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Article by DailyStocks_admin    (09-01-08 02:53 AM)

Filed with the SEC from Aug 14 to Aug 20:

Great Atlantic & Pacific Tea (GAP)
A fund group managed by Gamco Investors raised its stake to 3,646,319 shares (6.28%) after buying 754,200 from June 17 to Aug. 14 at $14.88 to $23.73 each.

BUSINESS OVERVIEW

General
The Great Atlantic & Pacific Tea Company, Inc. (“A&P”, “we”, “our”, “us” or “our Company”) is engaged in the retail food business. We operated 447 stores averaging approximately 42,000 square feet per store as of February 23, 2008.
Operating under the trade names A&P â , Super Fresh â , Waldbaum’s ä , Super Foodmart, Food Basics â , The Food Emporium â , Best Cellars â and Pathmark â , we sell groceries, meats, fresh produce and other items commonly offered in supermarkets. In addition, many stores have bakery, delicatessen, pharmacy, floral, fresh fish and cheese departments and on-site banking. National, regional and local brands are sold as well as private label merchandise. In support of our retail operations, we sell other private label products in our stores under other brand names of our Company which include without limitation, America’s Choice â , Master Choice â , and Health Pride â .
Building upon a broad base of A&P supermarkets, our Company has historically expanded and diversified within the retail food business through the acquisition of other supermarket chains and the development of several alternative store types. We now operate our stores with merchandise, pricing and identities tailored to appeal to different segments of the market, including buyers seeking gourmet and ethnic foods, a wide variety of premium quality private label goods and health and beauty aids along with the array of traditional grocery products.
On December 3, 2007, the Company completed our acquisition of Pathmark Stores, Inc., (Pathmark) for $1.4 billion in cash, stock, assumed debt, warrants and options.
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, as discussed in the Annual Report, Note 2 – Acquisition of Pathmark Stores, Inc. 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.
Under the merger agreement, each share of Pathmark common stock outstanding was converted into 0.12963 shares of A&P common stock (together with cash in lieu of fractional shares) and $9.00 in cash. In determining the purchase price, the common stock outstanding was valued using a Black-Scholes valuation model using the price of A&P common stock of $32.08 per common share, the average quoted market price of A&P common stock for two trading days before and two trading days after the merger was announced. We issued 6,781,067 shares of A&P common stock and paid $470.8 million to Pathmark common stockholders based on the number of shares of Pathmark common stock outstanding, less shares of restricted stock and shares held in treasury on November 30, 2007, of 52,310,959.
We issued 1,107,156 roll-over stock options in exchange for Pathmark options granted prior to June 9, 2005 (i.) where consents are not obtained or (ii.) that have exercise prices greater than or equal to $12.90, the quoted market price of Pathmark common stock on November 30, 2007, the last trading day before the closing date of the merger on December 3, 2007. The underlying stock price at the closing date of the merger was calculated using a ratio of the quoted closing market price for the Pathmark common stock on the merger closing date. In determining the purchase price, the options are valued using a Black-Scholes valuation model and a market price of $12.92, the average quoted closing market price of Pathmark common stock for the two trading days prior to the closing date and the closing date.
We also assumed 5,294,118 of outstanding Pathmark 2000 warrants. Upon exercise at the price of $22.31, each warrant will entitle the holder to receive 0.12963 shares of A&P common stock and $9.00 in cash. In determining the purchase price, the 2000 warrants are valued using a Black-Scholes valuation model using the price of A&P common stock of $32.08 per common share, the average quoted market price of A&P common stock for two trading days before and two trading days after the merger was announced. A&P’s stock price would need to exceed $102.70 before the Pathmark 2000 warrants would be considered “in-the-money”. As part of the acquisition of Pathmark on December 3, 2007, we issued 4,657,378 and 6,956,858 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 are exercisable at $18.36 and the Series B warrants are exercisable at $32.40. These warrants were 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. During fiscal 2007, we recorded a gain on the market value adjustment to these liabilities of $11.5 million and $14.8 million for Series A and Series B warrants, respectively which is included in “Non Operating Income” on our Consolidated Statements of Operations. The value of the Series A and Series B warrants were $44.5 million and $106.1 million, respectively as of February 23, 2008 and is included in “Current portion of other financial liabilities” and “Other financial liabilities”, respectively, on our Consolidated Balance Sheets.

