been named as one of many potentially responsible parties at Superfund sites, although our share of liability has typically been de minimis. Although we believe that we are currently in substantial compliance with applicable environmental requirements, future developments such as more aggressive enforcement policies, new laws or discoveries of unknown conditions may require expenditures that may have a material adverse effect on our business and financial condition. 39 o Our capital expenditures could differ from our estimate if development and remodel costs vary from those budgeted, or if performance varies significantly from expectations or if we are unsuccessful in acquiring suitable sites for new stores. 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 reduce shrink 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 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 and the extent to which trustees of the plans reduce the costs of future service benefits. o Our Company is currently required to acquire a majority of our saleable inventory from one supplier, C&S Wholesale Grocers, Inc. Although there are a limited number of distributors that can supply our stores, we believe that other suppliers could provide similar product on reasonable terms. However, a change in suppliers could cause a delay in distribution and a possible loss of sales, which would affect operating results adversely. 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. o The success of the merger with Pathmark will depend, in part, on the combined company's ability to realize the anticipated benefits from combining the businesses of A&P and Pathmark, including, anticipated annual integration synergies within two years, through cost reductions in overhead, greater efficiencies, increased utilization of support facilities and the adoption of mutual best practices between the two companies. These integration matters could have a material adverse effect on our business. o Following the closing of the acquisition of Pathmark, Tengelmann, A&P's former majority stockholder, owned beneficially and of record a substantial percentage of our common stock on a fully diluted basis. As a result of this equity ownership and our stockholder agreement with Tengelmann, Tengelmann has the power to significantly influence the results of stockholder votes and the election of our board of directors, as well as transactions involving a potential change of control of our Company. Tengelmann may support strategies and directions for our Company which are in its best interests but which are opposed to other stockholder interests. 40 o Our substantial indebtedness could impair our financial condition and our ability to fulfill our debt obligations. Our indebtedness could make it more difficult for us to satisfy our obligations, which could in turn result in an event of default on our obligations, require us to dedicate a substantial portion of our cash flow from operations to debt service payments, thereby reducing the availability of cash for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes, impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes, diminish our ability to withstand a downturn in our business, the industry in which we operate or the economy generally, limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, and place us at a competitive disadvantage compared to certain competitors that have proportionately less debt. Our New Credit Agreement ("Credit Agreement") contains restrictive covenants customary for facilities of that type which limit our ability to incur additional debt, pay dividends, grant additional liens, make investments and take other actions. These restrictions may limit our flexibility to undertake future financings and take other actions. If we are unable to meet our debt service obligations, we could be forced to restructure or refinance our indebtedness, seek additional equity capital or sell assets. We may be unable to obtain financing or sell assets on satisfactory terms, or at all. In addition, our Credit Agreement bears interest at a variable rate. If market interest rates increase, such variable-rate debt will have higher debt service requirements, which could adversely affect our cash flow. While we may enter into agreements limiting our exposure to higher interest rates, any such agreements may not offer complete protection from this risk. o We are the primary obligor for a significant amount of closed stores and warehouses under long-term leases. Our ability to sublet or assign these leases depends on the economic conditions of the real estate markets in which these leases are located. We have estimated our obligation under these leases, net of expected subleases and we have reserved for them, where appropriate. Unexpected changes in the marketplace or with individual sublessors could result in an adverse effect on our cash flow and earnings. o Fluctuating fuel costs may adversely affect our operating costs since we incur the cost of fuel in connection with the transportation of goods from our warehouse and distribution facilities to our stores. In addition, operations at our stores are sensitive to rising utility fuel costs due to the amount of electricity and gas required to operate our stores. We may not be able to recover these rising utility and fuel costs through increased prices charged to our customers. Our profitability is particularly sensitive to the cost of oil. Oil prices directly affect our product transportation costs and fuel costs due to the amount of electricity and gas required to operate our stores as well as our utility and petroleum-based supply costs; including plastic bags for example. 41 o We are subject to federal, state and local laws and regulations relating to zoning, land use, environmental protection, work place safety, public health, community right-to-know, beer and wine sales, pharmaceutical sales and gasoline station operations. A number of states and local jurisdictions regulate the licensing of supermarkets, including beer and wine license grants. In addition, under certain local regulations, we are prohibited from selling beer and wine in certain of our stores. Employers are also subject to laws governing their relationship with employees, including minimum wage requirements, overtime, working conditions, disabled access and work permit requirements. Compliance with these laws could reduce the revenue and profitability of our supermarkets and could otherwise adversely affect our business, financial condition or results of operations. In addition, any changes in these laws or regulations could significantly increase our compliance costs and adversely affect our results of operations, financial condition and liquidity. o We have large, complex information technology systems that are important to business operations. We could encounter difficulties developing new systems and encounter difficulties maintaining, upgrading or securing our existing systems. Such difficulties could lead to significant expenses or losses due to disruption in our business operations. o Our articles of incorporation permit our board of directors to issue preferred shares without first obtaining stockholder approval. If we issued preferred shares, these additional securities may have dividend or liquidation preferences senior to our common stock. If we issue convertible preferred shares, a subsequent conversion may dilute the current common stockholders' interest. Issuance of such preferred stock could adversely affect the price of our common stock. 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. 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. All amounts are in millions, except share and per share amounts. 16 WEEKS ENDED JUNE 14, 2008 COMPARED TO THE 16 WEEKS ENDED JUNE 16, 2007 - ------------------------------------------------------------------------- OVERALL - ------- Sales for the first quarter of fiscal 2008 were $2,922.7 million, compared with $1,679.2 million in the first quarter of fiscal 2007 due primarily to the acquisition of Pathmark; comparable store sales, which includes stores that have been in operation for two full fiscal years and replacement stores, increased 3.2%. Income from continuing operations decreased from $61.4 million for the first quarter of fiscal 2007 to $3.8 million for the first quarter of fiscal 2008 primarily due to the absence of the gain on sale of Metro, Inc. of $78.4 million. Loss from discontinued operations of $126.5 million for the first quarter of fiscal 2007 decreased to a loss from discontinued operations of $1.5 million for the first quarter of fiscal 2008 due to the absence of the sale and closure of stores in the Midwest and the sale of our stores in the Greater New Orleans area. Net income per share - basic for the first quarter of fiscal 2008 was $0.05 and net loss per share - diluted for the first quarter of fiscal 2008 was $0.51, compared to net loss per share - basic & diluted of $1.56 and $1.54, respectively, for the first quarter of fiscal 2007. 42
16 Weeks 16 Weeks Ended Ended Favorable June 14, 2008 June 16, 2007 (Unfavorable) % Change --------------- --------------- --------------- ---------- Sales $ 2,922.7 $ 1,679.2 $ 1,243.5 74.1% Increase in comparable store sales 3.2% 1.0% NA NA Income from continuing operations 3.8 61.4 (57.6) (93.8%) Loss from discontinued operations (1.5) (126.5) 125.0 98.8% Net income (loss) 2.2 (65.1) 67.3 >100.0% Net income (loss) per share - basic 0.05 (1.56) 1.61 >100.0% Net loss per share - diluted (0.51) (1.54) 1.03 66.9%
Average weekly sales per supermarket were approximately $429,900 for the first quarter of fiscal 2008 versus $348,700 for the corresponding period of the prior year, an increase of 23.3% primarily due to the acquisition of Pathmark's larger supermarkets in the fourth quarter of fiscal 2007. SALES - -----
For the 16 weeks ended ---------------------------------- June 14, 2008 June 16, 2007 -------------- ---------------- North $ 596,220 $ 584,835 Central 407,241 432,793 South 496,916 500,794 Pathmark 1,254,195 - Gourmet 94,479 88,183 Other 73,614 67,809 Investment in Metro, Inc. - 4,755 --------------- -------------- Total sales $ 2,922,665 $ 1,679,169 =============== ==============
Sales increased from $1,679.2 million for the 16 weeks ended June 16, 2007 to $2,922.7 million for the 16 weeks ended June 14, 2008 primarily due to the acquisition of Pathmark in the fourth quarter of fiscal 2007 contributing $1,254.2 million in sales as well as an increase in comparable stores sales of $48.1 million, offset by the absence of sales from store closures of $64.8 million. The increases in sales in our North and Gourmet segments of $11.4 million and $6.3 million, respectively, are primarily due to comparable store sales increases. Central sales decreased $25.6 million or 5.9% as a result of store closures from the beginning of the second quarter of fiscal 2007 through the first quarter of fiscal 2008. Sales in our South segment decreased by $3.9 million or 0.8%, which is primarily the result of store closures. The sales increase of $5.8 million, or 8.6%, in our Other segment, representing Discount and Liquor, is primarily due to an increase in comparable store sales driven by our remodel program and our acquisition of Best Cellars, offset partially by store closures. The decrease in sales of $4.8 million, or 100%, in our Metro Segment is due to the expiration of our information technology agreement with Metro, Inc. during fiscal 2007. GROSS MARGIN - ------------ Gross margin of $883.6 million decreased 92 basis points as a percentage of sales to 30.23% for the first quarter of fiscal 2008 from gross margin of $523.0 million or 31.15% for the first quarter of fiscal 2007 driven primarily by the inclusion of Pathmark in the first quarter of fiscal 2008 (64 basis points) and the expiration of our information technology agreement with Metro, Inc. (28 basis points.) Before considering the impact of the Pathmark acquisition, we achieved gross margin of $515.4 million or 30.89% as a 43 percentage of sales in the first quarter of fiscal 2008 which is comparable to results from the first quarter of fiscal 2007, excluding the margin related to our information technology agreement with Metro, Inc. The following table details the dollar impact of items affecting the gross margin dollar increase (decrease) from the first quarter of fiscal 2007 to the first quarter of fiscal 2008 (in millions):
Sales Volume Gross Margin Rate Total ---------------- ----------------- --------------- Total Company $ 387.3 $ (26.7) $ 360.6
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE - --------------------------------------------------- The following table presents store operating, general and administrative expense ("SG&A"), in dollars and as a percentage of sales for the 16 weeks ended June 14, 2008 compared to the 16 weeks ended June 16, 2007. SG&A expense was $881.5 million or 30.16% for the first quarter of fiscal 2008 as compared to $529.4 million or 31.52% for the first quarter of fiscal 2007. The increase in SG&A was primarily related to the acquisition of Pathmark of $340.9 million. Included in SG&A for the first quarter of fiscal 2008 were certain charges as follows: o net losses on real estate activity of $1.1 million (4 basis points); and o Pathmark acquisition related costs of $14.0 million (48 basis points). Partially offset by: o Reversal of net restructuring activity of $0.2 million (1 basis point). Included in SG&A for the first quarter of fiscal 2007 were certain charges as follows: o costs relating to the closing of our owned warehouses in Edison, New Jersey and Bronx, New York of $0.8 million (5 basis points) that were not 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 9 - Asset Disposition Initiatives; o net losses on real estate activity of $2.2 million (14 basis points); and o Pathmark acquisition related costs of $0.4 million (3 basis points). Excluding the items listed above, SG&A as a percentage of sales decreased by 171 basis points during the first quarter of fiscal 2008 as compared to the first quarter of fiscal 2007 primarily due to the acquisition of Pathmark which contributed higher sales productivity. During the 16 weeks ended June 14, 2008 and June 16, 2007, we recorded impairment losses on long-lived assets for impairments due to closure or conversion of stores in the normal course of business of $0.8 million and $0.5 million, respectively. The effects of changes in estimates of useful lives were not material to ongoing depreciation expense. If current operating levels do not improve, there may be a need to take further actions which may result in additional future impairments on long-lived assets, including the potential for impairment of assets that are held and used. 44 SEGMENT INCOME - --------------
For the 16 weeks ended ----------------------------------- June 14, 2008 June 16, 2007 -------------- -------------- North $ 28,571 $ 27,951 Central 5,879 6,549 South (3,689) (5,877) Pathmark 25,734 -- Gourmet 7,709 5,728 Other 446 (1,301) ------------ ----------- Total segment income $ 64,650 $ 33,050 ============ ===========
Segment income increased $31.6 million from $33.1 million for the 16 weeks ended June 16, 2007 to $64.7 million for the 16 weeks ended June 14, 2008. First quarter of fiscal 2008 results include segment income of $25.7 million from the Pathmark business acquired in the fourth quarter of fiscal 2007. Our North segment experienced an increase in segment income of $0.6 million from a combination of increased sales of $11.4 million and decreased costs, mainly in labor and administration. Segment income declined $0.7 million in our Central segment as a result of a decrease in sales of $25.6 million due to the divestiture of 5 stores in fiscal 2007. Our South segment results improved from a Segment loss of $5.9 million during the first quarter of fiscal 2007 to a loss of $3.7 million in the fourth quarter of fiscal 2008. This improvement is primarily due to the closure of certain under performing stores. Segment income from our Gourmet business improved by $2.0 million primarily as a result of an improved gross margin rate partially offset by additional operating and administrative costs. The increase in segment income of $1.7 million in our Other segment, representing Discount and Liquor, is primarily due to improving sales and margin rates in both businesses. Refer to Note 15 - Operating Segments for further discussion of our reportable operating segments. GAIN ON SALE OF METRO, INC. - --------------------------- During the first quarter of fiscal 2007, we sold 6,350,000 shares of our holding in Metro, Inc. resulting in a gain of $78.4 million. There were no such gains during the first quarter of fiscal 2008. INTEREST EXPENSE - ---------------- Interest expense of $45.9 million for the first quarter of fiscal 2008 increased from the prior year of $19.7 million due primarily to the higher level of indebtedness related to our acquisition of Pathmark including the issuance of $165 million 5.125% convertible senior notes due 2011 and $255 million 6.75% convertible senior notes due 2012 resulting in an increase in interest expense of $11.6 million ($3.7 million of which were non-cash costs), increased borrowings on our Line of Credit and Credit Agreement of $5.7 million and an increase in interest expense related to Pathmark of $7.4 million primarily due to interest on capital leases. NONOPERATING INCOME - ------------------- During the first quarter of fiscal 2008, we recorded $48.6 million in fair value adjustments for (i.) our Series A and Series B warrants acquired in connection with our purchase of Pathmark, (ii.) our conversion feature of the 5.125% convertible senior notes and the 6.75% convertible senior notes, and (iii.) our financing warrants recorded in connection with the issuance of our convertible senior notes. There were no such gains during the first quarter of fiscal 2007. 45 EQUITY IN EARNINGS OF METRO, INC. - --------------------------------- We used the equity method of accounting to account for our investment in Metro, Inc., through March 13, 2007, because we exerted significant influence over substantive operating decisions made by Metro, Inc. through our membership on Metro, Inc.'s Board of Directors and its committees and through an information technology services agreement with Metro, Inc. During the 16 weeks ended June 16, 2007, we recorded $7.9 million in equity earnings relating to our equity investment in Metro, Inc. During fiscal 2007, we sold all of our holdings in Metro, Inc. Thus, there were no such equity earnings during the first quarter ended June 14, 2008. INCOME TAXES - ------------ The provision for income taxes from continuing operations for the first quarter of fiscal 2008 was $1.4 million compared to $3.1 million for the first quarter of fiscal 2007. Consistent with prior year, we continue to record a valuation allowance against our net deferred tax assets. The effective tax rate on continuing operations of 26.9% for the 16 weeks ended June 14, 2008 varied from the statutory rate of 35% primarily due to the recording of state and local income taxes, recording additional valuation allowance offset by a permanent difference related to nonoperating income from the fair value adjustments related to the conversion features, financing warrants and Series B warrants. The effective tax rate on continuing operations of 4.9% for the 16 weeks ended June 16, 2007 varied from the statutory rate of 35% primarily due to the recording of state and local income taxes and a reduction of our valuation allowance as a result of taxes provided on other comprehensive income and cumulative translation adjustments. 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. However, our Company continues to pay occupancy costs for operating leases on closed locations. On April 24, 2007, based upon unsatisfactory operating trends and the need to devote resources to our expanding Northeast core business, our Company announced negotiations for the sale of our non-core stores within our Midwest operations, including inventory related to these stores. Our Company ceased sales operations in all stores as of July 7, 2007. Planned sale transactions for these stores have been completed. On May 30, 2007, our Company announced advanced negotiation for the sale of our non-core stores located within the Greater New Orleans area, including inventory related to these stores. Our Company ceased sales operations in all stores not sold as of November 1, 2007. Planned sale transactions for these stores have been completed. The loss from operations of discontinued businesses, net of tax, for the first quarter of fiscal 2008 of $4.2 million decreased from a loss from operations of discontinued businesses, net of tax, of $79.8 million for the first quarter of fiscal 2007 primarily due to a decrease in vacancy related costs that were recorded in the first quarter of fiscal 2007 due to the closure of stores in the Midwest and the Greater New Orleans area. The gain on disposal of discontinued operations, net of tax, for the first quarter of fiscal 2008 of $2.6 million relates to 46 the sale of our Eight O'Clock Coffee business in fiscal 2003. This gain was a result of the settlement of a contingent note and the value and payment was based upon certain elements of the future performance of the Eight O'Clock Coffee business and was not originally recorded in the gain during fiscal 2003. The loss on disposal of discontinued operations, net of tax, for the first quarter of fiscal 2007 of $46.8 million is primarily due to impairment losses recorded on the property, plant and equipment in the Midwest and the Greater New Orleans area as we recorded the assets' fair market value based upon the proceeds received less costs to sell. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- CASH FLOWS - ---------- The following table presents excerpts from our Consolidated Statement of Cash Flows:
16 weeks ended ------------------------------------------- June 14, 2008 June 16, 2007 ----------------- ----------------- Net cash (used in) provided by operating activities $ (5,415) $ 27,631 ----------------- ----------------- Net cash (used in) provided by investing activities $ (25,670) $ 32,900 ----------------- ----------------- Net cash provided by (used in) by financing activities $ 59,409 $ (52,530) ----------------- -----------------
Net cash used in operating activities of $5.4 million for the 16 weeks ended June 14, 2008 primarily reflected our net income of $2.2 million, adjusted for non-cash charges for (i.) depreciation and amortization of $80.0 million, (ii.) other share based awards of $4.8 million, partially offset by, (iii.) the reversal of charges related to our asset disposition initiatives of $1.8 million, (iv.) gain on disposal of discontinued operations of $2.6 million, and (v.) nonoperating income related to marked to market adjustments for financial instruments of $48.6 million. Further, cash was provided by an increase in accounts payable of $47.0 million mainly due to the timing of payments partially offset by a decrease in prepaid expenses and other current assets of $14.7 million, an increase in other assets of $6.4 million, a decrease in accrued salaries, wages and benefits, and taxes of $27.6 million, a decrease in other non-current liabilities of $35.9 million primarily due to payments on closed locations. Refer to Working Capital below for discussion of changes in working capital items. Net cash provided by operating activities of $27.6 million for the 16 weeks ended June 16, 2007 primarily reflected our net loss of $65.1 million, adjusted for non-cash charges for (i.) depreciation and amortization of $56.3 million, and (ii.) losses on the disposal of owned property of $1.2 million, (iii.) loss on disposal of discontinued operations, primarily related to our Midwest operations, of $46.8 million, partially offset by (iv.) our equity in earnings of Metro, Inc. of $7.9 million, and (v.) the gain on sale of shares of Metro, Inc. of $78.4 million. Further, cash was provided by a decrease in accounts receivable of $27.9 million, a decrease in inventories of $29.0 million partially offset by an increase in prepaid expenses and other current assets of $7.2 million, an increase in other assets of $8.4 million, a decrease in accounts payable of $11.9 million and a decrease in other accruals of $6.8 million mainly due to timing of payments. Net cash used in investing activities of $25.7 million for the 16 weeks ended June 14, 2008 primarily reflected property expenditures totaling $29.7 million, which included 1 major remodel, 1 major enlargement and 3 minor remodels partially offset by proceeds from disposal of property of $3.1 million. For fiscal 2008, we have planned capital expenditures of approximately $200 million, which relate primarily to enlarging or remodeling supermarkets and converting supermarkets to more optimal formats. Net cash provided by investing activities of $32.9 million for the 16 weeks ended June 16, 2007 primarily reflected 47 cash received from the sale of shares of Metro, Inc. of $203.5 million, and net sales of marketable securities of $20.4 million partially offset by an increase in restricted cash of $142.9 million and property expenditures totaling $50.9 million, which included 2 new supermarkets, 4 major remodels and 3 minor remodels. Net cash provided by financing activities of $59.4 million for the 16 weeks ended June 14, 2008 primarily reflected net proceeds under our revolving lines of credit of $81.1 million, net proceeds under line of credit of $5.5 million, an increase in book overdrafts of $17.2 million, partially offset by the settlement of Series A warrants of $45.7 million. Net cash used in financing activities of $52.5 million for the 16 weeks ended June 16, 2007 primarily reflected principal payments on long term borrowings of $31.9 million and net principal payments on revolving lines of credit of $30.0 million, partially offset by proceeds from the exercise of stock options of $5.6 million. 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. Our plan for fiscal 2008 at this time has been approved and we believe that our present cash resources, including invested cash on hand, available borrowings from our 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 the taxing authorities do not affirm the adequacy of our Company's Domestic Reinvestment Plan, we anticipate that we would be able to modify the operating plan in order to ensure that we have appropriate resources. WORKING CAPITAL - --------------- We had working capital of $149.1 million at June 14, 2008 compared to working capital of $117.1 million at February 23, 2008. We had cash and cash equivalents aggregating $129.1 million at June 14, 2008 compared to $100.7 million at February 23, 2008. 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 A decrease in current portion of other financial liabilities due to the exercise of Series A warrants by Yucaipa Corporate Initiatives Fund I, L.P., Yucaipa American Alliance Fund I, L.P. and Yucaipa American Alliance (Parallel) Fund I, L.P., and o A decrease in accrued salaries, wages and benefits primarily due to payments made in connection with our annual incentive programs. Partially offset by the following: o An increase in accounts payable (inclusive of book overdrafts) due to the timing of payments. 48 LINE OF CREDIT - -------------- On January 16, 2008, we entered into a secured line of credit agreement with Blue Ridge Investments, L.L.C. This agreement enables us to borrow funds on a revolving basis subject to invested cash balances. Each borrowing bears interest at a rate per annum equal to the BBA Libor Daily Floating Rate plus 0.10%. At June 14, 2008 and February 23, 2008, we had borrowings outstanding under this line of credit agreement of $17.2 million and $11.6 million, respectively. This agreement expires December 31, 2008. These loans are collateralized by a first priority perfected security interest in our ownership interest in the Columbia Fund. See Note 5 - Cash, Cash Equivalents, Restricted Cash and Restricted Marketable Securities, for further discussion on the Columbia Fund. CREDIT AGREEMENT - ---------------- On December 3, 2007, the 2005 Revolving Credit Agreement and Letter of Credit Agreement were refinanced pursuant to a new $675 million Credit Agreement ("Credit Agreement"), with Banc of America Securities LLC, Bank of America, N.A. Subject to borrowing base requirements, the Credit Agreement provides for a five-year term loan of $82.9 million and a five-year revolving credit facility of $592.1 million enabling us to borrow funds and issue letters of credit on a revolving basis. The Credit Agreement includes a $100 million accordion feature which gives us the ability to increase commitments from $675 million to $775 million. The Credit Agreement is collateralized by all assets of the company, including, but not limited to, inventory, certain accounts receivable, pharmacy scripts, owned real estate and certain Pathmark leaseholds. Borrowings under the Credit Agreement bear interest based on LIBOR or Prime interest rate pricing. Subject to certain conditions, we are permitted to pay cumulative cash dividends on common shares as well as make bond repurchases. At June 14, 2008, there were $251.0 million of loans and $236.4 million in letters of credit outstanding under this agreement. As of June 14, 2008, after reducing availability for borrowing base requirements, we had $178.4 million available under the Credit Agreement. On December 27, 2007, in order to facilitate the syndication of the Credit Agreement under current market conditions, we entered into an Amended and Restated Credit Agreement, whereby a portion of the revolving commitment was converted into a $50 million term loan tranche which was collateralized by certain real estate assets at an increased margin rate. This agreement expires in December 2012. SERIES A AND SERIES B WARRANTS - ------------------------------ As part of the acquisition of Pathmark on December 3, 2007, we issued 4,657,378 and 6,965,858 roll-over stock warrants in exchange for Pathmark's 2005 Series A and Series B warrants, respectively. The number of warrants issued was computed based on the conversion factor of 0.46296. The Series A warrants were exercisable at $18.36 and expired on June 9, 2008 and the Series B warrants are exercisable at $32.40 and expire on June 9, 2015. These warrants were originally valued using the price of A&P common stock of $30.05 per common share, the quoted market price of A&P common stock on November 30, 2007, the last trading day before the transaction closing date. The Tengelmann stockholders have the right to approve any issuance of common stock under these warrants upon exercise (assuming Tengelmann's outstanding interest is at least 25% and subject to liquidity impairments defined within the Tengelmann Stockholder Agreement). In addition, Tengelmann has the ability to exercise a "Put Right" whereby it has the ability to require A&P to purchase A&P stock held by Tengelmann to settle these warrants. Based on the rights provided to Tengelmann, A&P does not have sole discretion to determine whether the payment upon exercise of these warrants will be settled in cash or through issuance of an equivalent portion of A&P shares. Therefore, these warrants are recorded as liabilities and marked-to-market each reporting period based on A&P's current stock price. 49 On May 7, 2008, the 4,657,378 Series A warrants were exercised by Yucaipa Corporate Initiatives Fund I, L.P., Yucaipa American Alliance Fund I, L.P. and Yucaipa American Alliance (Parallel) Fund I, L.P. We opted to settle the Series A warrants in cash totaling $45.7 million rather than issuing additional common shares. Included in "Nonoperating Income" on our Consolidated Statements of Operations for the 16 weeks ended June 14, 2008, is a loss of $1.2 million for the Series A warrants through the settlement date of May 7, 2008 and a gain of $27.1 million for the Series B warrants market value adjustment. The value of the Series B warrants were $79.0 million as of June 14, 2008 and is included in "Other financial liabilities" on our Consolidated Balance Sheets. The following assumptions and estimates were used in the Black-Scholes model:
