1. Basis of Presentation

The accompanying Consolidated Statements of Operations, Consolidated Statements of Stockholders' Deficit and Comprehensive Loss, and Consolidated Statements of Cash Flows for the 12 and 40 weeks ended December 3, 2011 and December 4, 2010 and the Consolidated Balance Sheets at December 3, 2011 and February 26, 2011 of The Great Atlantic & Pacific Tea Company, Inc. ("we", "our", "us" or "our Company") are unaudited and, in the opinion of management, contain all adjustments that are of a normal and recurring nature necessary for a fair statement of financial position and results of operations for such periods. The Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes contained in our Fiscal 2010 Annual Report on Form 10-K. Interim results are not necessarily indicative of results for a full year.

The Consolidated Financial Statements include the accounts of our Company and all subsidiaries. All intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to prior year amounts to conform to current year presentation.

Bankruptcy Filing

On December 12, 2010, our Company and all of our U.S. subsidiaries (the "Debtors") filed voluntary petitions for relief (the "Bankruptcy Filing") under chapter 11 of title 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York in White Plains (the "Bankruptcy Court"), which are being jointly administered under case number 10-24549. Management's decision to initiate the Bankruptcy Filing was in response to, among other things, our Company's deteriorating liquidity and management's conclusion that the challenges of successfully implementing additional financing initiatives and of obtaining necessary cost concessions from our Company's business and labor partners, was negatively impacting our Company's ability to implement our previously announced turnaround strategy. Our Company's non-U.S. subsidiaries, which are immaterial on a consolidated basis and have no retail operations, were not part of the Bankruptcy Filing.

We are currently operating as debtors-in-possession pursuant to the Bankruptcy Filing and continuation of our Company as a going-concern is contingent upon, among other things, the Debtors' ability (i) to comply with the terms and conditions of the DIP Credit Agreement described in Note 9 – Indebtedness and Other Financial Liabilities; (ii) to develop a plan of reorganization and obtain confirmation of that plan under the Bankruptcy Code; (iii) to reduce debt and other liabilities through the bankruptcy process; (iv) to return to profitability, including by realizing necessary near-term cost concessions from our business and labor partners; (v) to generate sufficient cash flow from operations; and (vi) to obtain financing sources to meet our future obligations. The uncertainty regarding these matters raises substantial doubt about our ability to continue as a going concern.

Our Company was required to apply the FASB's provisions of Reorganizations effective on December 12, 2010, which is applicable to companies in chapter 11, which generally does not change the manner in which financial statements are prepared. However, it does require that the financial statements for periods subsequent to the filing of the Bankruptcy Filing petition distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the Consolidated Statements of Operations beginning in the year ended February 26, 2011. The balance sheet must distinguish pre-Bankruptcy Filing liabilities subject to compromise from both those pre-Bankruptcy Filing liabilities that are not subject to compromise and from post-Bankruptcy Filing liabilities. As discussed in Note 9 - Indebtedness and Other Financial Liabilities, currently the Senior Secured Notes totaling $260.0 million have priority over the unsecured creditors of our Company. Based upon the uncertainty surrounding the ultimate treatment of the Notes in our reorganization plan, including the potential that these Notes may be impaired, these Notes are classified as "Liabilities subject to compromise" in our Consolidated Balance Sheets. Our Company continues to evaluate creditors' claims for other claims that may also have priority over unsecured creditors. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be approved by the Bankruptcy Court, even if they may be settled for lesser amounts as a result of the plan of reorganization. In addition, cash used in reorganization items must be disclosed separately in our Consolidated Statements of Cash Flows.

Amended and Restated Securities and Purchase Agreements

On November 3, 2011, our Company entered into Amended and Restated Securities and Purchase Agreements ("Amended and Restated SPAs") to infuse our Company with $490.0 million new debt and equity investments from private investors comprised of (a) certain holders of our Company's prepetition 5.125% unsecured convertible notes due in 2011, 6.75% unsecured convertible notes due in 2012 and 9.375% senior quarterly interest bonds due August 1, 2039 (such holders, the "Convertible Noteholders"), and (b) certain affiliates of The Yucaipa Companies LLC, holders of our Company's "Series A-Y" convertible preferred stock and "Series A-T" convertible preferred stock (such holders, collectively, "Yucaipa," and with the Convertible Noteholders, the "Investors"). On December 6, 2011, the Bankruptcy Court authorized our Company to execute and deliver to the Investors the Amended and Restated SPAs. The Amended and Restated SPAs serve as the foundation to allow our Company to complete the restructuring of our balance sheet and emerge successfully from chapter 11 as a private entity in early 2012.