The acquisition of Pathmark was funded by restricted cash on hand, temporary bridge financing arrangements and the issuance of equity securities.
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 resulting in a loss on disposal of $34.3 million. In connection with the shutdown of these operations, we recorded net occupancy costs of $62.7 million during the fiscal year ended February 23, 2008, for closed stores and warehouses not sold. As we continue to negotiate lease terminations as well as sublease some of these locations, these estimates may require adjustment in future periods.
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 as of November 1, 2007. Planned sale transactions for these stores have been completed resulting in a loss on disposal of $16.5 million. In connection with the shutdown of these operations, we recorded net occupancy costs of $3.8 million during the fiscal year ended February 23, 2008. As we continue to negotiate lease terminations as well as sublease some of these locations, these estimates may require adjustment in future periods.
The Company’s Securities and Exchange Commission (“SEC”) filings are promptly posted to its website at www.aptea.com after they are filed with the SEC and can be accessed free of charge through a link on the “Investors” page.
Modernization of Facilities
During fiscal 2007, we expended approximately $123 million for capital projects, which included 2 new supermarkets, 2 new liquor stores, 9 major remodels or enlargements and 2 minor remodels. Our planned capital expenditures for fiscal 2008 are approximately $200 million, which relate primarily to enlarging or remodeling supermarkets, and converting supermarkets to more optimal formats.
Sources of Supply
Our Company currently acquires 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 comparable terms.
Licenses and Trademarks
Our stores require a variety of licenses and permits that are renewed on an annual basis. Payment of a fee is generally the only condition to maintaining such licenses and permits. We maintain registered trademarks for nearly all of our store banner trade names and private label brand names. Trademarks are generally renewable on a 10 year cycle. We consider trademarks an important way to establish and protect our Company brands in a competitive environment.
Employees
As of February 23, 2008, we had approximately 51,000 employees, of which 69% were employed on a part-time basis. Approximately 91% of our employees are covered by union contracts. Our Company considers its present relations with employees to be satisfactory.
Competition
The supermarket business is highly competitive throughout the marketing areas served by our Company and is generally characterized by low profit margins on sales with earnings primarily dependent upon rapid inventory turnover, effective cost controls and the ability to achieve high sales volume. We compete for sales and store locations with a number of national and regional chains, as well as with many independent and cooperative stores and markets.
Segment Information
The segment information required is contained under the caption “Note 15 – Operating Segments” in the Fiscal 2007 Annual Report to Stockholders (“Annual Report”) and is herein incorporated by reference.
ITEM 1A – Risk Factors
Set forth below is a summary of the material risks to an investment in our securities.
Various risk factors could cause us to fail to achieve these goals. These include, among others, the following:
• 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 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.
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.

• We are the primary obligor for a significant amount of closed stores and warehouses under long-term leases, primarily located in the Midwest. 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 earnings.
• 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.
• 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 law or regulations could significantly increase our compliance costs and adversely affect our results of operations, financial condition and liquidity.
• 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.
• 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.