Series B ------------ Expected life 7.0 years Volatility 51.8% Dividend yield range 0% Risk-free interest rate range 3.95%
PUBLIC DEBT OBLIGATIONS - ----------------------- Outstanding notes totaling $590.4 million at June 14, 2008 consisted of $12.8 million of 9.125% Senior Notes due December 15, 2011, $142.4 million of 5.125% Convertible Senior Notes due June 15, 2011, $235.2 million of 6.75% Convertible Senior Notes due December 15, 2012 and $200.0 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%, 5.125% and 6.75% Notes. The 9.375% Notes are now callable at par ($25 per bond) and the 9.125% Notes are callable at a premium to par (103.042%). 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 9.125% Senior Notes have been eliminated in connection with the cash tender offer in fiscal 2005. Our notes are not guaranteed by any of our subsidiaries. During the first quarter of fiscal 2007, the outstanding principal amount of our 7.75% Notes of $31.9 million due April 15, 2007 matured and was paid in full. On December 18, 2007, we completed a public offering and issued $165 million 5.125% convertible senior notes due 2011 and $255 million 6.75% convertible senior notes due 2012. The 2011 notes are not redeemable at our option at any time. The 2012 notes are redeemable at our option on or after December 15, 2010, at a redemption price of 102.70% and on or after December 15, 2011, at a redemption price of 101.35%. The initial conversion price of the 2011 notes is $36.40 representing a 30.0% premium to the offering price of $28.00 and the initial conversion price of the 2012 notes is $37.80 representing a 35.0% premium to the offering price of $28.00 at maturity, and at our option, the notes are convertible into shares of our stock, cash, or a combination of stock and cash. Concurrent with this offering, we entered into call options and financing warrant transactions with financial institutions that are affiliates of the underwriters of the notes to effectively increase the conversion price of these notes and to reduce the potential dilution upon future conversion. Conversion prices were effectively increased to $46.20 or a 65% premium and $49.00 or a 75% premium for the 2011 and 2012 notes, respectively. As of December 18, 2007, our Company did not have sufficient authorized shares to provide for all potential issuances of common stock. Therefore, in accordance with SFAS No. 133, "Accounting for Derivative 50 Instruments and Hedging Activities", our Company accounted for the conversion features as freestanding instruments. The notes were recorded with a discount equal to the value of the conversion features at the transaction date and will be accreted to the par value of the notes over the life of the notes. The value of the conversion features were determined utilizing the Black-Scholes option pricing model, recorded as a long term liability. The portion of the conversion feature for which there are not available shares is marked to market each balance sheet date. During the 16 weeks ended June 14, 2008, the gain that was recorded in "Nonoperating Income" on our Consolidated Statements of Operations for the conversion features of the 5.125% and 6.75% convertible senior notes was $11.1 million and $5.1 million, respectively. The fair value of the conversion features classified as a liability as of June 14, 2008 was $8.5 million and nil for the 5.125% and 6.75% convertible notes, respectively. The following assumptions and estimates were used in the Black-Scholes model:
For the 16 weeks ended June 14, 2008 --------------------- Expected life 3.0 years - 4.5 years Volatility 33.0% Dividend yield range 0% Risk-free interest rate range 3.38% - 3.73%
SHARE LENDING AGREEMENTS - ------------------------ We have entered into share lending agreements, dated December 12, 2007, with certain financial institutions, under which we have agreed to loan up to 11,278,988 shares of our common stock (subject to certain adjustments set forth in the share lending agreements). These borrowed shares must be returned to us no later than December 15, 2012 or sooner if certain conditions are met. If an event of default should occur under the stock lending agreement and a legal obstacle exists that prevents the Borrower from returning the shares, the Borrower shall, upon written request of our Company, pay our Company, using available funds, in lieu of the delivery of loaned shares, to settle its obligation. These financial institutions will sell the "borrowed shares" to investors to facilitate hedging transactions relating to the issuance of our 5.125% and 6.75% Convertible Notes. Pursuant to these agreements, we loaned 8,134,002 shares of our stock of which 6,300,752 shares were sold to the public on December 18, 2007 in a public offering. We did not receive any proceeds from the sale of the borrowed shares. We received a nominal lending fee from the financial institutions pursuant to the share lending agreements. Any shares we loan will be issued and outstanding. Investors that purchase borrowed shares will be entitled to the same voting and dividend rights as any other holders of our common stock; however, the financial institutions will not have such rights pursuant to the share lending agreements. The obligation of the financial institutions to return the borrowed shares has been accounted for as a prepaid forward contract and, accordingly, shares underlying this contract are removed from the computation of basic and dilutive earnings per share. On a net basis, this transaction will have no impact on earnings per share. 51 CALL OPTION AND FINANCING WARRANT - --------------------------------- Concurrent with our issuance of the convertible senior notes, we entered into call option and financing warrant transactions with financial institutions that are affiliates of the underwriters to reduce the potential dilution upon future conversion of the notes and to effectively increase the conversion price of the notes. The call options allow our Company to purchase common shares at $36.40 with respect to the 5.125% notes and $37.80 with respect to the 6.75% notes. These purchased shares would be used to satisfy the conversion of the convertible senior notes. The call options are accounted for as free standing derivatives and $73.5 million is recorded as equity in the Consolidated Balance Sheet. The financing warrants allow holders to purchase common shares at $46.20 with respect to the 5.125% notes and $49.00 with respect to the 6.75% notes. The financing warrants were valued at $36.8 million at the issuance date. At the issuance date our Company did not have sufficient authorized shares to provide all potential issuances of common stock. Therefore, the financing warrants are accounted for as freestanding derivatives, required to be settled in cash until sufficient shares are available and are recorded as a long-term liability in the Consolidated Balance Sheet. The financing warrants are marked to market each reporting period utilizing the Black-Scholes option pricing model and are valued at $24.7 million as of June 14, 2008. During the 16 weeks ended June 14, 2008, we recorded a gain of $6.5 million included in "Nonoperating income" on our Consolidated Statements of Operations. The following assumptions and estimates were used in the Black-Scholes model:
For the 16 weeks ended June 14, 2008 --------------------- Expected life 3.3 years - 4.8 years Volatility 33.0% Dividend yield range 0% Risk-free interest rate range 3.38% - 3.73%
OTHER - ----- We are the guarantor of a loan of $1.3 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 June 14, 2008, 233 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 $722.2 million, which could be partially or totally offset by reassigning or subletting such leases. Our existing senior debt rating was Caa1 with stable outlook with Moody's Investors Service ("Moody's") as of June 14, 2008. Our existing senior debt rating was B with positive outlook and was removed from CreditWatch with Standard & Poor's Ratings Group ("S&P") as of June 14, 2008. Also S&P assigned B- ratings to our $165 million 5.125% convertible senior notes due 2011 and our $255 million 6.75% convertible senior notes due 2012. Moody's assigned a Caa1 rating to our $165 million 5.125% convertible senior notes due 2011 and our $255 million 6.75% convertible senior notes due 2012. Our liquidity rating was SGL3 with Moody's as of June 14, 2008. Our recovery rating was 5 with S&P as of June 14, 2008 indicating a modest expectation of 10%-30% recovery of our senior debt to our lenders. Future rating changes could affect the availability and cost of financing to our Company. 52 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, legal costs and other data. Legal expenses incurred in connection with workers' compensation and general liability claims are charged to the specific claim to which costs pertain. 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 assets in stores planned for closure or conversion for impairment upon determination that such assets will not be used for their intended useful life. The value of the assets is determined based on estimates of future cash flows. Any impairment amounts are included in SG&A in our Consolidated Statements of Operations. The effects of changes in estimates of useful lives were not material to ongoing depreciation expense. If current operating levels do not improve, there may be a need to take further actions which may result in future impairments on long-lived assets, including the potential for impairment of assets that are held and used. Closed Store and Closed Warehouse Reserves For closed stores and warehouses that are under long-term leases, we adjust the charges originally accrued for these events for 1) interest accretion, 2) settlements on leases or sold properties, and 3) changes in estimates in future sublease rental assumptions. Net adjustments, all of which have been disclosed in the Notes to the Consolidated Financial Statements, for changes have been cumulatively approximately 5% from the date of inception, with the most significant adjustments being made prior to 2000. Adjustments are predominantly due to fluctuations in the real estate market from the time the original charges are incurred until the properties were actually settled. As of June 14, 2008, we had recorded liabilities for estimated probable obligations of $187 million. Of this amount, $19 million relates to stores closed in the normal course of business, $27 million relates to stores and warehouses closed as part of the asset disposition initiatives (see Note 9 of our Consolidated Financial Statements), and $141 million relates to stores closed as part of our discontinued operations (see Note 8 of our Consolidated Financial Statements). Due to the long-term nature of the lease commitments, it is possible that current accruals, which are based on estimates of vacancy costs and sublease income, will change in the future as economic conditions change in the real estate market; however, we are unable to estimate the impact of such changes at this time and the existing obligations are management's best estimate of these obligations at this time. 53 Conversion Feature, Financial Warrants, and Warrant Liability We have issued several financial instruments which are recorded as liabilities in our financial statements and marked to market each reporting period using the Black-Scholes option pricing model. The value of these liabilities may change as a result of changes in A&P's stock price, the remaining time until maturity, and the current interest rate. 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 the weighted average discount rate at which obligations can be effectively settled, the anticipated rate of future increases in compensation levels, the expected long-term rate of return on assets, increases or trends in health care cost, and certain employee related factors, such as turnover, retirement age and mortality. The discount rate is determined by taking into account the actual pattern of maturity of the benefit obligations. To generate the year-end discount rate, a single rate is developed using a yield curve which is derived from multiple high quality corporate bonds, discounting each future year's projected cash flow, and determining the equivalent single discount rate. A discount rate of 5.75% was selected for the February 23, 2008 disclosures. We use independent actuaries to assist us in determining the discount rate assumption and measuring our plans' obligations. The rate of compensation increase is determined based upon a scale of merit and promotional increases according to duration plus an economic increase per year. Our long-term rate of return is developed by taking into account the target allocations contained in each plan's investment policy, as of the beginning of the year, and reflecting long term historical data, with greater weight given to recent years. Under this approach, separate analyses are performed to determine the expected long-term rate of inflation, real rates of return for each asset class, and the correlations among the returns for the various asset classes. We use independent actuaries to assist us in determining our long-term rate of return assumptions. We believe that our current assumptions used to estimate plan obligations and annual expense are appropriate in the current economic environment. However, if economic conditions change, we may need to change some of our assumptions, and the resulting changes may materially affect our pension and other postretirement obligations in the Consolidated Balance Sheets and our future expense in the Consolidated Statement of Operations. Actual results that differ from our Company's assumptions are accumulated and amortized over future periods into the Consolidated Statement of Operations. 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. Physical inventory counts are taken every period for fresh inventory, approximately twice per fiscal year on a staggered basis for the remaining merchandise inventory in stores, and annually for inventory in distribution centers and supplies. The average shrinkage rate resulting from the physical inventory counts is applied to the ending inventory balance in each store as of the balance sheet date to provide for estimated shrinkage from the date of the last physical inventory count for that location. Adjustments to the stock loss reserve based on physical inventories have not been material. 54 Income Taxes As discussed in Note 14 of the Consolidated Financial Statements, our Company recorded a valuation allowance for the entire U.S. net deferred tax asset since, in accordance with SFAS 109, it was more likely than not that the net deferred tax asset would not be utilized based on historical cumulative losses. Under SFAS 109, this valuation allowance could be reversed in future periods if our Company experiences improvement in our U.S. operations. We adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an Interpretation of FASB Statement 109 ("FIN 48") as of February 25, 2007. The cumulative effect of the adoption of the recognition and measurement provisions of FIN 48 resulted in a $24.4 million increase to the February 25, 2007 balance of retained earnings. Results of prior periods have not been restated. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires that we determine whether the benefits of our tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, we recognize the largest amount of the benefit that is more likely than not of being sustained in our Consolidated Financial Statements. For tax positions that are not more likely than not of being sustained upon audit, we do not recognize any portion of the benefit in our Consolidated Financial Statements. Our policy for interest and penalties under FIN 48 related to income tax exposures was not impacted as a result of the adoption of the recognition and measurement provisions of FIN 48. Therefore, we continue to recognize interest and penalties as incurred within "Benefit from (provision for) income taxes" in our Consolidated Statements of Operations. Our Company makes estimates of the potential liability based on its assessment of all potential tax exposures. In addition, we use factors such as applicable tax laws and regulations, current information and past experience with similar issues to make these adjustments. The increase in our liabilities for unrecognized tax benefits as of the date of adoption of approximately $165 million was due mostly to our assessment of potential exposure concerning a deduction taken in the Company's fiscal 2005 federal income tax return. Despite the Company's belief that its tax return position is supportable, the Company believes that the position may not be fully sustained upon review by tax authorities. Such amount was adjusted to approximately $154 million in the fourth quarter of fiscal 2007 in connection with the Company's fiscal 2006 tax return to provision reconciliation. As we were in a full valuation allowance position, the approximate $11 million adjustment had no effect on the Company's earnings. In addition, the acquisition of Pathmark Stores Inc. increased this balance to the current $164 million. Our Consolidated Balance Sheet has been adjusted to reflect the liabilities for uncertain tax positions and deferred tax assets for net operating losses, since such losses are available to absorb the taxable income attributable to the unrecognized tax benefits. Thus, there was no impact on the Company's retained earnings resulting from the increase in the liability for unrecognized tax benefits. 55 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. 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 Notes as of June 14, 2008 of $592.9 million because they are at fixed interest rates. However, we do have cash flow exposure on our committed bank lines of credit of $268.2 million due to our variable floating rate pricing. Accordingly, during the first quarters of fiscal 2008 and fiscal 2007, a presumed 1% change in the variable floating rate would have impacted interest expense by $0.6 million and $0.1 million, respectively. Foreign Exchange Risk - --------------------- We are exposed to foreign exchange risk to the extent of adverse fluctuations in the Canadian dollar. As we have approximately $1.0 million in assets denominated in foreign currency, we do not believe that a change in the Canadian currency of 10% will have a material effect on our Consolidated Statements of Operations or Cash Flows. 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 Senior Vice President, Chief Financial Officer, 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 Senior Vice President, Chief Financial Officer, 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, our Company's President and Chief Executive Officer along with our Company's Senior Vice President, Chief Financial Officer, concluded that our Company's disclosure controls and procedures were effective as of the period covered by this report. There have been no changes during our Company's fiscal quarter ended June 14, 2008 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 56 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. PART II. OTHER INFORMATION ITEM 1 - Legal Proceedings Refer to Note 17 - Commitments and Contingencies for discussion of our legal proceedings. ITEM 1A - Risk Factors Refer to ITEM 1A - Risk Factors in our Fiscal 2007 Form 10-K ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds None ITEM 3 - Defaults Upon Senior Securities None ITEM 4 - Submission of Matters to a Vote of Security Holders None ITEM 5 - Other Information None 57 ITEM 6 - Exhibits (a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT NO. DESCRIPTION - ---------- ----------- 10.50 Warehousing, Distribution and Related Services Agreement dated March 7, 2008 by and between the Company and C&S Wholesale Grocers, Inc. ** 31.1* Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of the Chief Financial Officer Pursuant to 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 ** Confidential treatment has been requested for certain portions thereof pursuant to a confidential treatment request filed with the Securities and Exchange Commission (the "Commission") on July 18, 2008. Such provisions have been filed separately with the Commission. 58 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: July 21, 2008 By: /s/ Melissa E. Sungela ----------------------------------------------- Melissa E. Sungela, Vice President, Corporate Controller (Chief Accounting Officer) 59 EX-31 2 ex311f10q12008.txt EXHIBIT 31.1 - 302 CERTIFICATION E. CLAUS 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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 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 report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this 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; 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: July 21, 2008 - -------------- Eric Claus President and Chief Executive Officer 60 EX-31 3 ex312f10q12008.txt EHIBIT 31.2 - 302 CERTIFICATION - B. GALGANO Exhibit 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER Section 302 Certification I, Brenda M. Galgano, 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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 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 report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this 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; 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/ Brenda M. Galgano Date: July 21, 2008 - --------------------- Brenda M. Galgano Senior Vice President, Chief Financial Officer 61 EX-32 4 ex32f10q12008.txt E. CLAUS AND B. GALGANO 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 Brenda M. Galgano, Senior Vice President, Chief Financial Officer of the Company, each hereby certifies that (1) the Quarterly Report of the Company on Form 10-Q for the period ended June 14, 2008 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: July 21, 2008 /s/ Eric Claus -------------- Eric Claus President and Chief Executive Officer Dated: July 21, 2008 /s/ Brenda M. Galgano --------------------- Brenda M. Galgano Senior Vice President, Chief Financial Officer 62 EX-10 5 ex105candsagreement.txt EXHIBIT 10.50 - C & S AGREEMENT EXHIBIT 10.50 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS MARKED WITH "*" AND BRACKETS AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION WAREHOUSING, DISTRIBUTION AND RELATED SERVICES AGREEMENT -------------------------------------------------------- THIS WAREHOUSING, DISTRIBUTION AND RELATED SERVICES AGREEMENT the "Agreement") is made as of March 7, 2008 between THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., a Maryland corporation with principal offices located at 2 Paragon Drive, Montvale, New Jersey 07645 ("A&P") and C&S WHOLESALE GROCERS, INC., a Vermont corporation with principal offices located at 7 Corporate Drive, Keene, New Hampshire 03431 ("C&S" and together with A&P, the "Parties"). W I T N E S S E T H: WHEREAS, C&S operates warehouse and distribution centers, performs procurement and wholesale supply services, and provides related operational services to its customers; and WHEREAS, A&P has agreed to retain C&S to provide A&P certain warehousing and distribution services, and certain wholesale supply services, on the conditions set forth in this Agreement and the schedules hereto. NOW, THEREFORE, in consideration of the mutual covenants and obligations hereinafter set forth, the Parties hereto, intending to be legally bound, hereby agree as follows: 1. PRELIMINARY MATTERS. The Parties agree that as of the Effective Date, this Agreement shall supersede all prior agreements between C&S and A&P, and between C&S and Pathmark Stores, Inc. ("Pathmark"), as more fully described in Schedule 1.2 hereto. The Parties also agree that future Approved Budgets will comport with the form of the Interim Budget attached hereto as Exhibits 1.4(a)-(g) so as to facilitate the budget process described in Schedule 8. 