Pursuant to the Amended and Restated SPAs, the Investors are providing a total new money cash investment of $490.0 million (the "New Money Commitment") in the form of (i) new privately placed $210.0 million face value second lien notes due November 2017 (the "New Second Lien Notes"), to be purchased by the Investors at an aggregate purchase price equal to 95% of the face value, (ii) new privately placed $210.0 million face value convertible third lien notes due 2018 (the "New Convertible Third Lien Notes"), to be purchased by the Investors at the face value and (iii) a new privately placed $80.0 million investment in an aggregate of 800,000 shares of our Company's new common stock (the "New Equity").

Upon the Plan effective date (the "Closing Date"), our Company's existing debtor-in-possession financing facility is required to be refinanced with a similar facility that will be raised on market terms that are in form and substance reasonably satisfactory to the Investors (the "Exit Facility"). The proceeds of the Exit Facility and the New Money Commitment, combined with our Company's then existing cash on hand will provide the funding for the reorganization, including paying certain secured creditors in full in cash, and will provide a cash pool of $40.0 million, less the amount distributed pursuant to a substantive consolidation settlement cash pool, for distributions to general unsecured creditors.

The consummation of the transactions contemplated thereunder (the "Closing") is subject to the fulfillment of the conditions precedent set forth in the Amended and Restated SPAs, which include the following:

An Exit Facility with availability (when combined with the New Money Commitment Amount) sufficient to satisfy all allowed DIP Facility Claims, with a commitment of not less than $750.0 million and Excess Availability in an amount not less than $100.0 million as of the Closing Date (provided, however, that up to $30.0 million of such Excess Availability can be drawn at the Closing), and the closing and initial funding under the Exit Facility shall occur substantially concurrently with the Closing, subject to downward adjustments for each store closed after the Execution Date;
On the Closing Date, (i) the aggregate amount of the Company's unrestricted cash and cash equivalents, minus the amount of any revolving loans to be outstanding under the Exit Facility immediately after the Closing, shall be at least $70.0 million, calculated giving effect to the transactions occurring as of the Closing Date (subject to mutually-agreeable downward adjustments for store closures and asset sales); and (ii) the aggregate amount of the Company's unrestricted cash and cash equivalents, plus Excess Availability under the Exit Facility, shall be at least $170.0 million, calculated giving effect to the transactions occurring as of the Closing Date (subject to mutually-agreeable downward adjustments for store closures and asset sales);
The Company's total revenue (as defined thereunder) for the period running from (and including) the four week financial reporting period ending November 5, 2011 through the week ending immediately prior to the Plan effective date shall be at least equal to 90% of the total revenue projections set forth within the Amended and Restated SPAs, subject to mutually-agreeable downward adjustments for store closures;
The Company's total gross profit (as defined thereunder) for the period running from (and including) the four week financial reporting period ending November 5, 2011 through the closed financial reporting period ending immediately prior to the Plan Effective Date shall be at least equal to 90% of the total gross profit projections set forth within the Amended and Restated SPAs, subject to mutually-agreeable downward adjustments for store closures;
The Investors or our Company shall have secured term sheets evidencing the minimum aggregate labor savings of an agreed-upon amount (excluding employee buy-out savings) over the term of the contract not to exceed five years. Such term sheets should have been filed with the Bankruptcy Court for approval on the day before the hearing on our Company's motion to approve the Amended and Restated SPA. The Union locals shall have ratified the term sheet and the effective date of which shall be no later than December 4, 2011.

If the Closing occurs, our Company will pay the Convertible Noteholders a commitment fee in the aggregate amount of $40.0 million, payable in the form of the New Convertible Third Lien Note. As a result, the aggregate outstanding balance of the New Convertible Third Lien Note after the transaction will be $250 million, which amount includes the $210 million initial cash investment to be purchased by the Investors as part of the New Money Commitment (see discussion above). As of December 3, 2011, we are in compliance with the conditions precedent related to our Company's total revenue and gross profit.

We are in the process of negotiating our Exit Facility and we are currently in compliance with all other conditions precedent to the extent applicable prior to the closing of the transaction.