CEO BACKGROUND

Mr. Haub was appointed Executive Chairman in August 2005. He was elected a director in December 1991, and is Chair of the Executive Committee. Mr. Haub previously served as Chairman of the Board and Chief Executive Officer; and as Chief Operating Officer of our Company from December 1993, becoming Co-Chief Executive Officer in April 1997, sole CEO in May 1998 and Chairman of the Board in May 2001. Mr. Haub also served as President of the Company from December 1993 through February 2002, and from November 2002 through November 2004. Mr. Haub is a partner and Co-Chief Executive Officer of Tengelmann Warenhandelsgesellschaft KG, a partnership organized under the laws of the Federal Republic of Germany (“Tengelmann”). Mr. Haub is on the Board of Directors of Metro, Inc., the Food Marketing Institute and on the Board of Trustees of St. Joseph’s University in Philadelphia, Pennsylvania.
Mr. Claus was appointed President & Chief Executive Officer in August 2005. Mr. Claus previously served as President & Chief Executive Officer, Canadian Company from November 2002 to August 2005. Prior to joining our Company, Mr. Claus served as Chief Executive Officer of Co-Op Atlantic, between February 1997 and November 2002.
Ms. Galgano, CPA, was appointed Senior Vice President and Chief Financial Officer in November 2005. Ms. Galgano served as Senior Vice President and Corporate Controller, from November 2004 to November 2005; Vice President, Corporate Controller from February 2002 to November 2004, Assistant Corporate Controller of our Company from July 2000 to February 2002 and Director of Corporate Accounting from October 1999 to July 2000. Prior to joining our Company, Ms. Galgano was with PricewaterhouseCoopers LLP as Senior Manager, Assurance and Business Advisory Services.
Mr. Guldin was appointed Executive Managing Director, Strategy & Development on May 1, 2007 and was elected to the Board of Directors effective May 1, 2007. Prior to that he was Senior Executive Vice President (Corporate Finance) and Co-CFO of Tengelmann Warenhandelsgesellschaft KG. Prior to joining Tengelmann, Mr. Guldin served as a member of the Executive Management Team and Chief Financial Officer at E. Breuninger GmbH & Co. (Germany), the most prestigious department store and fashion retailer in Germany. Before that he worked for several years as a business and strategy consultant as a Senior Consultant and Project Leader at PA Consulting and CSC Index, Germany.
Ms. MacLeod was appointed Senior Vice President of Marketing and Communications in November 2005. Prior to joining our Company, Ms. MacLeod served as Vice President of Marketing and Public Relations from 1998 to November 2005 for Co-op Atlantic, an operator based in New Brunswick, Canada.
Ms. Philbert was appointed Senior Vice President, Merchandising, in December 2006. Prior to joining our Company, she was with Safeway, Inc. from 1981 to 2006, where she most recently served as Corporate Vice President and Senior Lead, Lifestyle Store development. Prior to that she served as Corporate Vice President Deli and Foodservice & Starbucks and prior to that Corporate Vice President of Marketing.
Mr. Richards was appointed Senior Vice President, Human Resources, Labor Relations & Legal Services in September 2005 and in October 2005 was additionally appointed the Company’s Secretary. Prior to that Mr. Richards served as Senior Vice President, Labor Relations & Human Resources from July 2004 to September 2005 and as Senior Vice President, Labor Relations from March 2004 to July 2004. Prior to joining our Company Mr. Richards served as a consultant with MGS Consulting, Inc. from July 2003 to July 2004; and prior to that as Director of Labor Relations and Employment Law for Fleming Companies, Inc. from June 2000 to July 2003.
Mr. Wiseman was appointed Senior Vice President, Store Operations in September 2005. Prior to that Mr. Wiseman was Senior Vice President, Discount Operations, A&P Canada from 2004 to September 2005 and prior to that served as District Manager/Vice President Retail Operations from 1999 to 2004 for Co-op Atlantic, an operator based in New Brunswick, Canada.

Mr. Moss was appointed Vice President and Treasurer in February 2002. Prior to that Mr. Moss was Vice President, Treasury Services and Risk Management from 1992 to February 2002.
Ms. Sungela, CPA, was appointed Vice President and Corporate Controller in November 2005. Ms. Sungela served as Vice President and Assistant Corporate Controller from June 2004 to November 2005. Prior to joining our Company, Ms. Sungela was North American Controller for Amersham Biosciences, a part of GE Healthcare, from April 2002 to June 2004. Previously, she served as Director of Accounting Policy for Honeywell, from June 1998 to January 2002.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

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 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:

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 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 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.

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.

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.

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.

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 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.

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.

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.

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 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.

CONF CALL

William J. Moss

Thank you and good morning everyone. This morning’s presentation may contain forward-looking statements about the future performance of the company and is based on management’s assumptions and beliefs in light of information currently available. The company assumes no obligation to update this information. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements including, but not limited to, competitive practices and pricing in the food industry generally and particularly in the company’s principal markets, the company’s relationships with its employees, the terms of future collective bargaining agreements, the cost 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 the company’s cost of capital or the ability to access capital, supplier quality control problems with the company’s vendors and changes in economic conditions which may affect the buying patterns of the company’s customers.

I will now turn the call over to Christian Haub, our Executive Chairman.

Christian W.E. Haub

Thank you, Bill, and good morning everyone and welcome to our first quarter conference call.

We had a very good start to our new fiscal year. The integration of Pathmark is proceeding right on track and our operating momentum continues to build. The Pathmark acquisition is delivering all the benefits we had anticipated and we are very confident about delivering our $150 million synergy target. Also, the costs of the integration arrived where we planed them to be, further evidence of how well we are executing this integration.

I am also excited about our operating momentum. Our core A&P business generated comparable store sales of over 3% for the fourth quarter in a row and even more exciting, Pathmark’s comparable store sales climbed above 3% for the first time, and this represents their strongest top line trend in many, many years.