2. WAREHOUSING SERVICES. During the Term of this Agreement, C&S shall provide to A&P comprehensive, managed warehouse, distribution and related services on the terms and conditions set forth in this Agreement and the schedules hereto, as more particularly described in Schedule 2. Together, the Warehousing Services, the Transportation Services, the Procurement Services, the Purchasing Services and the Additional Services shall be referred to as the "Services." 3. FACILITIES AND FIXED ASSETS. Commencing upon the Effective Date, C&S shall perform the Warehousing Services from the Facilities listed in Schedule 3, and/or from such other warehouse facilities as the Parties may determine from time to time, subject to the terms and conditions set forth in Schedule 3 of this Agreement. C&S shall maintain the Facilities, and shall invest in such Fixed Assets in support of the operations at the Facilities, as more particularly described in Schedule 3. 4. TRANSPORTATION SERVICES. The Parties agree that A&P will be responsible for the overall direction of all outbound transportation to the A&P Stores, and that C&S will hire, on a sub-contracted basis, common carriers for the delivery of Merchandise to certain A&P Stores all in accordance with the terms and conditions set forth in Schedule 4. C&S shall manage inbound transportation for the account of A&P in accordance with the terms set forth in Schedule 4. In all events, A&P shall have the right to assume responsibility for all inbound and outbound transportation and C&S shall perform such transportation services as A&P may direct. 5. OTHER SERVICES. C&S agrees to provide certain Other Services on behalf of A&P in accordance with the terms and conditions set forth in Schedule 5. In consideration for providing the Other Services, C&S shall receive the remuneration set forth in Schedule 5. 6. SERVICES FEES. As consideration for performing the Services under this Agreement, C&S shall receive from A&P payment of the Services Fees as set forth in Schedule 6 hereof. 7. PROCUREMENT AND PURCHASING SERVICES; [[*]]. Subject to the terms and conditions of this Agreement, A&P agrees to buy from C&S certain Merchandise for use or resale at the A&P Stores. The allocation of responsibilities for the procurement and purchase of such Merchandise between A&P and C&S shall be as set forth in Schedule 7 hereof. [*]. 8. PREPARATION OF INITIAL BUDGET AND ANNUAL BUDGETS; SHARED SAVINGS. The Parties shall agree upon and regularly review annual budgets for all Services prepared to an engineered standard on a facility-by facility basis in accordance with Schedule 8. The Initial Approved Budget and all subsequent Approved Budgets shall be prepared and reviewed in accordance with the terms and conditions set forth in Schedule 8. 9. REMUNERATION AND PAYMENT OF SERVICES FEES AND OPERATING COSTS. A&P will pay C&S all Services Fees and will pay or reimburse C&S for all Costs incurred by C&S in the provision of the Services under this Agreement, as set forth in Schedule 9 hereto. 10.INDEMNIFICATION AND INSURANCE; FORCE MAJEURE. Schedule 10 sets forth indemnification rights and insurance arrangements between the Parties. 11.TERM AND TERMINATION. This Agreement will commence on March 30, 2008 (the "Effective Date"), and shall remain in effect through September 29, 2018, unless earlier terminated in accordance with Schedule 11. 12.MISCELLANEOUS. The general conditions and definitions set forth in Schedule 12 are incorporated herein by reference and made a part hereof. - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 2 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. THE GREAT ATLANTIC AND C&S WHOLESALE GROCERS, INC. PACIFIC TEA COMP. By:/s/ Eric Claus By:/s/ Richard B. Cohen -------------- -------------------- Name: Eric Claus Name: Richard B. Cohen Title: President and Chief Title: Chairman and Chief Executive Officer Executive Officer 3 SCHEDULE 1 PRELIMINARY MATTERS ------------------- PRELIMINARY STATEMENT. The Parties wish to materially change their contracting relationship as it exists under the Prior Agreements (as defined below). Specifically, the Parties wish to establish, as of the Effective Date, a strategic "open-book" relationship to merchandise, procure, warehouse and distribute supermarket products to the A&P Stores in the most cost-efficient manner possible. The Parties further desire to collaborate with respect to the exploration, evaluation and implementation of practices and procedures to reduce A&P's total supply chain costs and allow each Party to share equitably in the benefits of such practices and procedures. 1.1 EFFECTIVE DATE. The "Effective Date" shall mean March 30, 2008. 1.2 PRIOR AGREEMENTS. The Parties agree that, subject to the terms hereof, and except as expressly provided herein, the Master Supply Agreement by and between A&P and C&S dated October 27, 2003 (the "Master Agreement"), the Supply Agreement by and between A&P and C&S dated June 27, 2005 (the "Ocean Agreement"), and the First Amended and Restated Supply Agreement by and between Pathmark and C&S dated January 29, 1998 (the "Pathmark Agreement"), together with all amendments thereto (collectively, the "Prior Agreements") shall remain in force and effect until the Effective Date. On the Effective Date, this Agreement shall replace and supersede the Prior Agreements in all respects, the Prior Agreements shall be terminated and no longer in effect as of the Effective Date, and neither of the Parties hereto shall thereafter have any rights, duties or obligations under the Prior Agreements; provided, however, with respect to any claim or cause of action that becomes known subsequent to the Effective Date (and should not have been known, through ordinary diligence, prior to the Effective Date) and arises from or is related to any set of facts or circumstances which arose or existed prior to the Effective Date, the terms and conditions of the respective Prior Agreement (including those related to dispute resolution) shall control. [[*]]. All claims that were known to a complaining Party, or through ordinary diligence should have been known by such Party, prior to the Effective Date shall be deemed waived and the complaining Party shall be forever barred from raising such claims as against the other, except as otherwise set forth in this Schedule 1.2 or with respect to such amounts as have been properly billed before the date hereof but not paid as of the date hereof. For the avoidance of doubt, no Affiliates of the Parties are or shall be deemed to be Parties to this Agreement. Notwithstanding the foregoing, each Party represents and warrants to the other Party that none of its Affiliates possesses any claims against such other Party. A&P hereby represents that as the sole shareholder of Pathmark, A&P has all proper right and authority to consent to the termination of the Pathmark Agreement and to waive any and all potential Pathmark claims and causes of action in accordance with the terms of this Schedule 1.2. - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 4 1.3 SUPPLY CHAIN EVALUATION. A&P and C&S wish to work together to create a network of distribution centers that, to the greatest extent possible, are dedicated exclusively to the service of A&P and the delivery of products to the A&P Stores. [[*]]. The Parties further wish to identify opportunities to achieve warehousing and distribution efficiencies and to implement practices and policies that will minimize A&P's costs throughout the supply chain. In furtherance of these goals, the Parties agree to jointly retain during the "Ramp-Up Period" (defined in Schedule 1.4 below) and annually thereafter the consulting firm of [*] or an equivalent firm ("Consultant") to conduct a comprehensive evaluation of the entire A&P supply chain and to make recommendations with respect to, among other areas, supply chain network configuration, facilities design, technology and systems design, loss prevention and health and safety, budgeting, operating best practices and policies, performance standards and shared cost-savings/incentive-sharing opportunities. The Parties by mutual agreement shall retain Consultant and shall each pay fifty percent (50%) of the fees incurred by Consultant in providing services pursuant to Schedule 1.3. The Parties anticipate that they will spend no more than [*] annually, in the aggregate, in fees and expenses paid to the Consultant. The Parties shall incorporate the recommendations of Consultant in the creation of the Initial Approved Budget and subsequent Approved Budgets, the Service Specifications and Performance Measures, and other warehousing practices and policies that will be implemented on or after the Effective Date. 1.4 RAMP-UP PERIOD AND INTERIM BUDGET. The period commencing with the Effective Date and continuing through September 28, 2008 shall be referred to as the "Ramp-Up Period." During the Ramp-Up Period, the Parties shall operate in accordance with the budgeted costs and income items set forth in the following Exhibits: Exhibit 1.4(a) (Budget Summary), Exhibit 1.4(b) (Total Warehousing Costs), Exhibit 1.4(c) (Total Transportation Costs); Exhibit 1.4(d) (Total Direct Overhead Costs); Exhibit 1.4(e) (Capital Expenditures); Exhibit 1.4(f) (Total Services Fees); and Exhibit 1.4(g) ([*]) (collectively, Exhibits 1.4(a)-(g) shall be referred to as the "Interim Budget"). Certain components of the Interim Budget shall also serve as the "Baseline Budget" which the Parties shall use for the purpose of computing whether and to what extent a Cost Savings Gainshare Incentive Fee is payable to C&S as described in Schedule 8.11 hereof. The Initial Approved Budget and all future Approved Budgets will comport with the form of the Interim Budget, and will include the same Budget Summary and categories of line item expenses and revenues. 1.5 INITIAL APPROVED BUDGET. Commencing promptly after the Effective Date, the Parties shall conduct meetings for the preparation of the Initial Approved Budget and the Service Specifications in accordance with Schedule 8 hereof. The Parties shall collaborate with the Consultant with respect to the preparation of the Initial Approved Budget and the Service Specifications and the Parties shall make best efforts to complete them not later than thirty (30) days prior to the commencement of the First Contract Year. In the event - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 5 that any of the Initial Approved Budget and/or the Service Specifications have not been agreed upon by the Parties at least thirty (30) days prior to the first day of the First Contract Year, any such dispute shall be resolved in accordance with the dispute resolutions provisions set forth in Schedule 12 of this Agreement. The Initial Approved Budget shall be the Approved Budget for the First Contract Year. The Parties agree that the Initial Approved Budget and each subsequent Approved Budget shall cover periods corresponding to C&S's fiscal year, which is a 52-week period (or 53-week period every five to six years) that runs through the last Saturday in September. The Parties will make any prorations necessary to account for the Ramp-Up Period or any 53-week Contract Year. The schedule of Contract Years for the Term is set forth on Exhibit 1.5 attached hereto. 6 SCHEDULE 2 WAREHOUSING SERVICES -------------------- 2.1 WAREHOUSING AND LOGISTICS SERVICES. During the Term of this Agreement, C&S shall provide to A&P (and, with respect to any A&P Operated Facility, A&P shall perform on its own account) comprehensive managed warehousing and logistics services on the terms and conditions set forth in this Agreement (the "Warehousing Services"), including but not limited to: the daily operation and maintenance of the Facilities; handling and confirming receipt of inbound orders; loading and unloading; storage; selection; pallet building; case labelling (where applicable); providing off-site resources for logistics management or analytical services; processing claims for recovery of lost or damaged Merchandise, as applicable; the Recyclable Material Processing Services; providing trained, skilled personnel; and interfacing with A&P personnel, all in accordance with the performance standards set forth below and the operating procedures and Service Specifications (the "Services Standards") and targeted performance levels (the "Performance Measures") that shall be set forth in the Service Specifications and made a part of this Agreement. The Service Specifications shall also set forth (i) A&P's obligations that relate to the Services performed by C&S including, but not limited to, timely provision of orders, ad forecasts, resolving issues with short-coded product, product discontinuances, new items, etc., and (ii) the penalties that shall be assessed to C&S for its failure to perform the Services in compliance with the Service Specifications; provided that in no event shall C&S be required to pay any such penalty to the extent: y) C&S has already borne Costs resulting directly from the failure to perform for which the penalty is being assessed (i.e., in the case of controllable Costs in excess of the Approved Budget); and z) the amount of such Costs exceeds the amount of the penalty prescribed under the Service Specifications. The Service Specifications may be revised from time to time in accordance with Schedule 8. 2.2 ADDITIONAL SERVICES. From time to time, A&P may request the provision of additional services not within the scope of Services ("Additional Services"). In such event, A&P and C&S shall negotiate in good faith to mutually agree upon a description of such Additional Services, including revisions to the Service Specifications, if necessary, and an adjustment of the Approved Budget, as determined or adjusted in accordance with Schedule 8. For the purposes of this Agreement, to the extent the Additional Services are mutually acceptable to C&S and A&P, such Additional Services shall form part of the Services hereunder and the Parties will mutually determine an appropriate adjustment to the Services Fee, if applicable. 2.3 EXCLUSIVITY. Except as may be otherwise stated in this Agreement, A&P agrees that for the Term of this Agreement it shall not contract with any third party other than C&S for the rendering of the Warehousing Services, except with regard to promotional, seasonal, cross-dock, DSD and other high-velocity or specialty Merchandise. Notwithstanding the foregoing, nothing in this Agreement shall be deemed to prohibit or restrict A&P from performing Warehousing Services on its own account or from contracting for any Warehousing Services with any Affiliate of A&P, provided that neither the Base Management Fee nor the Administrative Management Fee payable to C&S under this 7 Agreement shall be reduced as a result of A&P exercising its rights under this Schedule 2.3. Without limiting the foregoing in any way, the Costs related to the Facilities and Fixed Assets shall continue to be chargeable to A&P during the Term of the Agreement even to the extent such are underutilized in the event of A&P's exercise of its rights under this Schedule 2.3. 2.4 PERFORMANCE STANDARDS. In addition to the Services Standards and Performance Measures, C&S covenants and agrees to perform the Services and to maintain and operate the Facilities (including the cleanliness thereof) with the degree of care, skill and diligence consistent with an experienced, reputable warehouseman operating a warehouse and distribution service network in the Northeast United States, to the extent C&S's ability to perform the Warehouse Services in accordance with such standards is not prohibited by the Approved Budget, the Flex Budget or the withholding by A&P of any required approval. C&S covenants and agrees that it shall use commercially reasonable efforts to identify for A&P all necessary and desirable steps and measures to permit C&S to comply with its obligations under this Schedule so as to provide A&P the opportunity to include such steps and measures in the Approved Budget or the Flex Budget and to provide any required approvals. 2.5 WAREHOUSING SERVICES TO BE PROVIDED FROM THE FACILITIES. The Warehousing Services will be provided from the Facilities (as defined in Schedule 3.1) and from such other applicable facilities as may be permitted under the terms of this Agreement. 2.6 C&S COVENANTS. In addition to any of its other obligations as set out in this Agreement, C&S covenants and agrees that during the Term it will, consistent with the performance standards set forth in Schedule 2.4 above: (a) take all necessary and desirable steps and precautions to protect Merchandise from weather, water, theft, vandalism and all other reasonably foreseeable hazards and damages; (b) comply with all federal, provincial and municipal governmental laws, rules, regulations, by-laws, zoning legislation, guidelines, ordinances, orders of any municipal or other government body, and any other restrictions, covenants and other limitations (including, without limit, those in respect of environmental and health and safety matters) applicable to the occupation and operation of the Facilities, the providing of the Services and the Other Services and to otherwise comply with the terms and conditions of this Agreement. C&S shall keep in full force and effect all licenses, registrations and other qualifications imposed by any applicable governmental authorities necessary to occupy and operate the Facilities, and to provide the Services and to otherwise fulfill the terms and conditions of this Agreement; (c) except as otherwise instructed by A&P, not place any Merchandise in proximity to any other products or any material that is or may be noxious, flammable, hazardous or whose characteristics may adversely affect the quality, fitness or intended purpose, merchantability and other characteristics of the Merchandise or 8 otherwise cause in any manner whatsoever Merchandise to be adulterated or deteriorate; provided that C&S shall use commercially reasonable efforts to notify A&P where any of the Service Specifications or provisions in the Approved Budget are inconsistent with the protections referred to in this sub-schedule (c); and (d) maintain all of the Fixed Assets in good working order and promptly (or as soon as practicable in the case of refrigeration equipment) repair and/or replace any Fixed Assets that may prevent or hinder C&S's ability to provide the Services in accordance with the terms and conditions of this Agreement. C&S covenants and agrees that it shall use commercially reasonable efforts to identify all necessary and desirable maintenance and repair requirements outlined in this sub-schedule (d) for A&P and to provide A&P with an opportunity to include such requirements in the Approved Budget. 2.7 INDEPENDENT CONTRACTOR. It is expressly intended by the Parties hereto and each Party hereby specifically warrants, represents and agrees, that each Party (the "Performing Party" for the purposes of this Schedule) is an independent contractor having its own established place of business and all persons assisting the Performing Party in the performance of its obligations under this Agreement are and shall be deemed the employees of the Performing Party or under contract to the Performing Party for all purposes, and not of the other Party or any Affiliate of the other Party. It is further intended and agreed between the Parties that each Party shall have sole control of the manner and means of performing its obligations under this Agreement. The specific means of accomplishing the purposes of this Agreement shall be left to the discretion of the Performing Party, provided that the purpose of this Agreement is accomplished in a cost-effective manner and otherwise in a manner intended to benefit A&P and C&S. Each Party agrees that its officers, managers, or other management or supervisory personnel employed by them shall effect such management, direction and control in the sole and complete discretion of such Party. 2.8 INVENTORY CONTROL. The Parties hereto agree that they will agree to appropriate inventory control procedures (e.g., physical inventories and cycle counts, as applicable) as part of the Service Specifications. The Parties will further include in the Service Specifications procedures for regulating inventory levels (including investment buy formulas, taking into account the cost of money, and allocations of responsibility for inventory level overages or shortfalls) and handling short-coded or excess product. 2.9 RECYCLABLE MATERIAL PROCESSING. C&S agrees that throughout the Term of this Agreement it shall manage the processing of certain non-hazardous recyclable materials located at the A&P Stores or held at the Facilities for use or resale at the A&P Stores including, but not limited to, cardboard, pallets and plastic materials (the "Recyclable Material") on A&P's behalf (the "Recyclable Material Processing Services") and shall be considered to be part of the Warehousing Services. Recyclable Material expressly excludes: (i) Merchandise and other items traditionally handled through reclamation; and (ii) environmentally hazardous materials or food waste. Specifically, A&P agrees to bale or package in an orderly fashion all Recyclable Material at the A&P Stores, and to label 9 all such packages, so as to permit their collection, inventory, and the tracking of their movement, as set forth in the Service Specifications. C&S agrees to package Recyclable Materials at the Facilities in the same manner. C&S agrees to recover all Recyclable Materials from the A&P Stores, and to assemble the packages of all Recyclable Materials at the Facilities, and shall arrange for the transport of all such materials to an appropriate location for processing. All Recyclable Materials will be processed by C&S in accordance with the Service Specifications. C&S agrees to establish and maintain a means of tracking and reporting the movement of all Recyclable Materials from the A&P Stores and the Facilities, as well as the redemption or other processing of such Recyclable Materials on a unit-by-unit basis. The Parties acknowledge and agree that such a tracking process does not exist as of the Effective Date, but in no event will C&S establish and deploy a tracking system later than ninety (90) days after the Effective Date. [[*]]. All labor, transportation and other costs incurred by C&S in performing the Recyclable Material Processing Services shall be deemed to constitute Costs, as that term is hereinafter defined. Unless otherwise agreed in the Service Specifications, the A&P Stores will not load dunnage or other refuse on C&S's or its contractors' trailers. [*]. - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 10 SCHEDULE 3 FACILITIES AND FIXED ASSETS --------------------------- 3.1 FACILITIES. Commencing on the Effective Date and continuing throughout the Term of this Agreement, C&S (and, in the case of the Edison GMDC Facility, A&P) shall perform all Warehousing Services and Transportation Services hereunder from the following warehouse and/or distribution centers that are owned or leased by C&S or one of its Affiliates, and any new or replacement warehouse and/or distribution centers, subject to Schedule 3.5 (the "Facilities"): (a) Facilities Dedicated Exclusively to Service of A&P Stores (each, a -------------------------------------------------------------------- "Dedicated Facility"): ---------------------- Facility Product Category(ies) -------- --------------------- [*] [*] * [*] ** [*] (b) Facilities Servicing A&P and at least one other C&S Customer (each, -------------------------------------------------------------------- a "Shared Facility"): --------------------- Facility Product Category(ies) -------- --------------------- [*] [*] (c) Facilities Operated by A&P (each, an "A&P Operated Facility"): -------------------------------------------------------------- Facility Product Category(ies) -------- --------------------- [*] [*] (d) Shipping Origin. A schedule setting forth each of the A&P Stores that are serviced by each of the Facilities listed above has been annexed to this Agreement as Exhibit 3.1. Subject to a change in the roster of Facilities set forth in 3.1(a) and (b) above by the establishment of new, replacement or additional Facilities as set forth in Schedule 3.5, the shipping origin of A&P Stores may be changed in accordance with this Schedule 3.1(d). A&P may instruct C&S to change the shipping origin of one or more A&P Stores; provided, however, any change to the shipping origin of A&P Stores, whether singly or in the aggregate, that could reasonably be expected to (a) increase or decrease the volume of any Shared - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 11 Facility by [*] or more [[*]] shall require the mutual written consent of C&S and A&P. In addition, the Parties may agree, at any time, to change the shipping origin of any one or more A&P Stores. Changes of shipping origin of A&P Stores that occur during the course of any Contract Year shall be reflected in a Flex Budget. 3.2 DEDICATED FACILITIES. The Parties acknowledge and agree that the Dedicated Facilities are exclusively utilized to support the A&P Stores serviced from such Facilities. C&S covenants and agrees that it will not perform any services or other activities of any sort whatsoever at any of the Dedicated Facilities (a) on behalf of its other customers, (b) on its own account, or (c) for A&P Stores other than the A&P Stores which are normally serviced by such Dedicated Facilities, except to the extent expressly consented to in advance and in writing by A&P. Furthermore, C&S agrees it will not, without A&P's prior written approval, warehouse at or transfer to or from any Dedicated Facility any Merchandise that is not intended for use or resale at the A&P Stores serviced by such Dedicated Facility, nor will C&S otherwise transfer Merchandise between any Facilities. To the extent A&P gives written approval to C&S with regard to the activities for other customers otherwise prohibited in the preceding two (2) sentences, C&S will account for and record any incremental expense incurred in connection with such activities and such expenses will not be considered Costs under this Agreement and will therefore not be chargeable to A&P. The Parties will periodically explore additional opportunities to transfer the A&P Volume to Dedicated Facilities. To the extent any Shared Facility ceases to hold any significant amount of case volume for C&S customers other than A&P Volume for a period of time not less than one Contract Quarter, A&P and C&S shall jointly determine if such Shared Facility shall be treated as a Dedicated Facility for the purposes of this Agreement. 3.3 A&P OPERATED FACILITIES. A&P shall be permitted to occupy and operate any A&P Operated Facility, and to perform the Warehousing Services or any other activities at such A&P Operated Facility in any manner of its choosing, subject to A&P's obligations under this Agreement. [*]. 3.4 REAL ESTATE OBLIGATIONS. A statement of all Real Estate Obligations as of the Effective Date has been annexed to this Agreement as Exhibit 3.4. Subject to Schedule 3.5, below, C&S covenants and agrees that it shall not alter or add to any of the terms of the current Real Estate Obligations (or any of the future Real Estate Obligations established pursuant to Schedule 3.5 below) without first notifying A&P in writing. Furthermore, C&S agrees that to the extent it enters into any real estate financing transactions with respect to an existing Facility for the exclusive benefit of C&S (e.g., a sale-leaseback transaction) which would give rise to Costs in excess of what is set forth in the Approved Budget for the Contract Year in which such real estate financing transaction was entered into, C&S will hold A&P cost neutral with respect to such real estate financing transactions for such - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 12 Contract Year and for all future Contract Years. The preceding sentence shall not apply to renewals, extensions or modifications of existing or future Real Estate Obligations in the ordinary course of business. 