Plan of Reorganization

On November 14, 2011, our Company filed with the Bankruptcy Court the Debtors' Joint Plan of Reorganization (the "Plan") pursuant to chapter 11 of the Bankruptcy Code and a related Disclosure Statement for the Debtors' Joint Plan of Reorganization pursuant to chapter 11 of the United States Bankruptcy Code. On November 30, 2011, our Company filed revised versions of the Plan and related Disclosure Statement and a Motion for Entry of an Order approving: (a) the adequacy of the Debtors' Disclosure Statement; (b) the solicitation and notice procedures with respect to the confirmation of the Debtors proposed reorganization plan; (c) the form of various ballots and notices in connection therewith; and (d) the scheduling of certain dates with respect thereto.

The Disclosure Statement contains detailed information about the Plan, our five-year financial projections and events leading up to our Company's chapter 11 cases. On December 20, 2011, the Bankruptcy Court approved the adequacy of information in the Disclosure Statement and authorized our Company to send the Disclosure Statement, the Plan and ballots to creditors entitled to vote on the Plan. The deadline for voting on the Plan is January 24, 2012. A hearing before the Bankruptcy Court on the confirmation of the Plan is scheduled for February 6, 2012. The information contained in the Disclosure Statement is subject to change, whether as a result of amendments to the Plan, actions of third parties or otherwise.

The Plan will become effective only if it is confirmed by the Bankruptcy Court and upon the fulfillment of certain other conditions contained in the Plan. These conditions precedent include, but are not limited to, the following:

the Bankruptcy Court shall have entered the confirmation order and such confirmation order shall have become a final order;
the conditions precedent to the Exit Facility shall have been satisfied and/or waived;
all conditions to the effectiveness of the Amended and Restated SPAs shall have been satisfied or waived in accordance with the terms thereof; and
the commitment fee shall be paid concurrently with the Plan effective date to the new Investors, as provided in the Amended and Restated SPAs.

Pursuant to the terms of the Amended and Restated SPAs, the Debtors (in consultation with the Creditors' Committee and the DIP Facility Administrative Agent) and the Investors may jointly waive any of the conditions to the Plan effective date, except with respect to certain conditions, which waiver requires the consent of consenting noteholders in accordance with the plan support agreement. Our Company cannot make any assurances as to when, or ultimately if, the Plan will become effective

The summary of the provisions of the Plan contained herein highlights certain substantive provisions of the Plan and is not a complete description of the Plan or its provisions. The summary is qualified in its entirety by reference to the full text of the Plan, which is available at www.kccllc.net/APTea.com link.

Overall Structure of the Plan

The Plan contemplates the reorganization of our Company and the discharge of all claims against and interests in our Company. As part of the Plan, the Debtors and the Investors entered into Amended and Restated SPAs (see detailed discussion separately), which will serve as the backbone of the Plan. In connection with the Investor's purchase of the New Equity and New Convertible Third Lien Notes, Yucaipa will acquire warrants to purchase New Equity representing 7% of the fully diluted common equity in the new company at the time of the Plan effective date.

Unless otherwise provided in the Plan or the Amended and Restated SPAs, our Company, shall use the proceeds received from the New Money Commitment, together with proceeds from the Exit Facility and other funds held by the Debtors on the Plan effective date, (i) to make cash distributions required by the Plan, (ii) to pay Transaction Expenses (as defined in the Amended and Restated SPAs) not previously paid, (iii) to pay other expenses of the chapter 11 cases, to the extent so ordered by the Bankruptcy Court, and (iv) for general corporate purposes.

The Plan may also provide for an incremental recovery to trade creditors designated by our Company and the Investors that enter into a post-effective date trade agreement acceptable to our Company and the Plan Sponsors.

Substantive Consolidation Settlement

The Plan provides for a settlement and compromise of the issues relating to whether the liabilities and assets of the Debtors should be substantively consolidated for purposes of distributions under the Plan. Pursuant to the Substantive Consolidation Settlement set forth within the Plan, holders of allowed unsecured claims will receive their pro rata shares of unsecured creditor cash pool. The holders of allowed pension withdrawal claims, allowed guaranteed landlord claims and other allowed unsecured claims will receive the recoveries set forth within the Plan.