Our format strategy is clearly working, with all our formats delivering strong sales, gaining market share, and improving their bottom line contribution. We are very well positioned in this more difficult economic environment. Especially the improvements we made at A&P a year ago with our new pricing strategy are paying off, as the consume is seeking more value today. And since Pathmark already enjoys a strong price reputation, their resurgence is no surprise. So I believe that the current environment and change in consumer behavior is actually good for our business.

We are in a great position to take advantage of consumers trading from restaurants to grocery stores, consolidating their shopping trips due to higher gas prices, and seeking those stores that offer great quality and service at competitive prices. Even the presence of food price inflation is not really detrimental to our business as we are able to pass along cost increases in a more rational market, while at the same time working very hard to provide our customers with ways to stretch their food budgets and offer exceptional values throughout our stores without sacrificing gross margin unnecessarily.

Looking ahead to the rest of 2008, I am confident that we will be able to maintain our operating momentum, capture more and more synergies, and continue to roll out our format strategy with a particular emphasis on our price-impact format at Pathmark and existing A&P banner stores.

Another important objective we now have in our sights is achieving sustainable profitability and generating positive cash flow, which we believe we should begin to see before the end of this fiscal year and going forward into fiscal 2009, once the cost for the integration is behind for good.

As long as the economy doesn’t deteriorate meaningfully from current levels, I am quite optimistic about the prospect of our business. We have a lot of good things going for us right now and altogether I am confident in our strategy and in our management team, which is fully capable of delivering on the potential of the Pathmark acquisition and to successfully steer the company through a more challenging external environment we are facing this year.

And with that as an overview, I will turn it over to Brenda.

Brenda M. Galgano

Thank you, Christian, and good morning everyone.

Before I get into the details of our results, I would like to provide you my perspective on our operating progress. It has now been just over seven months since we closed on the Pathmark acquisition and I am more confident than ever that this was a great deal for the company. Pathmark sales are stronger than our expectation, the integration went very well, synergies are falling to the bottom line, and early results from our two Pathmark refreshes indicate that we have potential to grow the business above our original plan.

At the same time, the A&P business continues to improve. Although we have our challenges, such as dealing with the difficult economic environment, more aggressive competitive activity, and of course, rise in cost, I believe as a combined company we are well positioned to weather the storm.

Now, on to the numbers. First, I would like to remind everyone that Pathmark’s results prior to the date of acquisition are not included in our financial statements. Also note that Pathmark’s prior year first quarter results were for a 13-week period that ended May 5, 2007, whereas A&P’s first quarter was for a 16-week period ending June 16, 2007.

In order to help investors with prior year comparisons, we have separately provided and posted to our website adjusted prior year results for Pathmark on a basis consistent with A&P’s calendar.

For the first quarter, the combined results would have been approximately $78 million. This morning we reported first quarter sales of $2.9 billion and income from continuing operations of $4 million, or a loss of $0.48 per diluted share, due to the adjustment for our convertible instrument. Comparable store sales were positive 3.2% in the quarter, excluding Pathmark stores. Comparable store sales for Pathmark were 3.1% for our quarter. For the first five weeks of our second quarter, we continue this positive sales trend in both businesses.

Excluding non-operating items of approximately $14 million, ongoing EBITDA was $96 million this year, which compares to EBITDA of $39 million last year. The current quarter results include $22 million of integration synergies. Schedules 3 and 4 of our press release details the non-operating items for both years.

First quarter ongoing gross margin, which excludes a LIFO provision of $1.4 million, decreased 66 basis points to 30.21%, driven primarily by the inclusion of Pathmark’s results which have lower margins than A&P. Pathmark is a more price- and promotionally-driven format and generates a lower gross margin than A&P. In addition, we have begun to invest in the business to reinvigorate their top line momentum and we are very pleased with the results thus far.

First quarter ongoing SG&A expenses totaled 29.65% this year versus 31.36% last year, a decrease of 171 basis points. This decrease is driven by higher sales productivity, primarily attributable to the acquisition of Pathmark and the realization of synergies. Non-cash stock compensation expense was $1 million higher in the first quarter versus last year.

For the first quarter capital spending totaled $30 million with depreciation of $80 million. This compares to $51 million of CapEx during last year’s first quarter, with depreciation of $48 million. During the quarter we completed the renovation of our Homedale Fresh Store and two Pathmark stores. We are encouraged by the success of our first two Pathmark remodels in Irvington and Edison, New Jersey, which incorporate the best practices of our fresh and price-impact formats. As I noted earlier, these stores are so far exceeding our expectations. We are excited by the prospect of this format going forward.