3.5 FACILITY RELOCATION, CLOSURE, OPENING OR CONSTRUCTION. From time to time, C&S may propose to undertake a relocation or closure of a Facility; material enhancement of a dedicated Facility requiring capital expenditure that is not already reflected in the Capital Expenditures component of the Approved Budget; or opening or construction of a new Facility dedicated to A&P (each, a "Facility Decision"). Prior to undertaking a Facility Decision, C&S covenants and agrees that it will consult with A&P with regard to such Facility Decision. The Parties shall discuss in detail and in good faith (a) any capital expenditure requirements related to the Facility Decision and the impact of such expenditures on the Capex and Approved Budgets, including ROI assumptions; (b) the costs related to the Facility Decision, including any applicable shut-down expenses and liabilities, severance, [[*]] and pension contributions for prior underfunding, start-up costs, stranded facility costs, and cost of money for either party (their respective "Facility Decision Costs"); (c) the projected operational savings that will accrue once the Facility Decision Costs have been fully mitigated; and (d) the impact of the Facility Decision on C&S's compliance with the Service Specifications and other performance of the Services under the Agreement. [*] (i) [*] (ii) [*] (iii) [*] (iv) [*] [*]. 3.6 FIXED ASSETS. A&P recognizes, understands and agrees that C&S may be required to purchase, lease or license equipment or systems specifically dedicated to support the Services and necessary to meet C&S's obligations to A&P under this Agreement. Except with respect to any Emergency Expenditures, the Parties agree that C&S shall not purchase, lease, license or otherwise acquire any new Fixed Assets, or change the financing terms of any current Fixed Asset financing arrangements, which would give rise to Costs in any Fiscal Accounting Period in excess of what is set forth in the Approved Budget without first obtaining the written consent of A&P, which consent shall not be unreasonably withheld, delayed or conditioned. Any and all Fixed Assets which give rise to Costs chargeable to A&P hereunder shall be depreciated in accordance with C&S's depreciation schedule for such Fixed Assets as set forth on the Depreciation Schedule annexed hereto this Agreement as Exhibit 3.6. - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 13 SCHEDULE 4 TRANSPORTATION SERVICES ----------------------- 4.1 GENERAL. For so long as A&P may direct during the Term of this Agreement, C&S shall be responsible for inbound transportation of Merchandise to such Facilities and A&P Stores as A&P may direct, and shall provide such services in accordance with the terms of this Schedule 4. C&S will further be responsible for the routing and overall management of outbound transportation and delivery of Merchandise from such Facilities to such A&P Stores as A&P may direct, and C&S shall hire third-party contract carriers to deliver certain Merchandise to the A&P Stores, all in accordance with this Schedule 4 or otherwise as directed by A&P. Notwithstanding the foregoing, the A&P Stores bannered "Pathmark" are currently serviced by Grocery Haulers, Inc. ("GHI") under a contract directly with A&P, and C&S has no management or oversight responsibility with respect to GHI or the outbound transportation of Merchandise to the A&P Stores bannered "Pathmark". Until such time as A&P may amend its contract with GHI, GHI shall be responsible for the routing and delivery of all shipments of Merchandise to the A&P Stores bannered Pathmark. Together, C&S's management of the inbound and outbound transportation and hiring of contract carriers as set forth herein shall be referred to as the "Transportation Services". The Parties agree that, in its sole and exclusive discretion, A&P may elect, upon commercially reasonable notice to C&S, to assume exclusive responsibility for, or to contract with any third party to manage, the Transportation Services; provided that any Base Management Fee or Administrative Management Fee payable to C&S hereunder this Agreement shall not be reduced as a result of A&P exercising its right under this Schedule 4.1; and provided further that A&P shall be responsible for assuming from C&S such tractors, trailers and other similar assets owned or leased by C&S that C&S can demonstrate were utilized in its performance of the Transportation Services and which will not be used by C&S as a result of A&P exercising its rights hereunder. C&S agrees to act in a commercially reasonable fashion to mitigate any expense or losses associated with such assets prior to A&P's assumption thereof. 4.2 INBOUND TRANSPORTATION. Subject to A&P's rights in Schedule 4.1 above, C&S shall manage inbound delivery of Merchandise as it is shipped from A&P's vendors to the Facilities. C&S shall use commercially reasonable efforts to solicit bids from, and to otherwise negotiate with, reputable third-party contract carriers for inbound transport rate proposals to obtain the lowest possible rate for the delivery of Merchandise from the A&P vendors to the Facilities. A&P shall have the right to audit and/or monitor C&S's bidding processes with regard to inbound transportation. [[*]]. C&S shall provide to A&P, on a continuous and ongoing basis, a report setting forth all negotiated contract rates for the transport of Merchandise from the A&P vendors to the Facilities (the "Negotiated Inbound Rates"). Subject to the availability and capacity of such contract carriers, C&S - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 14 shall invoice A&P the Negotiated Inbound Rates for any delivery of Merchandise from the A&P vendors to the Facilities. 4.3 OUTBOUND TRANSPORTATION. The Parties agree that C&S, in cooperation with A&P and subject to A&P's strategic direction and right to assume exclusive responsibility for the Transportation Services, shall be responsible for the design, development and implementation of the outbound transportation activities, including, but not limited to, transportation network configuration and routing, and for the overall management of Transportation Services supporting the A&P Stores, except for the A&P Stores serviced by GHI as set forth in Schedule 4.1. C&S agrees to arrange, through the hiring of reputable contract carriers on a sub- contracted basis, for the diligent, professional and expeditious transport of such Merchandise to the A&P Stores, except for the A&P Stores serviced by GHI. C&S agrees to arrange, through its contract carriers, for the provision of transportation services, including such accessorial and special services that may relate to transportation services and may be requested by A&P, and to adhere to, and to cause its contract carriers to adhere to, the standards of service, delivery specifications, and other service requirements as set forth in the Service Specifications. C&S acknowledges and agrees that it will be responsible to A&P for the performance of the transportation services by such contract carriers. C&S's performance of the Transportation Services set forth herein shall be based upon the Service Specifications and other projections, information and directions provided by A&P to C&S. All costs associated with outbound transportation to the A&P Stores shall be estimated and agreed to by the Parties, shall be regarded as Costs herein, and shall be incorporated into and made a part of the Interim Budget and any Approved Budget. Title to Merchandise shall remain with C&S until (i) such time as the trailer containing Merchandise exits the loading dock of the applicable Facility, in the case of Merchandise that is picked up from the Facility by a contract carrier arranged for by A&P; or (ii) such time as the trailer containing Merchandise is received at the destination A&P Store, in the case of Merchandise that is picked up from the Facility by a contract carrier arranged for by C&S. Theft of Merchandise or Fixed Assets from an A&P Store location shall not be the responsibility of C&S, unless it is theft committed by a contract carrier or other party for whom C&S is responsible under this Schedule. 15 SCHEDULE 5 OTHER SERVICES -------------- 5.1 GENERAL. C&S agrees to perform certain services (the "Other Services") on A&P's behalf that are incidental or in addition to the Services, as specified in this Schedule 5. The Parties agree that the costs incurred by C&S in connection with the rendering of the Other Services, and all compensation earned by C&S in connection therewith, shall not constitute Costs but shall remain the sole responsibility of C&S and shall be excluded from the calculation of the Interim Budget and shall not be incorporated into or made a part of any subsequent Approved Budgets under Schedule 8. 5.2 COUPON PROCESSING SERVICES. C&S agrees that it will perform coupon processing services with respect to all of the A&P Stores (excluding those stores that as of the Effective Date are bannered as "Pathmark" and excluding stores that A&P may acquire, unless otherwise agreed in writing by the Parties). C&S agrees that it shall commence performing such services as soon as reasonably practicable following the Effective Date (which shall be no later than August 2008) [[*]]. The Coupon Processing Services will be performed in accordance with terms and conditions established by A&P and C&S and set forth in the Service Specifications, [*]. A&P will pay to C&S a fee of [*] per Contract Year for such services, which will be payable in accordance with Schedule 9 hereof. [*]. Notwithstanding the foregoing, the Parties further agree that: (a) if the coupon business materially changes during the Term and there is a material reduction in the prevalence of paper coupons, [*] then the Parties shall discuss an appropriate modification to the coupon processing services and/or the fee payable by A&P to C&S hereunder. 5.3 ACCOUNTS RECEIVABLES DEDUCTIONS. C&S agrees that throughout the Term of this Agreement it shall process and collect on A&P's behalf all accounts receivable deductions that are due A&P from the A&P vendors ("Accounts Receivables Deductions") and which A&P may direct C&S to so collect. [*]. 5.4 RECLAMATION. C&S agrees that throughout the Term of this Agreement it shall perform reclamation services (the "Reclamation Services") with respect to all damaged, discontinued or unsalable Merchandise located at the A&P Stores in accordance with the terms and conditions set forth in Exhibit 5.4 hereto. [*]. - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 16 SCHEDULE 6 SERVICES FEES ------------- 6.1 GENERAL. In addition to any other amounts payable hereunder, as consideration for performing the obligations under this Agreement, A&P shall pay to C&S the Services Fees, as set forth and defined below. In addition to the Base Management Fee and the Administrative Management Fee, A&P shall also pay to C&S the Incremental Volume Fee, the Cost Savings Gainshare Incentive Fee and the [*] if certain conditions are satisfied, as described below. For purposes of this Agreement, the Base Management Fee, the Administrative Management Fee, the Incremental Volume Fee, the Cost Savings Gainshare Incentive Fee and the [*] shall be referred to herein as the "Services Fees." Services Fees shall also include (a) the fees and/or [*] by A&P with respect to the Other Services as set forth in Schedules 5.2, 5.3 and 5.4 (together, the "Other Services Fee") and (b) any fees later agreed to by the Parties, including for Additional Services. 6.2 FEES. (a) Base Management Fee. The "Base Management Fee" will be [[*]] per Contract Year (prorated for the Ramp-Up Period) commencing on the Effective Date, as adjusted pursuant to Schedule 6.4 hereof. The Base Management Fee shall be payable to C&S in accordance with the terms and conditions set forth in Schedule 9 hereof. (b) Administrative Management Fee. In connection with C&S's provision of corporate and administrative services and personnel, C&S shall be entitled to an "Administrative Management Fee" in an amount equal to [*] per Contract Year (prorated for the Ramp-Up Period) commencing on the Effective Date, as adjusted pursuant to Schedule 6.4 hereof. The Administrative Management Fee shall be payable to C&S in accordance with the terms and conditions set forth in Schedule 9 hereof. 6.3 INCENTIVE COMPENSATION FEES. In addition to the Base Management Fee and the Administrative Management Fee and the Other Services Fee, C&S may be entitled to receive the following fees (the "Incentive Compensation Fees"). (a) Incremental Volume Fee. To the extent A&P's total net sales (as defined by US Generally Accepted Accounting Principles ("GAAP"), consistently applied) exceeds [*] (the "Incremental Volume Fee Trigger") in any Contract Year, C&S will be entitled to an "Incremental Volume Fee" in the amount equal to [*]. The Incremental Volume Fee, if any, shall be calculated in connection with the reconciliation performed by A&P and C&S following the completion of the year- - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 17 end reconciliation at the end of each Contract Year, as set forth in Schedule 8.5.3 and the Incremental Volume Fee will be invoiced to A&P on the Weekly Statement immediately following completion of such year-end reconciliation. The Incremental Volume Fee will not be in effect for the Ramp-Up Period, but will be in effect for the remainder of the Term. The Incremental Volume Fee Trigger will be equitably adjusted by the Parties for any acquisition or divestiture by A&P. (b) Cost Savings Gainshare Incentive Fee. During the Ramp-Up Period and in any Contract Year, C&S may be entitled to receive a "Cost Savings Gainshare Incentive Fee" as calculated in accordance with Schedule 8.11 hereof. (c) [*]. During the Ramp-Up Period and in any Contract Year, C&S may be entitled to receive a [*] as calculated in accordance with Schedule 7.15(c) hereof. 6.4 CPI ADJUSTMENTS TO CERTAIN SERVICES FEES. (a) The Base Management Fee and the Administrative Management Fee shall be adjusted at the beginning of each Contract Year, including the First Contract Year, by a percentage equal to that percentage by which the non-seasonally adjusted Northeast Urban Average All Items Consumer Price Index for All Urban Consumers (1982 - 1984 = 100), as available on the first day of the new Contract Year from the Bureau of Labor Statistics of the United States Department of Labor, or any successor index ("CPI"), varies from the same on such day of the prior year. The Parties agree that they will use the CPI report for the month of August each year as the basis for comparing to the prior year, as such report becomes available generally within two weeks of the close of August. For purposes of illustration, for the CPI adjustment that will occur effective upon the second full Contract Year commencing September 26, 2009, assume that the CPI for August 2008 is 258.1 and the CPI for August 2009 is 260.4, then the CPI adjustment effective September 26, 2009 is 260.4 - 258.1 = 2.3 / 258.1 = 0.89%. The then current Base Management Fee would be multiplied by 0.89% to arrive at the increase to the Base Management Fee. If the then current Base Management Fee was [[*]], then the adjustment would be [*] and the new Base Management Fee would be [*]. Notwithstanding the above, the adjustment shall have an annual cap of (i) 2.5% for the Base Management Fee only and (ii) 1.5% for the Administrative Management Fee only, provided in each case that the excess over the capped amount shall be accumulated and applied to future adjustments to the extent the CPI adjustment in any year is less than the capped amount. For example, if in the first adjustment cycle the CPI is 3.0%, the second adjustment cycle the CPI is 3.2% and the third adjustment cycle the CPI is 0.5%, for purposes of calculating the adjustment in the third cycle to the Base Management Fee, the accumulated excess for the prior two cycles is 1.2%, thus the adjustment is 0.5% - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 18 + 1.2% = 1.7%. In the case of the Administrative Management Fee, the accumulated excess would be 3.2%, so the adjustment in the third adjustment cycle would be 0.5% + 1.0% = 1.5%, leaving an accumulated excess of 2.2% (3.2% less the applied deficit of 1.0%). (b) The Incentive Volume Fee Trigger shall be adjusted at the beginning of each Contract Year, including the First Contract Year, for the "CPI for All Food" for most recent period for which such calculation is "Final" as reported by the United States Department of Agriculture Economic Research Service (or, if not available from the USDA, then as reported by such other similar authority). As set forth in Schedule 8.11, the Baseline Budget is also subject to a CPI adjustment pursuant to this Schedule 6.4. 19 SCHEDULE 7 PROCUREMENT AND PURCHASING SERVICES; [*] ---------------------------------------- I. GENERAL 7.1 MERCHANDISE. Subject to the terms and conditions set forth in this Agreement, A&P agrees to purchase from C&S, and C&S agrees to sell to A&P, certain quantities of grocery, produce, dry bakery, candy, fresh meat, fresh deli, fresh seafood, dairy, frozen (mainline), frozen bakery, frozen meat, frozen commodities, ice cream, ice, HBC/GM, private label products, spices and supplies, and certain other merchandise in the product categories carried by C&S or A&P, but excluding the products set forth in Schedule 7.4(a) (collectively, "Merchandise") for use or resale at the A&P Stores. 7.2 EXCLUSIVITY. Except as may be otherwise expressly stated in this Agreement, A&P agrees that for the Term of this Agreement it shall not contract with any unaffiliated third party other than C&S to procure and/or purchase Merchandise. 7.3 A&P STORES. The term "A&P Stores" means all supermarket stores owned and operated by A&P or any of its Affiliates as set forth on Exhibit 3.1, attached hereto. In addition, the term "A&P Stores" shall include any new or replacement stores of A&P or any of its Affiliates in the geographic region of any of the A&P Stores, except that A&P Stores shall not be deemed to include any acquisition of ten (10) or more stores at one time by A&P, nor shall it include those stores which are acquired by A&P and which, at the time of such acquisition, are already serviced by a third party logistics, procurement and/or purchasing services provider other than C&S and A&P was required to assume such third party contract as a condition of acquiring such stores. Likewise, should C&S acquire a business that supplies A&P, whatever contracts are then in existence shall continue and shall not be automatically subsumed into this Agreement. 7.4 EXCLUSIONS. (a) Merchandise does not include the following products: (i) products that are available for purchase by A&P through direct store delivery ("DSD") or from cross dock vendors and designated as DSD or cross dock by A&P from time to time; (ii) certain seasonal GM or specialty products, which may include natural, organic and private label products, which are procured and purchased by A&P (such as those products stored at the A&P Crown Facility) from specialty suppliers who at the time of this Agreement are, or in the future may become, authorized - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 20 by A&P in A&P's sole discretion to procure such product on behalf of A&P, provided however that A&P will in good faith support C&S and purchase such products through C&S if, in the reasonable opinion of A&P, C&S is cost competitive and provides similar services to the other vendors of such products; (iii) Floral; (iv) Tobacco; (v) Pharmacy (prescription medications); or (vi) Liquor. (b) Nothing in this Agreement shall prohibit or otherwise limit A&P's ability to (i) purchase either now or in the future any item that is available to A&P via DSD or cross dock, or (ii) designate on a temporary or long term basis any Merchandise as DSD or cross dock. 7.5 PROCUREMENT GENERALLY. For purposes of this Agreement, to "procure" shall mean to negotiate directly or indirectly with the applicable vendor with respect to all terms of the purchase of goods including, but not limited to (as applicable), price, specifications, quantity, freight and [[*]] (the "Purchase Terms"). Both Parties shall, with respect to the Merchandise it procures hereunder: (a) procure such Merchandise, and otherwise operate, in accordance with all applicable law and with prudent and ethical business practices; (b) maintain a right-sized procurement organization staffed with competent and appropriately skilled buyers, and supported by a commercially reasonable systems infrastructure, all taking into account the level and nature of procurement activity; and (c) in all cases negotiate for its most competitive price available with respect to the Merchandise that it procures. The Parties acknowledge and agree that, in its sole and exclusive discretion, A&P may elect upon commercially reasonable written notice to C&S to assume exclusive or partial responsibility for procuring any or all of the Merchandise intended for use or resale at the A&P Stores as more fully set forth in Schedule 7.7(e) hereof; provided that any Base Management Fee or Administrative Management Fee payable to C&S under this Agreement shall not be reduced as a result of A&P exercising its right under this Schedule 7.5. Subject to any exceptions contained in this Agreement, C&S shall continue to purchase all such Merchandise as set forth in Schedule 7.6, below. A&P shall have exclusive responsibility for procuring the goods that are excluded from Merchandise as set forth in Schedule 7.4(a), hereof. C&S shall not engage in the procurement of any Merchandise in connection with the A&P Volume except as is expressly stated in this Agreement. [*]. - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 21 7.6 PURCHASING GENERALLY. For the purposes of this Agreement, to "purchase" shall mean to: (a) perform the physical act of purchasing goods through the execution and tender of purchase orders to an applicable vendor; (b) to pay for such goods; and (c) to own such goods for the period immediately preceding their resale to A&P. [*]. A&P shall have exclusive responsibility for purchasing the goods that are excluded from Merchandise as set forth in Schedule 7.4(a), hereof. II. PROCUREMENT AND PURCHASE OF CENTER-STORE CATEGORIES OF PRODUCTS 7.7 CENTER-STORE PROCUREMENT AND PURCHASING. (a) [*]. (b) C&S shall purchase and manage the regular turn Center-Store Products inventory intended for use or resale at the A&P Stores. C&S's management of A&P's regular turn Center-Store Products inventory shall be based upon historic Center-Store Products turn information maintained by C&S, volume forecast requirements provided by A&P, product specifications supplied by A&P, and other projections and other information and direction provided by A&P to C&S. (c) C&S shall purchase promotional or other high-velocity Center-Store Products inventory intended for use or resale at the A&P Stores as directed by A&P. C&S's purchase of promotional or high-velocity Center-Store Products shall be based upon A&P's advance estimates of promotional volumes, product specifications, purchase quantities, delivery dates, store-specific volume allocations (as further set forth in the Service Specifications) and other Center-Store Products information supplied by A&P to C&S, and other projections and other information and direction provided by A&P to C&S. (d) C&S agrees that it shall maintain and provide A&P on a daily basis detailed inventory date code viewing and close dated reports with respect to all Center-Store Products that have code dates, intended for use or resale at the A&P Stores, along with any other reports or information required under the Service Specifications. The Parties recognize that C&S as of the Effective Date does not have a systemic solution for this obligation and is working with vendors on "open" code dating and external labeling to facilitate more efficient tracking of code dates on Center-Store Products, but that C&S shall establish such a system within a commercially reasonable time following the Effective Date. (e) [*]. - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 22 (f) [*]. 7.8 [*] WITH RESPECT TO CENTER-STORE PRODUCTS. (a) [*]. On the first Tuesday following the end of each Fiscal Accounting Period (but in no event sooner than 2 days following the end of the Fiscal Accounting Period), C&S will provide to A&P movement reports that will permit A&P to bill vendors for A&P's [*] for all Center-Store Products. C&S will not collect any [*] from A&P vendors with respect to Center-Store Products unless expressly consented to in writing by A&P. (b) [*]. C&S agrees it shall not make any communication to any vendor or other third party, or engage in any other conduct, that directly or indirectly reduces any economic benefits realized by A&P under its [*] programs in connection with the Center-Store Products Volume or that otherwise has an adverse impact on A&P's negotiations regarding such [*] programs. In no event shall any [*] program negotiated by C&S on its own account or that of its customers in any way prevent, interfere with, or otherwise take from A&P's realization of the full economic benefit of the [*] programs A&P may negotiate for its own account with respect to the Center-Store Products Volume. A&P shall provide or substantiate a direct nexus between the prohibited actions described in this Schedule 7.8(b) and any adverse economic impact suffered by A&P. III. PROCUREMENT AND PURCHASE OF FRESH CATEGORIES OF PRODUCTS 7.9 FRESH PRODUCTS PROCUREMENT AND PURCHASING. (a) Terms Applicable to all Fresh Products. (i) General. [*]. Under no circumstances shall C&S substitute for any Fresh Products alternative goods that do not possess the identical product specifications as those designated by A&P without A&P's express written consent. A&P agrees to respond in a timely manner to C&S requests to substitute Fresh Products in order to meet A&P's service requirements in the event a vendor designated by A&P is unable to fulfill an order. The - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 23 processes governing the substitution of Fresh Products shall be set forth in the Service Specifications. (ii) Procurement. [[*]]. C&S shall purchase all Fresh Products as instructed by A&P, all in strict accordance with the product specifications, vendor designations and other terms of purchase established by A&P. (iii) Purchases - Regular Turn Inventory. C&S shall purchase and manage the regular turn Fresh Products inventory intended for use or resale at the A&P Stores. C&S's management of A&P's regular turn Fresh Products inventory shall be based upon historic Fresh Products turn information maintained by C&S, volume forecast requirements provided by A&P, product specifications and vendor designations supplied by A&P, and other projections and other information and direction provided by A&P to C&S. C&S shall be responsible for determining the quantity and delivery date of regular turn inventory for Fresh Products. C&S's purchase of replenishment Fresh Products inventory shall be in strict accordance with all terms of purchase established by A&P in its procurement of Fresh Products. (iv) Purchases - Promotional. C&S shall purchase promotional or other high-velocity Fresh Products inventory intended for use or resale at the A&P Stores. C&S's purchase of promotional or high- velocity Fresh Products (which shall include turkey, shrimp, crab and other high-tonnage categories of frozen commodities) shall be based upon A&P's advance estimates of promotional volumes, product specifications, vendor designations, purchase quantities, delivery dates, store specific volume allocations (as further set forth in the Service Specifications), and other Fresh Products information supplied by A&P to C&S, and other projections and other information and direction provided by A&P to C&S. (v) Short Supply. If C&S fails to maintain the Fresh Products turn inventory, or to otherwise purchase any Fresh Products in accordance with instructions received from A&P hereunder, so as to result in "stock-outs" or short supplies of Fresh Products, C&S shall promptly notify A&P of such fact and A&P shall instruct C&S as to the manner and vendor from whom C&S shall purchase such amount of replenishment Fresh Products as may be required to cure the short supply. In the case of a short - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 24 supply, at A&P's request C&S shall be required to prove that it made a good faith attempt to purchase all Fresh Products from the Fresh Products vendors designated by A&P. (vi) Inventory; Purchase Orders; Inspections. Subject to the confidentiality provisions set forth in this Agreement, C&S will provide A&P, at the end of each business day, a report providing detailed transaction information with respect to the purchase orders for Fresh Products processed during such business day. A&P will review such purchase order information provided by the reports for Fresh Products and will provide C&S with such changes to the purchase orders as A&P may request prior to 10:00 a.m. on the next day following the delivery of such reports. Such reports will enable A&P to verify that C&S is purchasing Fresh Products in conformity with product specifications and vendor designations supplied by A&P. C&S will be responsible for the inspection of all Fresh Products prior to their acceptance at the Facilities by C&S to ensure strict compliance with A&P's Fresh Products specifications. C&S will provide A&P prompt notice of any Fresh Products that, in C&S's judgment, warrant complete or partial refusal. A&P and C&S shall collaborate, in good faith, to interact with vendors with respect to such Fresh Products and the Parties will minimize any out- of-code Fresh Products, including distribution of such Fresh Products to the A&P Stores. If A&P requests that C&S accept any Fresh Products that C&S would otherwise reject, A&P and C&S will agree on a plan of distribution for such Fresh Products and C&S will not be responsible for out-of-code or quality issues related to such product. (vii) Forward Buying. [*]. (viii)Information and Reports. C&S agrees that it shall maintain and provide to A&P on a daily basis detailed inventory date code viewing with respect to short coded items and close dated reports with respect to all Fresh Products intended for use or resale at the A&P Stores, along with any other reports or information required under the Service Specifications. In addition, C&S will provide A&P on a daily basis a daily inventory report on all fresh seafood slots/SKUs at the Facilities, which shall be prepared and maintained by C&S in accordance 25 with mutually agreed upon polling schedules and other specifications. The Parties agree to collaborate closely on minimizing out-of-code Fresh Product. (ix) Exact Weight - Meat. C&S shall invoice A&P for the exact weight of all fresh and frozen meat products in Facilities with voice selection technology, which information shall be scanned from the case packaging of the meat products as they are selected by C&S for delivery to the A&P Stores. In Facilities that do not have voice selection technology, C&S will continue to bill on an average weight basis. The Parties will agree on a method of calculating average weight, which will be set forth in the Service Specifications. (x) Product Handling Requirements. C&S shall receive, store, handle and distribute all Fresh Products in strict accordance with the Fresh Products handling requirements set forth in the Service Specifications. 7.10 FLORAL PRODUCTS PROCUREMENT AND PURCHASING. A&P shall determine all Floral Product specifications and shall exclusively negotiate with vendors all terms of purchase for Floral Products including, but not limited to, cost and quantity, delivery date and allowances, rebates, [[*]] and any other monetary or non-monetary funding for all Floral Product intended for use or resale at A&P Stores. A&P shall purchase all Floral Products. A&P shall purchase and manage the regular turn Floral Products inventory intended for use or resale at the A&P Stores. C&S shall have neither procurement nor purchasing responsibility with respect to Floral Products under this Agreement. C&S agrees that, except as otherwise expressly stated herein, C&S shall not communicate in any fashion, whether directly or indirectly, with any of A&P's vendors with respect to Floral Products volume intended for use or resale at the A&P Stores. 7.11 [*] WITH RESPECT TO FRESH PRODUCTS. (a) [*]. (b) [*]. In no event shall any [*] program negotiated by C&S on its own account or that of its customers in any way prevent, interfere with, or otherwise take from A&P's realization of the full economic benefit of the [*] programs A&P may negotiate for its own account with respect to A&P's Fresh Products Volume. A&P shall provide or substantiate a direct nexus between the prohibited actions described in this Schedule 7.11(b) and any adverse economic impact suffered by A&P. - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 26 (c) [*]. (d) [*]. IV TERMS COMMON TO ALL PROCUREMENT AND PURCHASING 7.12 PROCUREMENT SERVICE LEVELS. (a) Target and Required Purchasing Service Level. C&S agrees that, commencing on the Effective Date and continuing during the Term of this Agreement, the targeted service level for all Merchandise purchased by C&S on A&P's behalf will be [*] (the "Targeted Purchasing Service Level"), and the Required Purchasing Service Level shall be [*] for the first 18 months following the Effective Date and [*] thereafter (the "Required Purchasing Service Level"). The punitive service level shall be [*] for the first 18 months following the Effective Date and [*] thereafter (the "Punitive Service Level"). The Purchasing Service Level will be measured each Contract Week (the "Measurement Period") during the Contract Year for all A&P Volume purchased from C&S: (i) by Facility; (ii) by Department within Facilities; and (iii) aggregated for all Facilities. (b) Definitions. The "Purchasing Service Level" in each instance is calculated as a quotient, the numerator of which shall be the number of cases (or shipping units, in the case of HBC/GM) invoiced, plus "Ad Overpulls," short supplies due to untimely or inaccurate volume forecasts provided by A&P (subject to the information requirements set forth in the Service Specifications), and "Manufacturer Out-of- Stocks," and the denominator shall be the number of cases (or shipping units, in the case of HBC/GM) ordered, less unauthorized cases and discontinued items. The Purchasing Service Level calculation shall be adjusted at the end of each - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 27 week to reflect any shortages from the prior week that are in excess of [*] (based on audited results). "Ad Overpull" shall be defined as any promotional volume in excess of the forecast timely provided by A&P (with respect to whether A&P has provided information "timely" being determined in accordance with the Service Specifications and the subject vendor's lead-time requirements). An item will qualify as a "Manufacturer Out-of-Stock" if: (i) such item was subject to a product recall; (ii) such Fresh Products item was rejected by C&S on quality-based grounds and such rejection was confirmed by A&P or a USDA inspector; (iii) C&S provides within seven (7) days after shipment to the A&P Stores written proof of out-of-stock status (e.g., a letter from the manufacturer indicating the quantity of the item that was unavailable from the manufacturer for the period in question, or a received purchase order issued within proper lead time indicating the quantity of the item that was cut by the manufacturer); or (iv) the manufacturer has refused to ship product due to a dispute over an Accounts Receivables Deduction as set forth in Schedule 5.3 and C&S provides such evidence as described in sub-schedule (iii) in this paragraph. "Department" shall mean each of the following [*] groupings of product categories: [*] (c) Calculation and Reporting. C&S will provide A&P, throughout the Term of this Agreement, on a weekly and Fiscal Accounting Period basis, a "Purchasing Service Level Reconciliation Report" showing, with respect to all orders processed for the given period, the actual Purchasing Service Levels (each, respectively, the "Actual Purchasing Service Level") [*]. - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 28 (d) Service Level Breaches. A "Minor Service Level Violation" [*] shall occur when C&S fails to meet the Required Purchasing Service Level [*] in any Contract Week. [*] [*] A "Punitive Service Level Breach" is a failure to meet Punitive Service Level measured across all Facilities in the aggregate for: a) [*] consecutive Contract Weeks during any twelve month rolling period; or b) any [*] Contract Weeks during any twelve month rolling period. (e) Penalties. Minor Service Level Violation: [*]. [*] - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 29 Punitive Service Level Breach: [*] for every [*] (pro-rated) by which the Punitive Service Level measured across all Facilities is not met, for each week comprising the Punitive Service Level Breach and for each additional week thereafter that C&S fails to meet the Punitive Service Level (measured across all Facilities) during any twelve month rolling period. Termination Level Breach: A&P shall have the right to terminate this Agreement in the event that the Purchasing Service Level measured across all Facilities in the aggregate is below the Punitive Service Level for [*] consecutive Contract Weeks or any [*] Contract Weeks during any twelve month rolling period. However, A&P shall have the right to terminate this Agreement in the event that the Purchasing Service Level measured across all Facilities in the aggregate is below [*] for [*] consecutive Contract Weeks or any [*] Contract Weeks during any twelve month rolling period. Measurement Periods must be distinct and not overlapping. Penalties likewise may be assessed only a single time for cases or units that comprise a Service Level Shortfall, meaning that if C&S been assessed a penalty for such volume, it cannot be assessed another penalty for that same volume shortfall. (f) Exceptions. This Schedule 7.12 shall be void with respect to any Merchandise for which A&P assumes responsibility for turn or promotional buying. If A&P assumes a portion of the turn or promotional buying responsibility, this Schedule 7.12 shall apply only to that A&P Volume with respect to which C&S has retained buying responsibility. With regard to Merchandise for which A&P assumes turn or promotional buying responsibility, C&S shall notwithstanding be responsible for shipping (or making available for pickup where outbound transportation is arranged for by A&P) [*] of all Merchandise ordered by A&P, unless C&S can provide adequate proof that there was not sufficient inventory of such Merchandise at the Facility to meet the order placed by A&P and such was not attributable to C&S's failure to properly execute purchase order. 7.13 LEFTOVER AD. For the purposes of this Agreement, "Leftover Ad Volume" shall mean the volume of any Merchandise originally comprising a promotional order that remains - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 30 unshipped as of the date upon which the applicable promotion concluded minus the average regular turn inventory on-hand of such Merchandise for the prior Contract Quarter. C&S and A&P will work together to minimize Leftover Ad Volume, including, remerchandising items where possible, canceling trucks and having vendors pick up Leftover Ad Volume, or providing other instructions to C&S with regard to the disposition of such items prior to any Merchandise going out of code. If the Parties are not successful in disposing of such Leftover Ad Volume, A&P shall reimburse C&S for its [[*]] for such items, less any salvage value received. The specific procedures to be followed by the Parties shall be as set forth in the Service Specifications. 7.14 [*]. (a) [*]. (i) [*]. (x) [*]. (y) [*]. (ii) [*]. (iii) [*]. (iv) [*]. For the purpose of clarification, to the extent an A&P Store changes banner during the period between the date hereof and the commencement of the third Contract Year, the terms applicable to such A&P Store shall be those terms set forth in the Prior Agreement in effect with respect to such A&P Store on the Effective Date. As of the commencement of the [*] Contract Year, all such pre-existing billing practices will be terminated and C&S will charge A&P the [*] for such Center-Store Products, as set forth in Schedule 7.14(a)(i)(x). (v) With respect to sub-schedule (iv) in this Schedule 7.14(a), the Parties agree that they will re-examine such practices in light of the [*] results as measured in the year-end reconciliation and mutually determine whether such practices may be terminated before the end of the [*] Contract Year, making any necessary changes to the [*]. (b) [*]. - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 31 (c) Audit Rights. A&P may audit C&S's records in order to confirm that [*] are calculated and administered in accordance with the terms and conditions of this Agreement. Such audits shall be conducted in accordance with the terms of Schedule 12.5 hereof. [*]. To the extent A&P seeks to review any contracts or other records pursuant to such an audit and which are subject to a confidentiality agreement between C&S and any of C&S's vendors, A&P will execute an appropriate "clean room" protocol or other confidentiality agreement that will permit access to such confidential information but only to members of A&P's internal audit team or to any third-party external auditor A&P has engaged for that purpose and that are approved by C&S. (d) Restricted Information. A&P understands and agrees that information related to [*] ("Restricted Information") is highly sensitive and shall be subject to a heightened level of confidentiality and restricted access. Accordingly, in order for C&S to agree to provide such Restricted Information, A&P agrees that it will allow access to such Restricted Information only to those A&P employees or third party agents who have a need to know such Restricted Information in connection with A&P's confirmation of [*] and [*] (the "Permitted Use"), who have been approved of by C&S, and who will each individually be required to execute affirmations of the confidentiality obligations stated herein ("Permitted Individuals"). A&P agrees that other than to the Permitted Individuals, A&P shall not disclose such information to any other person or party. All such Restricted Information may not be copied or reproduced by A&P in any form, and may only be used pursuant to the Permitted Use. (e) Interim Pricing Methodology. C&S shall complete testing of and shall be prepared to commercially deploy its Lot Management System within ninety (90) days of the Effective Date (the "Interim Period"). However, A&P shall have the right to conduct a pre- deployment LMS audit and the LMS shall not be deployed until approved by A&P (which approval shall not be unreasonably withheld). [*]. (f) [*]. (g) [*]. 7.15 C&S [*]. (a) [*]. (b) [*]. In connection with the year-end reconciliations, A&P and C&S shall determine whether any amounts are due and owing to A&P pursuant to this Schedule 7.15(b). Any amounts due to A&P in connection with the [*] shall be paid to A&P in accordance with this Schedule 7.15(b) and Schedule 9 hereof and - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 32 shall be credited to A&P on the next Weekly Statement immediately following the conclusion of the year-end reconciliation. [*]. (c) [*]. This sub-schedule "c" shall be deemed null and void to the extent A&P elects to assume control over all aspects of procurement of Center-Store Products pursuant to Schedule 7.5 hereof. (d) [*]. 7.16 [*]. 7.17 STANDARD CREDIT POLICY. The Parties agree to the terms and conditions of the Standard Credit Policy attached hereto as Exhibit 7.17. A&P and C&S will work together in good faith to revise the Standard Credit Policy currently in effect to the Parties' mutual satisfaction. The purpose of such revision is to agree upon terms that comport with the open-book nature of the relationship between the Parties and to create costs savings and efficiencies wherever possible, while at the same time ensuring high quality selection and service level to the A&P Stores. When such revised terms have been mutually agreed to in writing by the Parties, such revised Standard Credit Policy will be included in the Service Specifications. - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 33 SCHEDULE 8 PREPARATION OF INITIAL BUDGET AND ANNUAL BUDGETS; SHARED SAVINGS ---------------------------------------------------------------- 8.1 BUDGET AND REMUNERATION PROCEDURES. The procedures for the establishment of the Initial Approved Budget and subsequent Approved Budgets, and Flex Budgets and budget variances which the Parties agree shall apply for the Term is set forth below. A&P agrees to pay to C&S the Costs and remuneration due under this Agreement in the time and manner set forth in Schedule 9. 8.2 INITIAL APPROVED BUDGET. Not less than thirty (30) days prior to the end of the Ramp-Up Period and the commencement of the First Contract Year, C&S and A&P will agree upon a budget that has been developed in accordance with the form of the Interim Budget attached hereto as Exhibits 1.4(a)- (g). The "Approved Budget" shall be comprised of the budgets for the Total Warehousing Costs, Total Transportation Costs, Total Direct Overhead Costs, Capital Expenditures, Total Services Fees and [*]. The Approved Budget for the First Contract Year shall be referred to herein as the "Initial Approved Budget". The Initial Approved Budget and all subsequent Approved Budgets will be prepared in accordance with the Interim Budget format. For the purposes of this Agreement, all calculations related to the Approved Budget and any other matters in connection with the terms of this Agreement shall be calculated consistent with GAAP. 8.3 BUDGETED COSTS. The Initial Approved Budget, and all subsequent Approved Budgets, shall set forth in absolute dollars all Costs agreed upon by the Parties to be incurred in connection with the performance of the Services, the operation of the Facilities by C&S, and purchases and other investments in Fixed Assets (in the applicable Contract Year) and shall be broken out on a Facility-by-Facility basis (except for the [*] and Direct Overhead). The Approved Budgets shall be prepared according to an engineered standard, provided however that the Parties acknowledge and agree that C&S, as of the Effective Date, has partially embarked on a project to convert its facilities from a cost-per-piece compensation system to engineered standards. Accordingly, to the extent that costs, bargaining obligations, and other factors bear on the rollout of engineered standards across the Facilities, C&S shall provide to A&P a business case setting forth all such costs and obligations as well as the return on investment (ROI) associated with such costs and obligations, and the Parties shall agree on an appropriate capital expenditure budget addressing such costs and obligations. (a) Costs will include costs and expenses reasonably incurred in connection with the performance of the Services and the operation of the Facilities during the Term as further set forth on the Approved Budget. Without limiting the foregoing, the term "Costs" shall include the following categories of costs and expenses: - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 34 (i) "occupancy costs" for all Facilities, which shall be comprised of: a. With respect to leased Facilities - all rent, additional rent, leasehold improvements, rental subsidies and other costs, liabilities and obligations relating to any leases or subleases of the Facilities; b. With respect to owned Facilities - an imputed rental amount for the applicable Facility; and c. such other customary periodic real estate carrying costs including, but not limited to, common area maintenance, real estate, personal property and business taxes, utilities, insurance and customary maintenance and repair expenses; (ii) imputed rental amount for all Fixed Assets owned by C&S; (iii) all equipment maintenance, repair and rentals and all charges under any leases of equipment assumed by C&S or entered into by C&S in accordance with the terms of this Agreement (including without limitation leases which constitute capital leases under GAAP) and relating to the provision of the Services; (iv) all reasonable and necessary transportation and freight costs, including fuel, tolls and payments made to contract carriers for freight services, directly relating to the provision of the Transportation Services; (v) all direct and indirect labor costs (including without limitation salaries, wages, benefits, worker's compensation expenses incurred or accrued by C&S on a GAAP basis) relating to the provision of the Services, provided however that the Parties agree beginning with the First Contract Year A&P shall be responsible to pay the amount of workers' compensation expense set forth in the Approved Budget, plus or minus a maximum of [*] (meaning that if the expense is greater than [*] over the budgeted amount, C&S will be responsible for such excess over [*], and if the amount is greater than [*] below the budgeted amount, C&S shall retain the benefit below [*]); (vi) costs of third party contractors; - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 35 (vii) all reasonable pay in lieu of notice, reasonable termination and severance payments and like amounts (other than those resulting from termination of this Agreement in accordance with Schedule 11 of this Agreement or from any Facility Decision, unless otherwise agreed to by the Parties pursuant to Schedule 3.5), and all related costs and expenses in accordance with C&S's procedures and policies, relating to the termination of employment of any one or more employees employed in connection with the provision of the Services; (viii)direct overhead charges representing the reasonable and necessary administrative and systems costs incurred by C&S to the extent they are necessary to directly support the rendering of Services performed by C&S hereunder but shall not include those in support of C&S's rendering of the Other Services (the "Direct Overhead Costs"). These costs primarily relate to the use of financial, human resources, procurement, purchasing and other management personnel and information systems; (ix) premiums payable with respect to the policies of insurance referred to in Schedule 10.2 of this Agreement; (x) deductibles, retentions, expenses and out-of-pocket settlements paid by C&S from time to time with respect to any of the policies of insurance referred to in Schedule 10.2 of this Agreement; (xi) product shrink, out of code, damaged or unsalable Merchandise; (xii) all reasonable and necessary costs with respect to any information processing and related communications devices, equipment, systems, information, data, or software (collectively "Systems") used in connection with the Services; and (xiii)all other costs of whatever nature properly incurred by C&S in connection with the provision of the Services and approved in advance by A&P, other than in the case of an Emergency Expenditure or other exigent circumstances, which, in C&S's commercially reasonable judgment, such costs were required to be incurred prior to such approval by A&P. (b) "Costs" shall not include: (i) imputed rent or depreciation related to any additional capital expenditures not included in the Capital Expenditures portion of the Approved Budget, unless C&S and A&P otherwise agree in writing, except in the case of an Emergency Expenditure; 36 (ii) Subject to Schedule 1.2, any costs, claims, liabilities, charges or obligations of any sort whatsoever that have been incurred by C&S, or have accrued or arisen, prior to the Effective Date, regardless of when asserted or when effective, whether in connection with the Prior Agreements, or in connection with Services rendered by C&S on behalf of A&P, Pathmark, any of C&S's other customers, or in connection with C&S's other activities prior to the Effective Date, including but not limited to judgments, claims, suits, actions or other obligations, subject to the treatment of workers' compensation expense as set forth in Schedule 8.3(a)(v) above; provided, however that claims such as personal injury claims in which the triggering incident occurred prior to the Effective Date but expenses associated therewith are experienced during the Term, such expenses as incurred and recorded on a GAAP basis during the Term shall properly be included as Costs under this Agreement, but in no event shall A&P be responsible for any such expenses incurred and recorded on a GAAP basis outside the Term of this Agreement; (iii) except for the pension plan contribution obligations as set forth in the applicable collective bargaining agreements, any costs, claims, liabilities, charges [*] or any underfunded pension plan payment obligations and any surcharges or assessments from multi-employer funds, subject to agreements that may be entered into pursuant to Schedule 3.5 [*]; (iv) costs resulting from any violation of Law, any labor or employment claims (other than workers' compensation claims), any costs related to C&S's or its subcontractors' negligence or third party personal injury claims outside of the Costs set forth in Schedule 8.3(a)(v) or Schedule 8.3(a)(ix)-(x), third-party contractual claims or other third-party judgments, claims, losses, suits, actions, or other obligations of any sort whatsoever, except to the extent such cost is subject to A&P's indemnification obligation to C&S under Schedule 10 hereof; (v) any costs resulting from any breach by C&S of its obligations under this Agreement, or from C&S's acts or omissions constituting gross negligence or willful misconduct; or (vi) costs in connection with the performance of Other Services by C&S. - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 37 (c) Costs for Shared Facilities. (i) Costs in connection with any Shared Facility during a Fiscal Accounting Period shall be allocated to A&P according to a ratio (expressed as a percentage) equal to (x) A&P's actual shipped case volume for such Shared Facility for the trailing twelve-month period ending on the last day of such Fiscal Accounting Period divided by (y) the total case volume, expressed as a percentage (the "Actual Allocation Amount"). For purposes of this Schedule 8.3(c), the "Baseline Allocation Amount" shall mean A&P's Actual Allocation Amount as of the last day of the first Fiscal Accounting Period of the Term. In the event of a change of shipping origin of one or more A&P Stores that results in a material volume shift, including but not limited to changes that occur as a result of a Facility Decision, the Actual Allocation Amount will be reset in accordance with A&P's volume in the new Facilities and will be modified every Fiscal Accounting Period using only the trailing volumes that reflect such changes in shipping origin. (ii) To the extent a reduction in the case volume of other C&S customers at a Shared Facility results in an increase of A&P's Actual Allocation Amount by [*] or more compared to the Baseline Allocation Amount for such Facility, A&P's Actual Allocation Amount for such Fiscal Accounting Period shall be deemed to be no more than the Baseline Allocation Amount plus [*]. For the avoidance of doubt, any increase in the Actual Allocation Amount due to an increase in A&P Volume at such Facility shall not be counted for purposes of the aforementioned calculation. (d) The Parties agree that to the extent the Actual Costs in an Aggregate Cost Grouping (as set forth on Exhibit 1.4(a)) exceed the Approved Budget for such Aggregate Cost Grouping in any Contract Year (or the Ramp-Up Period) after taking into account the budget Flex as described below (the "Excess Costs"), A&P will not pay or reimburse C&S for such Excess Costs, unless: (i) the Excess Costs were necessary or advisable in the discretion of C&S to perform the Services or to otherwise comply with its obligations under this Agreement and C&S obtained A&P's prior written authorization to incur the Excess Costs, to the extent obtaining such advance authorization was feasible under the circumstances; (ii) the Excess Costs were of the nature of an uncontrollable cost, which shall include all costs that are not within the reasonable control of C&S, including but not limited to inflation in the cost rate of fuel, electricity or like commodities - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 38 (e.g., natural gas); medical costs; out of code product resulting from investment buys made in accordance with the agreed investment buy procedures, provided such product is located in the Dedicated Facilities or is product unique to A&P in the Shared Facilities; costs related to materially adverse weather conditions; costs related to actions or omissions on the part of A&P; or costs related to Force Majeure; or (iii) the Excess Cost is related to an Emergency Expenditure. In the case of (iii), above, C&S shall provide notice to A&P promptly after incurring such Emergency Expenditure and A&P shall have the right to direct C&S to cease incurring such non-budgeted Costs; provided, however, that C&S shall have no liability for any loss or adverse consequences resulting from such cessation. Notwithstanding the foregoing, A&P shall have no responsibility for any uncontrollable cost to the extent such uncontrollable cost is incurred or exacerbated by the negligence, gross negligence or intentional misconduct of C&S. (e) With respect to Direct Overhead Costs only, it is the intent of the Parties that Direct Overhead Costs will be budgeted by the Parties each Contract Year in the Approved Budget, subject to Flex for material changes that occur during such Contract Year, and A&P will be responsible to pay only such budgeted amount (as Flexed) and such amounts will not be subject to true-up to actuals or reconciliation (as set forth in Schedule 8.5 hereof). 