We expect capital spending to total between $180 million-$200 million this year. Based on the project’s performance in the last two years, and through our first quarter, we are projecting our overall returns on the 2006 and 2007 projects to exceed our cost of capital. Our best performing project has been the large Fresh store and Food Basic remodels. As we have discussed previously, smaller Fresh store and Shore store remodels have not been performing as well. A majority of these projects were in our Super Fresh business, which has struggled to improve performance in the last two years but began to show some improvement in the first quarter. In the A&P and Waldbaum’s markets, however, the Fresh renovations have contributed significantly to the performance improvements we have realized in these areas.

We will continue to closely monitor the results on all our projects and going forward we expect to allocate more of our capital towards Pathmark remodels as we anticipate the returns of the Price Impact remodels and conversions to be superior to all other projects. However, we do not expect to increase capital in total.

With respect to our Super Fresh business, which has been a challenge to us, and as announced earlier this month, we plan to convert the majority of our Super Fresh stores in the Philadelphia market to the Pathmark Price Impact format as well as remodel the existing Pathmark stores in that market. Eric will further cover this next.

Turning now to our balance sheet, we ended the quarter with net debt of $1.349 billion, including capital leases and real estate liabilities and net of $2 million in short-term investments, and $22 million of restricted cash. The increase of $88 million from year end consists of the following: our adjusted EBITDA of approximately $90 million and real estate proceeds of $3 million offset by net cap interest expense of $32 million and taxes of $1 million, CapEx of $24 million, which excludes about $6 million of integration CapEx, stock store occupancy payments of approximately $18 million, Pathmark integration costs of $32 million, payoff of the Series A warrants of $46 million, and a networking capital and other increase of approximately $35 million. This $35 million includes an increase in our cash of $28 million and that cash is excluded from our net debt calculation. Most of this increase in working capital and other is timing related, given that large annual payments such as bonuses are paid in the first quarter. Excluding the integration costs of $32 million and warrant payment of $46 million, net debt would have increased by $10 million.

Availability under our revolving credit agreement was $178 million at the end of the quarter with outstanding loans of $251 million and letters of credit of $236 million. I would like to note that beginning this quarter we have included an interest expense payable in Note 11 in our 10-Q, which will be filed shortly.

As of the end of the quarter we had a tax net offering loss carry-forward of approximately $400 million to offset future tax profits, including operating profits and capital gains.

The Pathmark integration continues on track. During the quarter we realized $22 million of integration synergies, which is included in the adjusted EBITDA. This $22 million represents $14 million of admin cost reductions as we completed the transition of the Carteret facility in May, $6 million of profited savings, and $2 million of store operating cost savings.

At the end of the quarter our annual synergy run rate was approximately $100 million, exceeding our original estimate of about half of our $150 million target within the first six months. I am very encouraged by the integration progress and the synergy run rate as it demonstrates our success in bringing the two companies together and realizing the benefits as we had anticipated.

We incurred $12 million of integration expense in the quarter and approximately $6 million of integration CapEx, which is in line with our original plans.

Cash came in the quarter totaled $32 million and included approximately $13 million of severance payments which were charged to good will.

To date we have paid $64 million, which includes approximately $9 million of capital, $19 million of acquisition-related costs charged to good will, which is primarily severance, and $36 million of costs charged to the P&L. We continue to estimate total costs at approximately $100 million.

So in closing, I am pleased with our continued progress, both in the A&P business as well as with the Pathmark acquisition. Comparable store sales for both A&P and Pathmark continue to trend positively. Physical integration is substantially complete and the realization of synergies is progressing as planned. We remain financially strong and continue to focus on maintaining sufficient liquidity.

Based on our current operation trends and the realization of synergies ahead of schedule, we expect to be cash-flow positive in the fourth quarter and fiscal 2009.

Before I turn it over to Eric. I want to cover one more thing. I would like to let you know that we are planning to hold an investor day on October 15 of this year. The day will include store tours in the morning with lunch and management presentations to follow at the Sheraton in Newark, New Jersey. Investors should expect to receive further details of this event in the near future.

I will now turn it over to Eric.

Eric Claus

Thank you, Brenda, and thank you, also, Christian.