8.4 FLEX BUDGETS, FUEL, EMERGENCY EXPENDITURES. 8.4.1 Flexing an Approved Budget. Prior to the commencement of each Fiscal Accounting Period and in connection with the year end reconciliation, or as otherwise agreed to by the Parties hereto, the Approved Budget will be adjusted (a "Flex Budget") for the following factors: i) changes in regulatory requirements, compliance with GAAP, and compliance with Laws (provided such adjustment is not required to correct C&S's non-compliance for any prior Fiscal Accounting Period), ii) market fluctuations in C&S's actual cost of fuel (except to the extent of A&P's participation in C&S's fuel hedging program), or other uncontrollable costs, iii)Emergency Expenditures (defined below), iv) changes in Facilities' case volumes, Daily Peaking and other volume fluctuations, v) changes to the Product Mix or Service Specifications, and vi) any other such similar factors as may be appropriate or mutually agreed to by the Parties hereto. 39 The Capital Expenditures portion of the Approved Budget is not subject to budget Flexing, but shall be subject to amendment at the mutual agreement of the Parties. 8.4.2 Fuel Cost Adjustment. It is the intent of the parties that A&P pay the actual delivered cost of fuel, exclusive of any financial hedging unless the Parties otherwise agree in writing. Prior to the Ramp-Up Period and each Contract Year, as part of the budget process, the parties shall agree upon a "Base Cost of Fuel" for the Approved Budget for the forthcoming Ramp-Up Period or Contract Year (as applicable). Each Contract Quarter, the Base Cost of Fuel used to calculate fuel costs as a component of the Total Transportation Costs for such Contract Quarter will be adjusted for any changes to reflect the actual delivered cost of fuel incurred by C&S in connection with the Services hereunder. The Service Specifications shall set forth in detail the formula for calculating Base Cost of Fuel for each Facility. 8.4.3 Emergency Expenditures. An "Emergency Expenditure" shall be any cost, expense or liability incurred by C&S in an emergency in connection with the performance of the Services which C&S deems, in its reasonable business judgment, necessary in order to (a) protect or preserve the Merchandise, any Facility or any Fixed Assets used in connection with the performance of the Services, (b) comply with any Laws, or (c) avoid harm to persons or property, whether C&S, A&P or a third party. To the extent feasible, C&S will attempt to obtain A&P's prior written consent before undertaking any such Emergency Expenditure, and C&S shall use commercially reasonable best efforts to mitigate the costs of such Emergency Expenditures. Where it was not feasible for C&S to obtain A&P's prior written consent before incurring the Emergency Expenditure, C&S shall provide notice to A&P promptly after incurring such Emergency Expenditure. In such case, A&P shall have the right to direct C&S to cease incurring such non-budgeted Costs; provided, however, that C&S shall have no liability for any loss or adverse consequences resulting from cessation of such Cost. The Parties will make a good faith effort to include Emergency Expenditures in a Flex Budget. In any event, Emergency Expenditures will be billed to A&P in accordance with the monthly reconciliation as set forth in Schedule 8.5.1. 8.5 REPORTING OF VARIANCES. ----------------------- 8.5.1 Monthly Reconciliations. Within twenty (20) days of the end of each Fiscal Accounting Period, C&S shall provide to A&P a detailed report (the "Monthly P&L") containing a comparison of variances between (i) Costs actually incurred by C&S in performing the Services (the "Actual Costs"); (ii) the Approved Budget Costs; and (iii) Flex Budget Costs for the immediately preceding period, on a line item basis. A&P will either (a) receive a credit on its next Weekly Statement equal to the amount of C&S's Actual Costs set forth on the Monthly P&L for such month were less than the Approved Budget Costs (or Flex Budget Costs, as applicable) paid by A&P for such month or (b) pay C&S, in connection with the next Weekly Statement, any amount by which C&S's Actual Costs set 40 forth on the Monthly P&L for such month were greater than the Costs set forth on the Approved Budget (or Flex Budget as applicable) which were paid by A&P for such month less any Emergency Expenditures not reflected in a Flex Budget. 8.5.2 Quarterly Reconciliations. Within forty-five (45) days of the end of each Contract Quarter, C&S will reconcile the Monthly P&Ls for such Contract Quarter and either (i) provide to A&P a credit on A&P's next Weekly Statement equal to the amount C&S's Actual Costs set forth on the Monthly P&Ls for such Contract Quarter were less than the amount of Costs set forth on the Approved Budget (or Flex Budget as applicable) for such Contract Quarter paid by A&P or (ii) A&P will pay C&S any amount C&S's Actual Costs set forth on the Monthly P&Ls for such Contract Quarter were in excess of the Costs set forth on the Approved Budget (or Flex Budget as applicable) for such Contract Quarter and paid by A&P for such Contract Quarter, in either case (i) or (ii) taking into account any amounts credited to or paid by A&P in connection with the monthly reconciliations. Quarterly reconciliations will be completed in conjunction with the closing of the accounts for the C&S fiscal quarter in which such Contract Quarter concludes. 8.5.3 Year-End Reconciliations. Within ninety (90) days of the end of each Contract Year, C&S will reconcile the final Contract Quarter for such Contract Year and either (i) provide to A&P a credit on A&P's next Weekly Statement equal to the amount C&S's Actual Costs for such Contract Year were less than the amount of Costs set forth on the Approved Budget (or Flex Budget, as applicable) for such Contract Year paid by A&P, plus any Excess Costs previously paid by A&P or (ii) A&P will pay C&S any amount C&S's Actual Costs for such Contract Year were in excess of the Costs set forth on the Approved Budget (or Flex Budget as applicable) for such Contract Year and paid by A&P for such Contract Year, minus any Excess Costs previously paid by A&P, in either case (i) or (ii) taking into account any amounts credited to or paid by A&P in connection with the monthly and quarterly reconciliations. The year-end reconciliations will be completed in conjunction with the closing of the accounts for the C&S fiscal year, which is coterminous with the Contract Year. The Parties shall also include a reconciliation pursuant to Schedule 8.3(d) as a part of the year-end reconciliation to determine whether and to what extent there were Excess Costs during such Contract Year. 8.5.4 Review of Reconciliations. Within seven (7) days after the receipt of each of the monthly and quarterly reconciliation reports or within fourteen (14) days after the receipt of the yearly reconciliation report, representatives of the parties shall meet to review the report. The Flex Budget shall be subject to adjustment based on such review. A&P shall have access to C&S internal accounting records to verify Costs incurred by C&S and presented to A&P are accurate. C&S will bring to each meeting sufficient authentic documentation of costs incurred (e.g., general ledger to verify depreciation taken on equipment, invoices to verify any material/equipment purchased, etc.) to support and permit analysis of all reconciliations. 41 8.6 FORECASTING. On a quarterly basis (or more often as needed), C&S shall provide to A&P an updated estimate of Actual Costs and Services Fees compared against the Approved Budget, which shall include material changes in budget assumptions with respect to case volume, Daily Peaking and other volume fluctuations, as well as Product Mix, Service Specifications, timeliness of order advice, level of stocking and other factors as may be appropriate. 8.7 RECONCILIATION OF VARIANCES. Any dispute between the parties relating to this Schedule 8 which cannot be resolved after the parties have used all reasonable efforts to do so shall be resolved in accordance with Schedule 12 hereof. 8.8 PREPARATION OF SUBSEQUENT APPROVED BUDGETS. A&P and C&S will meet annually, beginning at least 90 days prior to the end of the Contract Year, to negotiate subsequent Approved Budgets, which shall be completed within thirty (30) days prior to the commencement of the upcoming Contract Year. The parties understand and agree that timely completion of the Approved Budget is a critical component of the open-book relationship and that if there is a delay in the budgeting process the parties will dedicate whatever executive-level resources are necessary to ensure completion. In the event the parties cannot agree on a subsequent Approved Budget then either Party may invoke the dispute resolution procedure set forth in Schedule 12 to determine or establish an Approved Budget. Until such subsequent Approved Budget is determined, the Approved Budget for the immediately preceding Contract Year shall remain in full force and effect. 8.9 FAILURE TO SETTLE SERVICE SPECIFICATIONS. If, at any time during the Term of this Agreement, C&S and A&P are unable to agree on revised Service Specifications, the matter shall be resolved in accordance with the dispute resolution procedures set forth in Schedule 12 and current Service Specifications shall continue to apply to the provision of Services until such time as new Service Specifications are established. 8.10 QUARTERLY CHANGES TO INFORMATION. Prior to each Contract Quarter, A&P shall advise C&S of any anticipated changes to the forecasted case volumes, and other volume fluctuations, Product Mix, Service Specifications and other information used as the basis for preparation of the Approved Budget. 8.11 SHARED SAVINGS; COST SAVINGS GAINSHARE INCENTIVE FEE. (a) Baseline Budget. The "Baseline Budget" is defined as the sum of the Interim Budgets for the: a) Total Warehousing Costs (excluding HBC/GM and occupancy); b) Total Occupancy Costs (excluding HBC/GM); c) Total Transportation Costs (excluding HBC/GM); d) Total HBC/GM Operating Costs (warehousing, transportation and occupancy); and e) Total Direct Overhead Costs. The Baseline Budget (as adjusted under sub-schedule (c) below) will be utilized in this Agreement for the calculation of the Cost Savings Gainshare Incentive Fee ("Gainshare"), if any, payable to C&S for actual cost savings realized by A&P against such Baseline Budget in the Ramp-Up Period or any Contract Year, as calculated in accordance with this Schedule 8.11. 42 The Baseline Budget is annexed to this Agreement as Exhibit 8.11(a). The Baseline Budget for the below categories are expressed either on a rate basis expressed as cost per case or as a percentage of sales (the "Cost Rate") or on the basis of absolute dollars ("Fixed Absolute Dollars"), as follows: a. Total Warehousing Costs (excluding HBC/GM and occupancy) - cost per case b. Total Occupancy Costs (excluding HBC/GM) - Fixed Absolute Dollars c. Total Transportation Costs (excluding HBC/GM) - cost per case d. Total HBC/GM Operating Costs - cost expressed as percentage of sales e. Total Direct Overhead Costs - Fixed Absolute Dollars The Cost Rate or Fixed Absolute Dollars measure shall be utilized in calculating the Shared Savings and the resulting Gainshare payable to C&S, if any, in the Ramp-Up period or any Contract Year in accordance with sub-schedule (d) below. (b) Non-C&S Managed Outbound Transportation. The outbound transportation expense to the Pathmark-bannered stores is not included in the Interim Budget, as that is an A&P-managed function currently performed by GHI and paid for directly by A&P. [*]. The parties agree further that all savings associated with the non-C&S- managed outbound transportation (the "Non-C&S Managed Outbound Transportation") shall be calculated as part of the Gainshare, including the savings that may later result from relocations, openings or closures of Facilities, except that the Gainshare shall not include fee or cost reductions that A&P negotiates directly with GHI, or that A&P negotiates on its own, and that do not include C&S's participation or cooperation. As more fully set forth in sub- schedule "d" below, the savings associated with the Non-C&S Managed Outbound Transportation shall be calculated as a separate component of the Shared Savings and added to the Gainshare calculation. Further, the base cost (non-fuel) for the Non-C&S-Managed Outbound Transportation shall be adjusted for CPI (as defined in Schedule 6.4 above). Fuel will be adjusted as set forth in sub-schedule "c", below. Attached as Exhibit 8.11(b) are the base costs of the Non- C&S Managed Outbound Transportation which shall operate as the baseline for the calculation of this component of the Shared Savings. The Costs outlined on Exhibit 8.11(b) are subject to further due diligence and confirmation by C&S and will be adjusted if necessary pursuant to sub-schedule "c" below. C&S shall further have the right to audit the actual costs related to the Non-C&S Managed Outbound Transportation for the purpose of the Gainshare. (c) Adjustments to Baseline Budget. The Baseline Budget will be adjusted annually as follows ("Adjusted Baseline Budget"): - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 43 (i) All costs (other than fuel) comprising the Baseline Budget will be adjusted annually in the following manner: Total Warehousing Costs - adjusted for CPI (as defined in Schedule 6.4, above) Total Occupancy Costs - adjusted for CPI (as defined in Schedule 6.4 above) Total Transportation Costs - adjusted for CPI (as defined in Schedule 6.4, above) Total Direct Overhead Costs - adjusted for CPI (as defined in Schedule 6.4, above) Fuel will be adjusted in the Baseline Budget annually consistent with Schedule 8.4.2 above to accurately reflect the actual current cost of fuel. Total HBC/GM Operating Costs will be adjusted only for fuel. (ii) If there is any material change in A&P's service requirements that increases the cost of providing services to A&P (including, by way of example only and not limited to, C&S's assumption of the Edison GMDC operation), the parties will meet and in good faith negotiate a revision to the savings calculation and, if necessary, a revision to the Baseline Budget to better reflect the performance of C&S against such Baseline Budget. (iii) For any fifty-three (53) week Contract Year, the Baseline Budget will be adjusted for the additional Costs arising from an additional week of operation. (iv) If there is case or unit volume deviation of more than [*] from the volume reflected in the Baseline Budget, up or down, the Parties agree that they will examine the fixed and variable cost components within the Baseline Budget and make any necessary adjustments to the Baseline Budget to allow an appropriate comparison of the costs incurred in the applicable Contract Year to the costs set forth in the Baseline Budget. (v) If there is any other matter or development that prevents a legitimate and meaningful comparison of the Baseline Budget to the Actual Costs, then the parties shall meet and in good faith adjust the Baseline Budget to permit such a meaningful comparison. - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 44 The Cost Rates or Fixed Absolute Dollars for the Baseline Budget shall be re-calculated following any adjustment to the Baseline Budget in accordance with this sub-schedule (c). (d) Calculation of Shared Savings and Cost Savings Gainshare Incentive Fee. In the event that the Actual Costs paid by A&P for the Ramp-Up Period or any Contract Year are lower than the Adjusted Baseline Budget, as calculated in accordance with sub-schedules 8.11(d)(i)- (vi) below, thereby resulting in cost savings as against such Adjusted Baseline Budget, then the favorable difference between the Actual Costs paid by A&P and the Adjusted Baseline Budget (the "Shared Savings") shall be allocated between A&P and C&S on [*] basis. (i) Total Warehousing Cost savings (non HBC/GM) shall be calculated by multiplying: A) the difference between the Cost Rate for Total Warehousing Costs under the Adjusted Baseline Budget and the Cost Rate for the actual Total Warehousing Cost paid by A&P for the Contract Year for which the Gainshare is being determined; and B) the number of cases for the Contract Year for which the Gainshare is being determined. (ii) Total Occupancy Cost savings shall be calculated by taking the difference, in Fixed Absolute Dollars, between the Total Occupancy Cost under the Adjusted Baseline Budget and the actual Total Occupancy Costs paid by A&P for the Contract Year for which the Gainshare is being determined (iii) Total Transportation Cost savings (non HBC/GM) shall be calculated by multiplying: A) the difference between the Cost Rate for the Total Transportation Cost under the Adjusted Baseline Budget and the Cost Rate for the actual Total Transportation Cost paid by A&P for the Contract Year for which the Gainshare is being determined; and B) the number of cases for the Contract Year for which the Gainshare is being determined. (iv) Total HBC/GM Operating Cost savings shall be calculated by multiplying: A) the difference between the Cost Rate for the Total HBC/GM Operating Cost under the Adjusted Baseline Budget and the Cost Rate for the actual Total HBC/GM Operating Cost paid by A&P for the Contract Year for which the Gainshare is being determined; and B) the total HBC/GM sales for the Contract Year for which the Gainshare is being determined. - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 45 (v) Direct Overhead Cost savings shall be calculated by taking the difference, in Fixed Absolute Dollars, between the Total Direct Overhead Cost under the Adjusted Baseline Budget and the actual Total Direct Overhead Cost paid by A&P for the Contract Year for which the Gainshare is being determined. (vi) The Non-C&S-Managed Outbound Transportation savings shall be calculated by multiplying A) the difference, on a cost-per-case basis, the costs that existed as of the Effective Date, as adjusted per sub- schedule 8.11(b) above, with the cost per case for the Contract Year for which the Gainshare is being determined; and B) the number of cases applicable to the Non-C&S-Managed Outbound Transportation for the Contract Year for which the Gainshare is being determined. Savings that do not qualify for the Gainshare as set forth in sub-schedule 8.11(b) hereof shall not be included in the calculation of savings under this sub-schedule 8.11(d)(vi). The Shared Savings for the Ramp-Up Period or any Contract Year shall be determined by adding (i) through (vi) above. An illustrative example of the calculation of the Shared Savings has been annexed hereto as Exhibit 8.11(d). (e) Payment of Cost Savings Gainshare Incentive Fee. (i) C&S and A&P shall reconcile the Gainshare in connection with the year-end reconciliation (as set forth in Schedule 8.5.3 hereof). To the extent any portion of the Cost Savings Gainshare Incentive Fee is disputed, A&P shall nonetheless pay to C&S the undisputed portion of such Fee on the next Weekly Statement and the parties shall resolve any disputed portion in accordance with the terms and conditions as set forth in Schedule 12 hereof; (ii) Payment of the Cost Savings Gainshare Incentive Fee shall be made to C&S in accordance with the terms and conditions set forth in this Schedule 8.11 and Schedule 9 hereof. 46 SCHEDULE 9 REMUNERATION AND PAYMENT OF SERVICES FEES AND OPERATING COSTS ------------------------------------------------------------- 9.1 PAYMENT OF COSTS AND SERVICES FEES. ---------------------------------- (a) Weekly Statements. Commencing on the Effective Date and on each Sunday thereafter during the Term of this Agreement, C&S will electronically transmit to A&P a statement (the "Weekly Estimate") setting forth (a) the estimated amounts payable to C&S for the [*] of A&P's purchases of Merchandise and (b) the Costs and Services Fees for the forthcoming Contract Week, as set forth in the Approved Budget (or Flex Budget, as the case may be) (the "Estimated Weekly Payment Amount"). In addition, each Sunday during the Term, C&S will electronically transmit to A&P files (such files shall be referred to collectively as the "Weekly Statement") setting forth all amounts actually due to C&S (including the [*] of A&P's purchases of Merchandise, Services Fees, and Costs) for the immediately preceding Contract Week (the "Weekly Actual Amount"). The Weekly Statement will include a shipment file with all Merchandise charged to the A&P Stores at the [*]; a gross profit file indicating the [*]; and an Expense/Charge File with all Costs and the Services Fees allocated to such week as set forth on the Approved Budget or Flex Budget, as applicable. With respect to the Cost Savings Gainshare Incentive Fee, for the First Contract Year only, such amounts will be paid to C&S in connection with the year- end reconciliation related to any Contract Year. Thereafter, the Cost Savings Gainshare Incentive Fee will be budgeted in the Approved Budget (or the Flex Budget, if applicable) for each succeeding Contract Year, based on the amounts realized in the immediately preceding Contract Year and trued up in connection with the year-end reconciliations. Each week, the Weekly Statement will reflect, and A&P will pay in accordance with Schedule 9.1(b) below, [*] of the budgeted amount of the Cost Savings Gainshare Incentive Fee budgeted for the preceding Contract Week. (b) Payment. [*] - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 47 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. If at any time A&P's S&P corporate credit rating is B+ or above, then C&S will adjust A&P's payment terms for a Friday payment of such Contract Week's Estimated Weekly Payment Amount with a true-up payment the following Wednesday. (c) Miscellaneous Billing and Payment Matters. Time is of the essence. If any payment under Schedule 9.1 is in default, and A&P has failed to cure the default within seventy-two hours after receiving written notice from C&S, then 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 five (5) business days following notice from C&S, to terminate this Agreement in accordance with Schedule 11 hereof. If either of the Parties disputes any portion of the Weekly Statement, absent manifest error, such Party shall nonetheless pay the full amount of the statement by the payment due date, without any deductions or offsets; provided, such Party may avail itself of the dispute resolution provision set forth below and in Schedule 12 hereof with respect to such disputed amount. The Party disputing the payment shall give the other Party notice of any billing adjustments it believes should be made, and the Parties shall attempt to reach agreement on any adjustments within seven days. 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 seven days from the date notice is received. In the event an agreement cannot be reached on disputed adjustments within said seven days, the Parties will settle the dispute in accordance with the dispute resolution procedures for accounting disputes set forth in Schedule 12 hereof. 9.2 TAXES. All amounts payable by A&P under this Agreement shall be paid together with any applicable taxes and duties including any sales taxes and any other miscellaneous taxes related to the provision of Services hereunder (such as the New Jersey Litter Tax or the Delaware Gross Receipts Tax) which are assessed against C&S or its Affiliates, other than income taxes related to the collection of the Services Fees. 9.3 PAYMENTS FOR ASSUMPTION OF PERFORMANCE. If any provision of this Agreement requires C&S to make any payment to any third person or perform specific actions and C&S fails to make such payment or perform such actions within 5 days of notice thereof from A&P to C&S, and provided that C&S is not in dispute with such third person with respect to such obligation, A&P may elect (but in no event shall A&P be obligated) to make all or part of such required payment or perform all or part of such actions, in which event C&S shall immediately reimburse A&P for such payment or performance, provided that A&P shall have the right, as an alternative to such reimbursement, to set-off the amount of any such required payment made by A&P against any amount owed by A&P to C&S. In the event that A&P exercises such right of set-off, it shall provide C&S with a copy of supporting documentation including evidence of payment. 48 SCHEDULE 10 INDEMNIFICATION AND INSURANCE; FORCE MAJEURE -------------------------------------------- 10.1 INDEMNIFICATION. ---------------- (a) C&S. C&S shall defend, indemnify and hold harmless A&P and its Affiliates, and their respective employees, servants, agents, independent contractors, successors and assigns from any and all losses, damages, claims, liabilities, causes of action, costs and expenses, including but not limited to reasonable legal fees and costs of settlement (collectively, "Losses") arising out of or related to any third party claim in connection with or resulting from (i) C&S's acts, omissions or negligence in its performance of the Services or its other obligations under this Agreement; (ii) C&S's failure to comply with any applicable Laws related to its performance of the Services or its other obligations under this Agreement; or (iii) the acts, omissions or negligence of any third party hired by C&S or its Affiliates in connection with this Agreement; provided, however, this indemnification and hold harmless with respect to sub-schedules (i)-(iii) shall not apply to the extent of any claims arising out of or resulting from the negligence or willful misconduct of A&P, its Affiliates or their respective employees, representatives or agents. 