Well, good morning to you all. This is now our first full quarter with Pathmark operations integrated into the company and I have to say that we are very pleased with the progress and momentum and we are definitely on track with our short- and long-term expectations. We are now pretty well done with the integration of Pathmark which is a very sizeable business, to say the least, and I am very proud of the exceptional planning and execution of our integration teams. This team has now delivered, and by this team I mean this management team, has now delivered ten straight quarters of improved momentum in our business.

Top line sales in all four of our formats were very strong and I will speak to each of these formats in a moment.

EBITDA is where we planned it to be for the quarter and in line with our expectations for the year. I strongly believe that our format, merchandising, and pricing strategy positions us well to weather the fragile economic outlook and also the consumer mind set.

Our store portfolio is also geographically well-suited for the rising fuel costs as we reside close to our customers. We manage to keep inflationary pressures relatively in check and the fundamental key performance indicators in our business all remain positive. Notably, our customer account is up, our market share is up, and comp store sales are up.

Our private label renewal program, which is so important to us, is on track and will be ready for the launch of our consolidated brands for the third quarter of this year. Private label penetration continues to grow at an aggressive rate as we better the product, the packaging, and the price points. Consumers’ acceptance of the America’s Choice brand at Pathmark has so far exceeded all of our expectations.

Our plan is to be at the high end of the penetration ranges for American retailers when all is said and done. Our relationship in our new contract role with C&S is working very, very well. Service levels, particularly in the Pathmark stores, continue to improve, costs are in line, and buying opportunities are being created daily.

Now, let me give you a brief update on our format progress. And I will start with the Fresh format. Our Fresh stores continue to trend positively and continue to gain momentum every period. We continue to experience solid sales growth and has been previously noted, returns on our Fresh store remodels are exceeding our cost of capital.

Consistent with our capital plan, we had slowed our spend and number of capital projects to accommodate the Pathmark integration. This is now back on track and we have several projects underway that will be launched in the second quarter. Overall we continue to be pleased with our Fresh store financials as the mixed growth to Fresh continues, driving increased sales in both center store and fresh, while driving margin dollar growth.

We have a considerable amount of knowledge now, given the number of stores that we have renovated over the past years, and our ability to forecast and select great new projects has increased exponentially. We now have better than one third of our former A&P stores that are in great capital shape, and that is obviously the worst third in terms of capital structure or capital condition, as well as the most likely to succeed.

That said, we will see, however, more stores convert from our former A&P store banners to the new price-impact format that we had originally anticipated. The better price image of Pathmark and the lower cost of Price Impact remodels, and by that I mean the lower capital cost of those Price Impact remodels, and conversions should drive superior returns and are compelling factors to accelerate the roll out of the price-impact format going forward.

So that’s a natural segue to talk about Pathmark. As I previously stated, integration of Pathmark is for all intents and purposes complete. There were no major issues that surfaced that we could not resolve. That said, we did have some minor process issues and did leave some money on the table, notably it would be about $5 million that was in our merchandising income area of Pathmark, and we did leave that on the table the first quarter. We are very well underway in having a good handle on those issues now so we see that as a one-time effect for the quarter which we should be able to recover in subsequent quarters.

Like I said earlier, I am very pleased and impressed with our team’s outstanding execution of a series of very complex tasks in this integration. And has Brenda has previously mentioned, we are also in good shape in attaining our synergy goals. We will deliver the $150 million of synergies that we had expected to our bottom line. With that as our goal and expectation we will, however, invest at least some, if not most, of the excess synergy dollars we expect to realize back into the business.

Improving our price perception in the current environment is clearly the right thing to do, particularly in the price-impact format, as this is the format that should benefit the most from a more price-conscious consumer and we expect superior returns from our investments in this concept.

We are really pleased with the Pathmark acquisition and see big potential in this format. This is clearly an acquisition that is working and will continue to provide great benefits to our overall performance.

In the first quarter we launched, with tremendous momentum, the first of our new remodeled Price Impact stores. This will be the template for a massive Pathmark refresh to be rolled out between now and the end of 2009. We are starting in earnest at the end of August and will complete quite a few projects by mid-November of this year. These stores look super, super impactful and they’re truly price-impact stores. They are cost-efficient to execute and they deliver a more modern and today impact experience.

We did enhance the Fresh experience, particularly in the areas such as produce and bakery. We are very pleased that the Pathmark stores with renewed energy and aggressive merchandising plans are experiencing continued positive comp store sales as momentum keeps on building.