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. Notwithstanding anything to the contrary set forth herein, nothing in this Schedule 10.1(a) shall be interpreted to excuse A&P from its obligation to reimburse C&S for Costs as set forth in Schedule 8. (b) A&P. A&P shall defend, indemnify and hold harmless C&S and its Affiliates, and their respective employees, servants, agents, successors and assigns from any and all Losses arising out of or related to any third party claim in connection with or resulting from (i) A&P's acts, omissions or negligence related to this Agreement; (ii) A&P's failure to comply with any applicable Laws related to Merchandise procured, handled, packaged, used, possessed, transported or stored by A&P; or (iii) acts, omissions or negligence of any Affiliate of A&P or any third party hired by A&P or its Affiliates in connection with this Agreement including, but not limited to, GHI; provided, however, this indemnification and hold harmless with respect to sub-schedules (i)-(iii) shall not apply to the extent of any claims arising out of or resulting from the negligence or willful misconduct of C&S, its Affiliates or their respective employees, representatives or agents. 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. (c) Product Liability - Infringement. The Parties hereto agree that each shall use commercially reasonable efforts to seek indemnity from the manufacturer of any Merchandise with respect to any and all Losses arising out of or relating to any third party claim in connection with or resulting from (i) actual or alleged product 49 liability or the handling, possession, storage, use or any other dealing by any person of any Merchandise or (ii) any actual or alleged infringement of any trademark, patent, copyright or other intellectual property right. To the extent C&S has exhausted its efforts to seek indemnity from the manufacturer as set forth in this Schedule 10(c), but was unable to secure such indemnity, A&P shall indemnify C&S with respect to Losses to the extent (a) such Losses are related to private label or A&P unique items and (b) such Losses do not arise from or are not related to the negligence or willful misconduct of C&S. To the extent A&P has exhausted its efforts to seek indemnity from the manufacturer as set forth in this Schedule 10(c), but was unable to secure such indemnity, C&S shall indemnify A&P with respect to any Losses arising out of or relating to any third party product liability claim related to C&S's handling, possession, storage or use of Merchandise, to the extent such claim does not relate to any actual or alleged negligence or willful misconduct of A&P. Notwithstanding anything to the contrary set forth herein, this paragraph shall not be deemed to prohibit or restrict either Party in any way from seeking indemnification from the other Party under this Schedule 10. 10.2 INSURANCE BY C&S. (a) Insurance Policies. During the Term of this Agreement, C&S shall carry and maintain the following policies of insurance issued by recognized, reputable insurers reasonably acceptable to A&P, in forms satisfactory to A&P acting reasonably, and naming A&P as an additional insured on all policies except the Workers Compensation and Disability Benefits policies of insurance: (i) All Risks of physical damage property insurance for the Facilities and Fixed Assets including Boiler & Machinery coverage, all on a full replacement cost basis, (ii) All Risks of physical damage property insurance (including coverage against acts of terrorism and coverage for goods in transit) on all inventories of Merchandise on a full replacement cost basis. (iii) Commercial General Liability coverage with a limit of not less than [*] per occurrence for bodily injury, personal injury and property damage. Such policy shall include blanket contractual liability coverage and products/completed operations liability coverage. Products/completed operations liability coverage shall remain in effect for not less than two (2) years after expiration or earlier termination of this Agreement. - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 50 (iv) Workers Compensation and Disability Benefits coverage as required by statute and Employers Liability coverage in a minimum amount of [*] per accident/disease. (v) Automobile Liability Insurance coverage with a limit of not less than [*] per occurrence for bodily injury, personal injury and property damage. (b) Primary Coverage. The policies set forth in this Schedule 10.2 shall be primary with respect to the acts or omissions of C&S. (c) Subrogation. C&S agrees to waive all rights of subrogation against A&P. (d) Proof of Insurance. Not later than ten (10) days prior to the Effective Date, C&S shall provide to A&P certificates evidencing the insurance coverages required of C&S under this Schedule 10.2, and such certificates shall state that all policies of insurance evidenced therein may not be terminated, cancelled or modified except upon no less than thirty (30) days prior written notice to A&P. In addition, C&S shall deliver renewal certificates to A&P promptly upon receipt by C&S, and C&S will provide evidence that such coverage did not lapse. 10.3 INSURANCE BY A&P. (a) Insurance Policies. During the Term of this Agreement A&P shall carry and maintain the following, naming C&S as an additional insured with respect to "i" below, policies of insurance issued by recognized, reputable insurers reasonably acceptable to C&S, in forms satisfactory to C&S acting reasonably: (i) Commercial General Liability coverage with a limit of not less than [*] per occurrence for bodily injury, personal injury and property damage. Such policy shall include blanket contractual liability coverage and products/completed operations liability coverage. Products/completed operations liability coverage shall remain in effect for not less than two (2) years after expiration or earlier termination of this Agreement. (ii) Workers Compensation and Disability Benefits coverage as required by statute and Employers Liability coverage in a minimum amount of [*] per accident/disease. (b) Primary Coverage. The policies set forth in this Schedule 10.3 shall be primary with respect to the acts or omissions of A&P. (c) Subrogation. A&P agrees to waive all rights of subrogation against C&S. - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 51 (d) Proof of Insurance. Not later than ten (10) days prior to the Effective Date, A&P shall provide to C&S certificates evidencing the insurance coverages required of A&P under this Schedule 10.3 and such certificates shall state that all policies of insurance evidenced therein may not be terminated or cancelled except upon no less than thirty (30) days prior written notice to C&S. In addition, A&P shall deliver renewal certificates to C&S promptly upon receipt by A&P, and A&P will provide evidence that such coverage did not lapse. 10.4 SELF-INSURANCE. Notwithstanding anything to the contrary contained herein, if any Party required to carry insurance hereunder has a net worth in excess of $100.0 Million ($100,000,000) Dollars, then such insurance may be carried whole or in part under a program of self-insurance. 10.5 FORCE MAJEURE. (a) If either Party is rendered unable at any time, wholly or in part, to perform or comply with any of its obligations under this Agreement, other than obligations regarding the payment of money, by reason of act of God, force of nature, fire, or other casualty, eminent domain, war-like activity, utility failure, insurrection, or civil commotion, shortage of raw materials or supplies, any law, regulation or order by any governmental body or authority of competent jurisdiction, or any other cause beyond its reasonable control, or beyond the control of any person directly or indirectly engaged by it (any such event being referred to as a "Force Majeure"), the obligations of such Party shall be suspended for the duration of the Force Majeure, but only to the extent such event of Force Majeure impairs the Party's ability to perform its obligations under this Agreement. (b) As soon as the Party whose performance is affected by the Force Majeure (the "Affected Party") becomes aware that an event of Force Majeure has occurred or is likely to occur, such Affected Party will notify the other Party. Upon receipt of such notice by the other Party, representatives of the Parties shall meet to establish plans and procedures to overcome or mitigate the effects of the Force Majeure and the Affected Party shall use all reasonable efforts to minimize any adverse effects on the other Party. A&P shall pay all reasonable costs and expenses incurred by C&S in overcoming or mitigating the effects of the Force Majeure and shall continue to pay to C&S all Costs and Services Fees otherwise payable under this Agreement. (c) The foregoing notwithstanding, if the Force Majeure causes C&S to be unable to render substantial performance of its obligations under this Agreement, which inability causes substantial damage to A&P and A&P can either render such performance itself or obtain such performance from a third party, then A&P may perform or engage third parties to perform the Services until C&S is able to resume the performance of the Services. 10.6 DISASTER AND RECOVERY PLANS. Each of the Parties shall maintain a disaster and recovery plan that is specific to the performance of their respective obligations under this 52 Agreement and to the information systems maintained by the respective Parties in connection with this Agreement. Each Party shall have the right to audit, test and review the other Party's disaster and recovery plan, and may conduct on-site interviews with relevant officers and employees. 53 SCHEDULE 11 TERM AND TERMINATION -------------------- 11.1 TERM. This Agreement will commence on March 30, 2008 (the "Effective Date"), and shall remain in effect through September 29, 2018, unless earlier terminated in accordance with this Schedule 11. The Parties shall meet and in good faith discuss an extension of the Term if C&S makes material capital expenditures exclusively to service A&P during the Term. However, under no circumstances shall A&P be deemed to be under any obligation whatsoever to agree to any extension of this Agreement for any reason. Unless the Parties otherwise agree in writing, the Parties shall cooperate in good faith to ensure that upon the expiration of this Agreement, the Services, Other Services and inventory of Merchandise held on A&P's behalf at the Facilities is transitioned and transferred to A&P or A&P's designee in accordance with Schedule 11.7. 11.2 C&S EVENTS OF DEFAULT. Subject to any applicable cure period set forth in this Schedule 11.2 or elsewhere in this Agreement, each of the following is a "C&S Event of Default" and in case of occurrence of one or more of the following, C&S will be in default hereunder: (a) C&S fails to make any material, undisputed payment required under this Agreement, and such non-payment remains uncured for a period of ten (10) days after written notice thereof from A&P. (b) C&S fails to perform any of its material obligations as and when required under this Agreement and such nonperformance continues uncured for thirty (30) days after written notice thereof from A&P. Notwithstanding the foregoing, if the non-performance under this Schedule 11.2 represents an immediate and emergent threat to the health, safety or welfare of the public, then such nonperformance shall be deemed to constitute a "C&S Event of Default" if it continues uncured for ten (10) days. (c) Any of C&S's material representations or warranties in this Agreement is breached or not true in any respect, and such representation or warranty remains breached or untrue for thirty (30) days after written notice thereof from A&P and such continuing breach materially adversely affects C&S's ability to perform its obligations hereunder. Notwithstanding the foregoing, if the breach of such representation or warranty under this Schedule 11.2 presents an immediate and emergent threat to the health, safety or welfare of the public, then such breach of representation or warranty shall be deemed to constitute a "C&S Event of Default" if it continues uncured for ten (10) days. (d) C&S (i) becomes insolvent; (ii) commits an act of bankruptcy; (iii) becomes subject to any voluntary or involuntary bankruptcy proceedings; (iv) makes an assignment for the benefit of creditors; (v) appoints or submits to the appointment of a receiver or a receiver manager for all or any of its assets; (vi) admits in 54 writing its inability to pay its debts as they become due; or (vii) enters into any type of voluntary or involuntary liquidation. (e) C&S is in default with respect to any financial covenant of C&S's most senior tranche of indebtedness and such default remains uncured or un-waived beyond the applicable cure period or any extension thereof. (With respect to this sub-schedule "e", C&S agrees to provide to A&P within 120 days of the completion of its fiscal year a copy of the annual certification of covenant compliance that C&S's auditors provide to C&S lenders for the just-completed fiscal year). (f) C&S is in material breach of Schedule 7.8(b), 7.11(a) or 7.11(b). (g) A majority of the assets or voting stock of C&S is acquired by a competitor of A&P. (h) C&S has breached any obligation under any provision of this Agreement other than this Schedule 11.2 which gives rise to A&P's ability to terminate this Agreement as specifically set forth in such provision, subject to any applicable cure period set forth therein. 11.3 REMEDIES UPON C&S EVENT OF DEFAULT. Upon the occurrence of any C&S Event of Default and subject to any applicable cure periods: (a) A&P shall have all remedies available to it under this Agreement, at law and/or in equity in each case subject to the terms of this Agreement. (b) A&P shall have, at its discretion, the right to terminate this Agreement upon written notice to C&S, such termination to occur at the termination date specified in such notice. 11.4 A&P EVENTS OF DEFAULT. Subject to any applicable cure period set forth in this Schedule 11.4 or elsewhere in this Agreement, each of the following is an "A&P Event of Default" and in the occurrence of one or more of the following, A&P will be in default hereunder: (a) A&P fails to make any material, undisputed payment required under this Agreement, and such non-payment remains uncured for a period of ten (10) days after written notice thereof from C&S. (b) A&P fails to perform any of its other material obligations as and when required under this Agreement and such non-performance continues uncured for 30 days after written notice thereof from C&S. Notwithstanding the foregoing, if the non-performance under this Schedule 11.4 represents an immediate and emergent threat to the health, safety or welfare of the public, then such nonperformance shall be deemed to constitute an "A&P Event of Default" if it continues uncured for ten (10) days. 55 (c) Any of A&P's material representations or warranties in this Agreement is breached or not true in any respect, and such representation or warranty remains breached or untrue for thirty (30) days after written notice thereof from C&S and such continuing breach materially adversely affects A&P's ability to perform its obligations hereunder. Notwithstanding the foregoing, if the nonperformance under this Schedule 11.4 represents an immediate and emergent threat to the health, safety or welfare of the public, then such nonperformance shall be deemed to constitute an "A&P Event of Default" if it continues uncured for ten (10) days. (d) A&P (i) becomes insolvent; (ii) commits an act of bankruptcy; (iii) becomes subject to any voluntary or involuntary bankruptcy proceedings; (iv) makes an assignment for the benefit of creditors; (v) appoints or submits to the appointment of a receiver or a receiver manager for all or any of its assets; (vi) admits in writing its inability to pay its debts as they become due; or (vii) enters into any type of voluntary or involuntary liquidation. (e) A&P has breached any obligation under any provision of this Agreement other than this Schedule 11.4 which gives rise to C&S's ability to terminate this Agreement as specifically set forth in such provision, subject to any applicable cure period set forth therein. 11.5 REMEDIES UPON A&P EVENT OF DEFAULT. Upon the occurrence of any A&P Event of Default, and subject to any applicable cure periods: (a) C&S shall have all remedies available to it under this Agreement, at law and/or in equity in each case subject to the terms of this Agreement. (b) C&S shall have, at its discretion, the right to terminate this Agreement upon written notice to A&P, such termination to occur at the termination date specified in such notice. 11.6 FORCE MAJEURE. Either party shall have the right to terminate this Agreement without penalty if due to a Force Majeure event which has occurred and is continuing, C&S is unable to perform any material obligation, as and when required, under this Agreement for more than twenty-six (26) consecutive weeks. 11.7 PROCEDURES ON TERMINATION. (a) Notwithstanding termination of this Agreement by reason of a C&S Event of Default or an A&P Event of Default or as otherwise stipulated herein, C&S shall remain obligated to fully perform, to the extent permitted by Law and for a period of up to (but no more than) one hundred and eighty (180) days, the Services and the Other Services pursuant to this Agreement (including without limitation, making whatever arrangements are necessary to continue such Services without interruption or diminution in the Service Specifications), and C&S shall continue to be compensated for such Services and Other Services in accordance with this Agreement, until such time (the "Effective Date of Termination") as may be reasonably required to transition or transfer to A&P or its designee responsibility 56 for performing all Services and Other Services, and all inventory of Merchandise ordered on behalf of A&P and held at the Facilities. The Parties shall cooperate to ensure that the Services and Other Services, and the inventory described above, are transferred or transitioned to A&P or A&P's designee in an orderly and professional manner. A&P's payment obligations for Services under this Agreement shall not be subject to any increase as a direct or indirect result of any termination of this Agreement. This Schedule 11.7(a) shall be void in the event that the termination by C&S of this Agreement was due to nonpayment by A&P and such nonpayment is not immediately cured. (b) If this Agreement terminates by reason of a C&S Event of Default, C&S agrees to: (i) pay or rebate to A&P all sums due to A&P under the Agreement through the effective date of termination and for such further period during which Services or Other Services are rendered in accordance with sub- schedule (a) above; and (ii) pay and/or reimburse A&P for all proven direct damages made against or suffered or incurred by A&P arising from or in any way related to the termination of this Agreement. (c) If this Agreement terminates by reason of an A&P Event of Default, A&P agrees to: (i) pay C&S all sums due to C&S under the Agreement through the effective date of termination and for such further period during which Services or Other Services are rendered in accordance with sub- schedule (a) above; (ii) additionally pay and/or reimburse C&S for all proven direct damages made against or suffered or incurred by C&S arising from or in any way related to the termination of this Agreement and the Services hereunder including, but not limited to, early termination fees and equipment pay-out amounts related to any early termination of a lease or licensing agreement related to the Facilities or any Fixed Assets. (d) IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL, PUNITIVE OR EXEMPLARY DAMAGES, INCLUDING LOST SALES OR LOST PROFITS; PROVIDED THAT THIS LIMITATION OF LIABILITY SHALL NOT APPLY IN INSTANCES OF WILLFUL BREACH OR MISCONDUCT OR TERMINATION PURSUANT TO SCHEDULE 7.12(e). 11.8 FACILITIES AND FIXED ASSETS. Notwithstanding anything contained in this Agreement to the contrary, but without limiting A&P's obligations in Schedule 11.7(c), in no event shall A&P have any responsibility or obligation to take title to any of the Facilities or Fixed 57 Assets, or to assume any Real Estate Obligations relating to the Facilities, or to assume any leases, licenses or other agreements relating to the Fixed Assets or otherwise, upon the expiration or earlier termination of this Agreement (regardless, in the case of an early termination, of the reason for such early termination). 58 SCHEDULE 12 MISCELLANEOUS ------------- 12.1 NEGOTIATION. If a dispute arises under this Agreement which cannot be resolved by the personnel directly involved, either Party may invoke the dispute resolution procedure set forth below by giving written notice to the other Party of the dispute and designating its chief legal officer as its representative in negotiations relating to the dispute. The chief legal officers of both Parties, acting in good faith and using reasonable efforts, shall work toward a reasonable and equitable resolution of the dispute. In the event the chief legal officers are unable to reach resolution, the Parties will designate their respective Chief Executive Officers to negotiate resolution of the dispute. 12.2 APPOINTMENT OF MEDIATOR - NON ACCOUNTING DISPUTES. If the respective designated officers of C&S and A&P are unable to resolve the dispute within ten (10) business days from the receipt of written notice of the dispute, the Parties shall agree on the appointment of a mediator to assist in resolving the matter. A mediator shall be appointed by the American Arbitration Association upon the request of either Party if the Parties cannot agree in the selection of such person within five (5) business days of a request to agree. The person so appointed shall, within one month of appointment, render his decision on the matter. Such decision shall not be binding on the Parties. The Parties shall cooperate with any person appointed pursuant to this Schedule 12.2 and shall provide him with such information and other assistance as he shall require and his costs shall be paid by such Party as he shall determine. 12.3 RESOLUTION OF ACCOUNTING DISPUTES. Any accounting disputes, including disputes relating to specific amounts and numerical assumptions to be used in the preparation or modification of budgets, shall be resolved in the following manner: If the Parties exhaust all good faith efforts to reach agreement within 10 days, the matter shall be referred to each Parties' independent accountants and such independent accountants shall agree upon the appointment of a third independent accountant to resolve the matter. The independent accountant so appointed shall, within 20 days of appointment, render a decision on the matter and such decision shall be final and binding on the Parties. 12.4 RESOLUTION OF ALL OTHER DISPUTES. Failing resolution by the Parties through negotiation or mediation, 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 before a single arbitrator in New York City pursuant to the applicable rules of the American Arbitration Association, with the sole exception for a breach of confidentiality requiring injunctive relief. The single arbitrator shall be selected within 20 days after the commencement of the arbitration proceeding. The Parties agree that the arbitrator's award shall be duly made in writing within thirty (30) days after the hearings in the arbitration proceedings are closed, and that such award shall be binding and conclusive on all of the Parties to this Agreement. The arbitrator shall have the right and authority to assess the cost of the arbitration proceedings and to determine how its decision as to each issue or matter in dispute may be implemented or 59 enforced. 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. Notwithstanding anything to the contrary contained in this Schedule 12, neither Party shall be prohibited from opting out of the arbitration process set forth hereunder and litigating in court any claim arising under Schedule 11 of this Agreement; provided, however, each of the Parties hereby expressly waives a right to a jury trial with respect to any such claim or cause of action. 12.5 AUDIT AND ACCESS RIGHTS. (a) Books and Records. C&S shall maintain complete and detailed records, data, information and statements in auditable form and quality in respect of all activities related to the provision of Services on behalf of A&P and to all of C&S's other obligations under this Agreement, as information fully integrated into the overall financial statements maintained by C&S in the ordinary course of business. C&S shall maintain all such records consistent with GAAP. Without limiting the generality of the foregoing, C&S shall maintain and provide to A&P such other separate records, information and reports in such forms and for such periods of time as are set forth in the Service Specifications. C&S shall prepare and maintain for a period of not less than five (5) years following the end of each of its fiscal years, adequate books and records with respect to: (i) C&S's performance of Services, Other Services and all of its other obligations under this Agreement; (ii) all amounts charged or credited by C&S to A&P hereunder; (iii) all Costs arising under this Agreement; (iv) C&S's compliance with Laws governing its performance hereunder; [*] and (vi) such other records, data or information as may be set forth under the Service Specifications or as may be otherwise required under this Agreement or by A&P from time to time (collectively, the "Books and Records"). The Books and Records shall also be deemed to include any other books, records, data or other materials that relate to the activities described in subsections (i) through (vi) above and which may be maintained by C&S or its employees, representatives or third-party vendors. The Books and Records shall be maintained consistent with GAAP, consistently applied, and shall be in a form suitable for audit, review and copying and shall be made available as reports produced from C&S's overall financial statements maintained by C&S for its entire operations in the ordinary course of business. All Books and Records shall be maintained in accordance with C&S's document retention policy. A&P will be provided access to, and the right to audit, any information A&P determines it needs in order to verify any of the items listed in (i)-(vi) above, provided however, A&P will not be provided access to data or information relating to other customers of C&S or information unrelated to the - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 60 performance of the Services, except as may be necessary to verify cost allocations at the Shared Facility. (b) Financial Statements. Each Party shall promptly deliver to the other audited financial statements for the year-end period, which have been certified to by a registered public accounting firm, after such financial statements have been issued by such public accounting firm. (c) Access to Books and Records. C&S shall permit A&P and its officers, directors, representatives, counsel, advisors and other agents (collectively, "Agents"), upon reasonable notice and during normal business hours, to inspect, have access to the Facilities and to inspect, have access and audit all of the Books and Records for the purpose of auditing: a) the performance of the Services and the Other Services; [*] c) preparation and maintenance of records related to such Services; and d) any other matter relating to C&S's performance or obligations under this Agreement. The right of access under this Schedule 12.5(c) shall include the right to discuss such documentation with C&S's employees, representatives and outside vendors having knowledge of their contents, and C&S shall instruct all such employees, representatives or third-party vendors to fully cooperate with any request for information made by A&P to such employee, representative or third-party vendor. (d) Frequency and Scope. During the Term of this Agreement, and for a period of one (1) year thereafter, A&P or A&P's duly authorized auditor or agent shall have the right at any time to audit and review the Books and Records. The scope of the audit shall encompass no more than the prior 24-month period, except in the event that the auditor determines reasonably that there is a specifically identified irregularity that requires further inspection, in which case the audit shall be permitted to look back an additional three (3) years but solely with respect to the identified irregularity. All Books and Records are subject to audit and review by A&P in accordance with this Agreement including the confidentiality provisions set forth in Schedule 12.23 below. Notwithstanding anything to the contrary set forth herein, failure by A&P to challenge the amount of any [*], Cost, or the Services Fee within the audit periods described herein shall be deemed to be A&P's agreement and consent to such billed amounts, and A&P shall thereafter waive any claim or right to adjust such amounts. (e) Deficiencies. If an audit or review reveals that any amounts to be paid or charged to A&P have been overstated or understated, then C&S shall issue a charge or credit, as applicable, to correct such overstatement or understatement. If an audit or review reveals that amounts paid or charged to A&P were overstated or understated by ten percent (10%) or more during the period audited, the Party required to pay such amount to the other Party shall reimburse the other Party for - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 61 all costs and expenses incurred in connection with the audit or review. The foregoing remedies shall be in addition to any other remedies available to A&P and C&S at law or in equity. (f) Confidentiality. Any and all information provided to A&P pursuant to this Schedule 12.5 including, but not limited to any audited financial statements and other financial information, will be subject to the Confidential Information provisions set forth in Schedule 12.23 below. 12.6 HEADINGS. The division of this Agreement into Schedules and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Agreement. Unless inconsistent with the context, references in this Agreement to Schedules are to Schedules of this Agreement. 12.7 EXTENDED MEANINGS. In this Agreement words importing the singular number only include the plural and vice versa, words importing the masculine gender include the feminine and neuter genders and vice versa and words importing persons include individuals, partnerships, associations, trusts, unincorporated organizations and corporations. 12.8 ACCOUNTING PRINCIPLES. Wherever in this Agreement reference is made to a calculation to be made in accordance with GAAP (generally accepted accounting principles consistently applied), such reference shall be to generally accepted accounting principles of the United States of America from time to time recommended by the Financial Accounting Standards Board (FASB), or any successor, applicable as at the date on which such calculation is made or required to be made. 12.9 CURRENCY. All references to dollar amounts in this Agreement are to lawful money of The United States of America. 12.10 PROPER LAW OF CONTRACT; CONSENT TO JURISDICTION. This Agreement shall be governed by the laws of the State of New York and the laws of The United States of America as applicable in such State. 12.11 LEGAL RELATIONSHIP. The legal relationship of C&S and A&P to each other shall be that of independent contractors, and neither Party shall be the agent or legal representative of the other for any purpose. Neither Party shall have the right or authority to bind or obligate the other to any third party for any purpose whatsoever. 12.12 NOTICES. Any demand, notice or other communication to be given in connection with this Agreement shall be in writing and shall be given by personal delivery, by overnight courier, by registered mail or by facsimile or electronic means of communication addressed to the recipient at the address set forth below or to such other address, individual or electronic communication number as may be designated by notice given by either Party to the other. Any demand, notice or other communication shall be conclusively deemed to have been given (i) on the day of actual delivery if given by personal delivery; (ii) on the next business day if given by overnight courier; (iii) on the third business day following deposit in the mail if given by registered mail; and (iv) on 62 the day of transmittal if given by facsimile or electronic communication during the normal business hours of the recipient and on the next following business day if not given during such hours on any day. If to C&S: C&S Wholesale Grocers, Inc. 7 Corporate Drive Keene, NH 03431 Attn: Richard B. Cohen, Chairman and Chief Executive Officer Phone: (603) 354-4601 Fax: (603) 354-4692 with a copy to: General Counsel Phone: (603) 354-5885 Fax: (603) 354-4694 If to A&P: The Great Atlantic & Pacific Tea Company, Inc. 2 Paragon Drive Montvale, NJ 07645 Attention: Eric Claus, President and Chief Executive Officer Phone: (201) 571-8770 Fax: (201) 571-8715 with a copy to: Vice President - Legal Services Phone: (201) 571-8161 Fax: (201) 571-8106 12.13 FURTHER ASSURANCES. Each of C&S and A&P shall from time to time execute and deliver all such further documents and instruments and do all acts and things as the other Party may reasonably require to effectively carry out or better evidence or perfect the full intent and meaning of this Agreement. 12.14 BENEFIT OF THE AGREEMENT. This Agreement shall inure to the benefit of and be binding upon C&S, A&P and their respective assigns and successors, including any transferee of substantially all of the assets of either Party. 12.15 THIRD PARTY AGREEMENTS. Neither C&S nor A&P shall enter into any agreement with any Person that would have the effect of impairing any of the other Party's rights hereunder this Agreement or limiting either Party's ability to amend this Agreement in accordance with the terms hereof, without the prior written consent of the other Party hereto. 63 12.16 CONTINUED PROVISIONS. Notwithstanding any expiration or termination of this Agreement, (i) the indemnification obligation of both Parties as set forth in Schedule 10; (ii) the obligations of the both Parties upon termination of this Agreement as set forth in Schedule 11; (iii) the confidentiality and non-solicitation provisions set forth below; and (iv) any other provision which expressly or by its nature is intended to survive termination of this Agreement, shall continue in full force and effect. 12.17 GENERAL REPRESENTATIONS AND WARRANTIES BY A&P. A&P represents and warrants to C&S as follows: (a) A&P is a corporation duly incorporated and validly existing under the laws of its jurisdiction of incorporation and has all necessary corporate power, authority and capacity to enter into this Agreement and to carry out its obligations under this Agreement. The execution and delivery of this Agreement and the performance of A&P's obligations under this Agreement have been duly authorized by all necessary corporate action on the part of A&P. (b) A&P is not a party to, bound or affected by, or subject to, any indenture, mortgage, lease, agreement, collective bargaining agreement, obligation, instrument, charter or by-law provision, statute, regulation, order, judgment, decree, license, permit or law which would be violated, contravened or breached as a result of the execution and delivery of this Agreement, or the performance by A&P of any of its obligations under this Agreement. 12.18 GENERAL REPRESENTATIONS AND WARRANTIES BY C&S. C&S represents and warrants to A&P as follows: (a) C&S is a corporation duly incorporated and validly existing under the laws of its jurisdiction of incorporation and has all necessary corporate power, authority and capacity to enter into this Agreement and to carry out its obligations under this Agreement. The execution and delivery of this Agreement and the performance of C&S's obligations under this Agreement have been duly authorized by all necessary corporate action on the part of C&S. (b) C&S is not a party to, bound or affected by, or subject to, any indenture, mortgage, lease, agreement, collective agreement, obligation, instrument, charter or by-law provision, statute, regulation, order, judgment, decree, license, permit or law which would be violated, contravened or breached as a result of the execution and delivery of this Agreement, or the performance by C&S of any of its obligations under this Agreement. (c) C&S is not in breach of any Laws that could reasonably be expected to have a material, adverse effect on C&S's ability to perform the Services or perform its other obligations under this Agreement, including without limitation and to the extent applicable all Laws pertaining to human rights, labor or employment standards, labor relations and employment, protection of personal information, 64 occupational health and safety, workers' compensation and workplace safety insurance and environmental Laws. 12.19 ENTIRE AGREEMENT. This Agreement together with all schedules and exhibits hereto constitutes the entire agreement between the Parties with respect to its subject matter and cancels and supersedes any prior understandings and agreements between the Parties with respect to such subject matter. There are no representations, warranties, terms, conditions, undertakings or collateral agreements, express, implied or statutory, between the Parties other than as expressly set forth in this Agreement. 12.20 AMENDMENTS AND WAIVER. No modification of or amendment to this Agreement shall be valid or binding unless in writing and duly executed by both of the Parties and no waiver of any breach of any term or provision of this Agreement shall be effective or binding unless made in writing and signed by the Party purporting to give the same and, unless otherwise provided, shall be limited to the specific breach waived. 12.21 ASSIGNMENT. Except as provided below, this Agreement may not be assigned, either directly or by operation of law, by either Party without the written consent of the other Party, such consent not to be unreasonably withheld; provided, however, that in the event of any assignment the assignor shall continue to be bound by all obligations under this Agreement as if such assignment had not occurred and shall perform such obligations to the extent that the assignee fails to do so. This Agreement may be assigned by either Party without the consent of the other Party to an affiliate of the assignor, provided that the affiliate enters into a written agreement with the other Party to be bound by the provisions of this Agreement in all respects and to the same extent as the assignor is bound and provided that the assignor shall continue to be bound by all obligations under this Agreement as if such assignment had not occurred and shall perform such obligations to the extent that the affiliate fails to do so. Notwithstanding anything to the contrary, this Agreement shall be binding on any transferee of substantially all of the assets of either Party. 12.22 NON-SOLICITATION. During the Term of this Agreement and for a period of twelve (12) months following the expiration or termination of this Agreement for any reason whatsoever, A&P shall not, and shall not permit any of its Affiliates to, directly or indirectly, hire, solicit, induce or encourage any person who is a managerial employee or agent employed or engaged by C&S or any of its Affiliates within one year prior to such solicitation, to leave or otherwise cease being employed or engaged by C&S or any of its Affiliates (other than a person whose pay in lieu of notice, termination, and severance payments has been reimbursed pursuant to this Agreement). 12.23 CONFIDENTIALITY. Each Party shall not, during the Term of this Agreement or at any time thereafter, transmit Confidential Information of the other Party to any third person either in whole or in part. Each Party shall take all reasonable precautions to safeguard the Confidential Information of the other Party from unauthorized disclosure and, at a minimum, shall afford the Confidential Information of the other Party such precautions and safeguards as it affords to its own confidential information of a similar nature. A&P also agrees to the heightened confidentiality restrictions as set forth in Schedule 7.14(d). 65 "Confidential Information" for purposes of this Agreement shall mean all non-public, confidential or proprietary information of either Party and its clients and customers, including but not limited to information regarding costing, merchandising, procurement, inventory systems, technology, formulations, transportation, warehouse, administrative and other technical and economic data and information, received by the other Party in the course of the negotiation of, or performance of its obligations under, this Agreement. The above restrictions shall not apply to the extent that Confidential Information comes into the public domain through no fault of the other Party, is received by the other Party from a third party having a bona fide right to disclose such information, or disclosure is required by law. (a) PUBLIC NOTICES. Neither Party shall make any press release or public announcement regarding this Agreement or otherwise publicly disclose any of the terms of this Agreement without the prior written consent of the other Party, except where required to do so by Law or by the applicable regulations or policies of any Federal, State or other regulatory agency of competent jurisdiction or any stock exchange in circumstances but only after prior consultation with the other Party, and the disclosing Party shall use commercially reasonable best efforts to ensure that all Confidential Information and other information that is required to be disclosed in accordance with Laws will be accorded confidential treatment. (b) REQUIREMENT TO DISCLOSE. Wherever in this Agreement disclosure is permitted if "required by Law", (i) the term "Law" shall be deemed to include (A) any applicable statute, regulation or policy of The United States of America or other government, any State or local government or any agency or authority of any of them having jurisdiction over a Party or its business or any stock exchange or self-regulatory organization in the securities industry and (B) any order, demand or subpoena of any such government, agency, authority, exchange or organization or any court of competent jurisdiction; and (ii) such disclosure shall be permitted only if, as promptly as practicable after determining that disclosure is required or after receipt of any such order, demand or subpoena, the Party intending to make such disclosure shall notify the other Party of such requirement and the scope of the proposed disclosure and shall simultaneously deliver to the other Party a copy of such order, demand or subpoena or, if there is none, a written opinion of its counsel describing the legal basis upon which such disclosure is required. The Party intending to make such disclosure shall cooperate with all reasonable requests of the other Party for assistance in preventing or limiting such disclosure. 66 12.24 DEFINITIONS. "A&P" is a Maryland corporation with its principal offices located at 2 Paragon Drive in Montvale, New Jersey 07645. "A&P EVENT OF DEFAULT" has the meaning set forth in Schedule 11.4. "A&P OPERATED FACILITY(IES)" has the meaning set forth in Schedule 3.5(c). "A&P STORES" has the meaning set forth in Schedule 7.3. "A&P VOLUME" means any volume of Merchandise intended for use or resale at the A&P Stores or otherwise procured or purchased on A&P's behalf, at A&P's direction or with any other reference to A&P's account, business, operations or name. [*]. "ACCOUNTS RECEIVABLES DEDUCTIONS" has the meaning set forth in Schedule 5.3. "ACTUAL ALLOCATION AMOUNT" has the meaning set forth in Schedule 8.3(c)(i). [*] "ACTUAL COSTS" has the meaning set forth in Schedule 8.5.1. "ACTUAL PURCHASING SERVICE LEVEL" has the meaning set forth in Schedule 7.12(c). "AD OVERPULL" has the meaning set forth in Schedule 7.12(b). "ADDITIONAL SERVICES" has the meaning set forth in Schedule 2.2. "ADJUSTED BASELINE BUDGET" has the meaning set forth in Schedule 8.11(c). "ADMINISTRATIVE MANAGEMENT FEE" has the meaning set forth in Schedule 6.2(b). "AFFECTED PARTY" has the meaning set forth in Schedule 10.5(b). "AFFILIATE" means a corporation or business entity that, directly or indirectly, is controlled by, controls or is under common control, with respect to A&P or C&S, as applicable. "AGENTS" has the meaning set forth in Schedule 12.5(c). "AGGREGATE COST GROUPING" is a grouping of Cost items as depicted on Exhibit 1.4(a). "AGREEMENT" means this Warehousing and Distribution Services Agreement, including the Schedules and Exhibits to this Agreement, as it or they may be amended or supplemented from time to time, and the expressions "hereof", "herein", "hereto", - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 67 "hereunder" and similar expressions refer to this Agreement and not to any particular portion or section of this Agreement. "ALL RISK" means losses are covered with respect to all perils unless a peril is specifically excluded under the policy. [*] "APPROVED BUDGET" has the meaning set forth in Schedule 8.2. [*] "BASE COST OF FUEL" has the meaning set forth in Schedule 8.4.2. [*] "BASELINE ALLOCATION AMOUNT" has the meaning set forth in Schedule 8.3(c)(i). "BASELINE BUDGET" has the meaning set forth in Schedule 8.11(a). "BASE MANAGEMENT FEE" has the meaning set forth in Schedule 6.2(a). "BOOKS AND RECORDS" has the meaning set forth in Schedule 12.5(a). "C&S" is a Vermont corporation with its principal offices located at 7 Corporate Drive in Keene, New Hampshire 03431. "C&S EVENT OF DEFAULT" has the meaning set forth in Schedule 11.2. "CAPITAL EXPENDITURE" means an expense related to the acquisition (including any rent or lease payments), replacement, repair, maintenance or improvement of any Fixed Asset, Facility or real estate used in connection with the performance of the Services. "CAPITAL EXPENDITURES BUDGET" means that portion of any Approved Budget that reflects the Capital Expenditures and which comports with the form of Exhibit 1.4(e). [*] [*] "CENTER-STORE PRODUCTS" means grocery, spices, candy, dairy, frozen (mainline), frozen meat, packaged meat, frozen and processed meat, ice cream, ice, and HBC/GM, and supplies. - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 68 "CENTER-STORE PRODUCTS VOLUME" means any A&P Volume comprised of Center- Store Products. "CONFIDENTIAL INFORMATION" has the meaning set forth in Schedule 12.23. "CONSULTANT" has the meaning set forth in Schedule 1.3. "CONTRACT QUARTER" means C&S's four (4) fiscal quarters, which together comprise C&S's fiscal year. "CONTRACT WEEK" means any period of seven (7) consecutive calendar days commencing on a Sunday and concluding on a Saturday during any Contract Year. "CONTRACT YEAR" means C&S's fiscal year which is a 52-week period (or 53- week period every five to six years) that runs through the last Saturday in September. Each Contract Year is comprised of four (4) Contract Quarters. A schedule of Contract Years for the Term is set forth on Exhibit 1.5. The "Ramp-Up Period" shall be treated as a "stub period" and all amounts calculated on a Contract Year basis shall be prorated accordingly for the Ramp-Up Period. "COST RATE" has the meaning set forth in Schedule 8.11(a). "COSTS" has the meaning set forth in Schedule 8.3(a). "COST SAVINGS GAINSHARE INCENTIVE FEE" has the meaning set forth in Schedule 6.3(b). [*] "CPI" has the meaning set forth in Schedule 6.4. "CURRENCY" has the meaning set forth in Schedule 12.9. "DAILY PEAKING" means that the volume of product units within any product category in the Product Mix which C&S actually receives or ships in a day varies by more than [*] from the average number of product units received or shipped, as the case may be, in a Fiscal Accounting Period (based on the total number of product units received or shipped in the period divided by the number of business days within that period). "DEDICATED FACILITY(IES)" has the meaning set forth in Schedule 3.1(a). "DEPARTMENT" has the meaning set forth in Schedule 7.12(b). [*] - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 69 "DIRECT OVERHEAD COSTS" has the meaning set forth in Schedule 8.3(a)(viii). "DSD" means direct store delivery. "EFFECTIVE DATE" has the meaning set forth in Schedule 11.1. "EFFECTIVE DATE OF TERMINATION" has the meaning set forth in Schedule 11.7. "EMERGENCY EXPENDITURE" has the meaning set forth in Schedule 8.4.3. "ESTIMATED WEEKLY PAYMENT AMOUNT" has the meaning set forth in Schedule 9.1(a). "EXCESS COSTS" has the meaning set forth on Schedule 8.3(d). "FACILITIES" has the meaning set forth in Schedule 3.1. "FACILITY DECISION" has the meaning set forth in Schedule 3.5. "FACILITY DECISION COSTS" has the meaning set forth in Schedule 3.5. "FIRST CONTRACT YEAR" means the contract year commencing September 28, 2008 and ending September 26, 2009. "FISCAL ACCOUNTING PERIOD" means periods of four consecutive Contract Weeks beginning on the Effective Date. In a 53-week Contract Year, one Fiscal Accounting Period will be comprised five (5) consecutive Contract Weeks. Thirteen (13) Fiscal Accounting Periods comprise each Contract Year. "FIXED ABSOLUTE DOLLARS" has the meaning set forth in Schedule 8.11(a). "FIXED ASSETS" means the fixed assets or items of plant, machinery, equipment and leasehold improvements, together with any additional items of plant, machinery, equipment and leasehold improvements acquired by C&S in accordance with the terms of this Agreement and relating to the provision of Services. "FLEX BUDGET" has the meaning set forth in Schedule 8.4.1. "FLEX" or "FLEXING" shall mean the process of adjusting an Approved Budget in accordance with the terms and conditions set forth in Schedule 8.4 hereto. "FLORAL PRODUCTS" means non-food plants and flowers. "FORCE MAJEURE" has the meaning set forth in Schedule 10.5(a). "FRESH DISCOUNTS" has the meaning set forth in Schedule 7.11(c). 70 "FRESH PRODUCTS" shall include, but not be limited to, produce, fresh meat, fresh deli, dry bakery, frozen bakery, non-warehouse-delivered candy, fresh seafood, and frozen commodities (e.g., turkey, shrimp and crab), and shall exclude Floral Products and any Center-Store Products. "FRESH PRODUCTS VOLUME" means any A&P Volume comprised of Fresh Products. "GAAP" has the meaning set forth in Schedule 6.3(a). "GAINSHARE" has the meaning set forth in Schedule 8.11(a). "GHI" means Grocery Haulers Inc., a Delaware corporation. [*] [*] "INCENTIVE COMPENSATION FEES" has the meaning set forth in Schedule 6.3. "INCREMENTAL VOLUME FEE" has the meaning set forth in Schedule 6.3(a). "INCREMENTAL VOLUME FEE TRIGGER" has the meaning set forth in Schedule 6.3(a). "INITIAL APPROVED BUDGET" has the meaning set forth of Schedule 8.2 "Interim Budget" has the meaning set forth in Schedule 1.4. "INTERIM PERIOD" has the meaning set forth in Schedule 7.14(e). "LAWS" has the meaning set forth in Schedule 12.22(b)(i). "LEASE" means the leases for the Facilities set forth on Exhibit 3.4. "LEFTOVER AD VOLUME" has the meaning set forth in Schedule 7.13. [*] "LOSSES" has the meaning set forth in Schedule 10.1(a). "MANUFACTURER OUT-OF-STOCK" has the meaning set forth in Schedule 7.12(b). "MASTER AGREEMENT" is the Supply Agreement by and between A&P and C&S dated October 27, 2003. "MEASUREMENT PERIOD" has the meaning set forth in Schedule 7.12(a). - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 71 "MERCHANDISE" has the meaning set forth in Schedule 7.1. "MINOR SERVICE LEVEL VIOLATION" has the meaning set forth in Schedule 7.12(d). "MONTHLY P&L" has the meaning set forth in Schedule 8.5.1. "NEGOTIATED INBOUND RATES" has the meaning set forth in Schedule 4.2. "NEW JERSEY FACILITIES" has the meaning set forth in Schedule 4.1. "NON-C&S MANAGED OUTBOUND TRANSPORTATION" has the meaning set forth in Schedule 8.11(b). "OCCUPANCY COSTS" has the meaning set forth on Schedule 8.3(a)(i). "OCEAN AGREEMENT" means the Supply Agreement by and between A&P and C&S dated June 27, 2005. "OTHER SERVICES" has the meaning set forth in Schedule 5.1. "OTHER SERVICES FEE" has the meaning set forth in Schedule 6.1. "PATHMARK" means Pathmark Supermarkets, Inc., a Delaware corporation and a wholly-owned subsidiary of A&P. "PATHMARK AGREEMENT" is the First Amended and Restated Supply Agreement by and between Pathmark and C&S dated January 29, 1998. "PARTIES" means C&S together with A&P. "PERFORMANCE MEASURES" has the meaning set forth in Schedule 2.1. "PERFORMING PARTY" has the meaning set forth in Schedule 2.7. "PERMITTED INDIVIDUALS" has the meaning set forth in Schedule 7.14(d). "PERMITTED USE" has the meaning set forth in Schedule 7.14(d). "PERSON" is to be interpreted broadly and includes an individual or group of individuals, an entity or group of entities, a corporation, a partnership, a trust, an unincorporated organization, the government of a country or any political subdivision thereof, or any agency or department of any such government, and the executors, administrators or other legal representatives of an individual in such capacity. "PRIOR AGREEMENTS" means Master Agreement, Ocean Agreement, Pathmark Agreement and all amendments thereto. 72 "PROCUREMENT SERVICES" shall be those services described in Schedule 7 related to the procurement of Merchandise. "PRODUCT MIX" means the mix of categories of Merchandise handled by C&S calculated on a unit basis with the categories being as more particularly described in the variance analysis included in the Service Specifications, as they may be amended from time to time in new Service Specifications. "PUNITIVE SERVICE LEVEL" has the meaning set forth in Schedule 7.12(a). "PUNITIVE SERVICE LEVEL BREACH" has the meaning set forth in Schedule 7.12(d). "PURCHASE SERVICES" shall mean those services described in Schedule 7 related to the purchase of Merchandise. "PURCHASE TERMS" has the meaning set forth in Schedule 7.5. "PURCHASING SERVICE LEVEL" has the meaning set forth in Schedule 7.12(b). "PURCHASING SERVICE LEVEL RECONCILIATION REPORT" has the meaning set forth in Schedule 7.12(c). "RAMP-UP PERIOD" has the meaning set forth in Schedule 1.4. "REAL ESTATE OBLIGATIONS" means any lease or sublease to occupy any Facility in connection with the performance of Services hereunder as set forth on Exhibit 3.4. [*] "RECLAMATION SERVICES" has the meaning set forth in Schedule 5.4. "RECYCLABLE MATERIAL" has the meaning set forth in Schedule 2.9. "RECYCLABLE MATERIAL PROCESSING SERVICES" has the meaning set forth in Schedule 2.9. "REQUIRED PURCHASING SERVICE LEVEL" has the meaning set forth in Schedule 7.12(a). "RESTRICTED INFORMATION" has the meaning set forth in Schedule 7.14(d). [*] "SERVICE LEVEL SHORTFALL" has the meaning set forth on Schedule 7.12(e). "SERVICE SPECIFICATIONS" shall mean the standard operating procedures to be followed by the Parties in connection with the performance of the Services, the Other Services, and in - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 73 connection with their respective obligations under this Agreement, as may be amended from time to time. "SERVICES" means Warehousing Services, the Transportation Services, the Procurement Services, Purchasing Services and Additional Services. "SERVICES FEES" has the meaning set forth in Schedule 6.1. "SERVICES STANDARDS" has the meaning set forth in Schedule 2.1. "SHARED FACILITY(IES)" has the meaning set forth in Schedule 3.1(b). "SHARED SAVINGS" has the meaning set forth in Schedule 8.11(d). "SYSTEMS" has the meaning set forth in Schedule 8.3(a)(xii). "TARGETED PURCHASING SERVICE LEVEL" has the meaning set forth in Schedule 7.12(a). "TERM" has the meaning set forth in Schedule 11.1. "TOTAL TRANSPORTATION COSTS" shall mean those Costs set forth on Exhibit 1.4(c). "TOTAL WAREHOUSING COSTS" shall mean those Costs set forth on Exhibit 1.4(b). [*] "TRANSPORTATION SERVICES" has the meaning set forth in Schedule 4.1. [*] "WAREHOUSING SERVICES" has the meaning set forth in Schedule 2.1. "WEEKLY ACTUAL AMOUNT" has the meaning set forth in Schedule 9.1(a). "WEEKLY ESTIMATE" has the meaning set forth in Schedule 9.1(a). "WEEKLY STATEMENT" has the meaning set forth in Schedule 9.1(a). "WEEKLY ACTUAL AMOUNT" has the meaning set forth in Schedule 9.1(a). - ------------------------------ * Material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act 1934, as amended. 74 -----END PRIVACY-ENHANCED MESSAGE-----