When we first spoke about the benefits of the Pathmark transaction, we talked about the potential to convert stores from one format to another, and this based on demographic data. Well, that time has come. We recently announced a market strategy, which Brenda just reviewed in short, for the Philadelphia market and we will see the majority of our Super Fresh stores convert to the price-impact format, Pathmark Save-a-Center.

We are really pleased to see how this change was embraced by our associates and their union. We clearly all see the tremendous upside and opportunity in converting to this price-impact format. This market will also see the refresh of all existing Pathmark stores to the new Price Impact look, as well as the remodeling of the few Fresh Stores that clearly are in more upscale locations.

So that means in this market, again, we are consistent with our objectives to move into the number one and number two market share positions by regions in which we operate. So all in all, we are very, very pleased with our progress thus far with Pathmark and are very impressed with what the team is accomplishing.

When it comes to food basics in the discount format, these stores once again continue to experience very strong double-digit, year-over-year sales growth. Now for the fifth quarter in a row we can report a much improved bottom line from stores that were major money losers in their previous lives as conventional supermarkets.

In this first quarter Food Basics, as a group, had positive store contribution for the first time in our history in the U.S. They are now very much in the same trajectory as our former Canadian Food Basics success story. My congratulations goes our to our merchandising, marketing, and operations team for that success.

Last by not least when it comes to formats are Manhattan Food Emporiums. We are finally firing on all cylinders; all formats are working. Overall sales in the Manhattan market continue to exceed total company costs as does increased store contribution. The Food Emporium team is doing a super job of getting the stores cleaned up, bettering service, and really leading the market in new product development. Some capital will also be spent in this market to finish some of the store projects previously commenced and take on one new project.

When it comes to best sellers our wine, beer, and spirits concepts, things are progressing well. We’ve just opened our first prototype freestanding store in Westwood, New Jersey. It’s a great and exciting concept and well worth a visit because it’s a whole new experience in buying wine and beer.

Got to talk a little bit about cost control, also. Our administrative run rate continues to be on track, including the integration of Pathmark. The Pathmark Carteret, as previously mentioned, is closed, or officially closed I should say. We are realizing those administrative costs and synergies and we speak.

Utility costs continue to remain a challenge and we continue to aggressively pursue and implement systems and tactics to mitigate some of the energy price increases. Although overall costs are a challenge, we are very, very determined on resisting increases, finding ways to reduce usage of supplies and other materials, and generally be creative in finding ways to curtail rising costs. Our store operations teams in all formats continue to an outstanding job as they focus on cost control.

Labor productivity and sales per employee hour, once again, better than last year in all formats, demonstrating the commitment from all of our teams at retail. Stock losses and center store were again higher than last year, an area, as I said before, our operators continue to focus on. We believed the economic environment plays a role in this as does our aggressive attack on product code dating. This is once again offset by improved pressuring which is company-wide initiative driven by the retail and merchandising teams.

So to conclude, we continue to stay very, very focused on our game plan and the strategic direction that we’ve chosen. The strategy remains the same but our game plan is nimble, flexible, and non-bureaucratic. This is evidenced in the shift of our capital strategy with more emphasis on price impact going forward. We are proactive and reactive to the economic times, ensuring our continued progress and drive to profitability and that in the time frame that we had set out for ourselves. We are on track for the operating cash-flow positive for the first time in year in the fourth quarter of this year and plan to be cash-flow positive for the full year 2009. And this while executing our capital spending plan objectives. We are pleased with the continuity of management and our teams and at the consistent progress that we have demonstrated over the past ten quarters.

In closing, once again, my thanks goes our to our Board for their guidance and support, to my executive management team, a small group of very hard-working and dedicated people, and to the whole team who are doing so much in order to deliver on expectations.

I will now pass it back to Christian, and thank you.

Christian W. E. Haub

Thank you, Eric, and I want to close with a brief summary for you have heard today. We had a very good start to our fiscal year in our first quarter and our results demonstrate that we are on track to achieve our longer-term targets.

To recap our key points, the integration of Pathmark is on track to deliver synergies of at least $150 million. Our key performance indicators are all pointing in the right direction. We are very well positioned to deal with the challenges of a more difficult economical environment and our formats are all winning in the market place. We are poised to deliver significantly improving results in 2008. Sustained profitability and free cash flow are now clearly in our sights.

Thanks as always for listening. This is the end of our presentation part and we are now pleased to take your questions.

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