Treatment of Claims

The Plan shall provide, unless a holder of an allowed claim agrees to a different treatment, for the following treatment of allowed claims:

DIP Facility Claims will be satisfied in full in cash;
Administrative and Priority Claims will be satisfied in full in cash;
Second Lien Notes Claims that are allowed by the Bankruptcy Court will be satisfied in full in cash, provided that upon agreement of the Investors and our Company, the Plan may provide for the cramdown of the Second Lien Notes Claims to the extent permitted by 11 U.S.C. 1129(b)(2), and the funding of the New Money Commitment may be adjusted accordingly in such instance so that the New Second Lien Notes would not be purchased by the Investors; and
Unsecured Claims that are allowed by the Bankruptcy Court will receive cash distributions from the Unsecured Credit Cash Pool.

New Equity

The issuance of the New Equity by the new company to the Investors on the Plan effective date in consideration for the New Equity investment is authorized without the need for any further corporate action or without any further action by the new company, as applicable. On the Plan effective date, each of the new company shall be a private company. As such, the new company will not list the New Equity on a national securities exchange as of the Plan effective date.

Certificate of Incorporation and Bylaws

The certificates of incorporation and bylaws (or other formation documents relating to limited liability companies, limited partnerships, or other forms of Entity) of the Debtors (other than our Company) shall be amended in a form as may be required to be consistent with the provisions of the Plan, the Amended and Restated SPAs and the Bankruptcy Code, and shall be in form and substance acceptable to the Investors. The new company's Charter will, among other things, (1) authorize the issuance of the shares of New Equity; and (2) pursuant to and only to the extent required by section 1123(a)(6) of the Bankruptcy Code, include a provision prohibiting the issuance of non-voting Equity Securities (as defined in section 101(16) of the Bankruptcy Code).

Directors and Officers of Reorganized A&P

On the Plan effective date, the term of the current members of the board of directors of our Company shall expire, and the New Board shall be appointed pursuant to the Amended and Restated SPAs. The New Board shall have been reconstituted to consist of seven directors, of whom at least five directors shall be persons designated by the Investors, one director shall be designated by the Union, and one person shall be the Chief Executive Officer of the new company. On and after the Plan effective date, each director or officer of new company shall serve pursuant to the terms of the new company Charter, the new company Bylaws, or other constituent documents, the Management Services Agreement, as applicable, and applicable state corporation law.

Management Equity Incentive Plan

The Management Equity Incentive Program (the "MEIP") for the new company shall become effective on the Plan effective date without need for further corporate action as contemplated by the Amended and Restated SPAs. The MEIP's terms and conditions shall be set forth in a Plan Supplement which will be filed with the Bankruptcy Court prior to the commencement of the Bankruptcy Court's hearing to consider confirmation of the Plan.

Pension

As of the Plan effective date, the new company shall continue our Company's defined benefit plans in accordance with, and subject to, their terms, ERISA, and the Internal Revenue Code, and shall preserve all of their rights thereunder. The pension claims and all proofs of claims filed on account thereof shall be deemed withdrawn as of the Plan effective date without any further action of the Debtors, the new company or the PBGC, and without any further action, order, or approval of the Bankruptcy Court.

Supply Agreement

On June 2, 2011, our Company entered into a definitive supply agreement with C&S Wholesale Grocers, Inc. ("C&S") effective May 29, 2011, whereby C&S will provide warehousing, transportation, procurement, purchasing and ancillary services (the "Services") in support of a substantial portion of our Company's supply chain. This agreement replaced the warehousing, logistics, procurement and purchasing agreement under which the parties had been operating since 2008.

The term of the agreement is through the effective date of our Company's plan of reorganization in its Bankruptcy Filing but may be extended by either party for a term concurrent with a fixed volume commitment based upon wholesale purchases of merchandise resulting in a term of approximately seven years. The cost structure of the agreement is a combination of a fixed cost and variable upcharge pricing model. The charges are subject to adjustment due to volume change or other material changes to the operating assumptions of the agreement.

Our Company expects it will realize a run-rate of more than $50.0 million in annual savings commencing with our Company's emergence from the Bankruptcy Filing pursuant to a plan of reorganization. The agreement provides our Company with important service enhancements, including detailed service specifications and key performance measures. The agreement also permits our Company to maintain product standards and specifications for all merchandise purchased for resale in our Company's stores.

Assumed Leases

During the 12 and 40 weeks ended December 3, 2011, our Company assumed 63 and 393 real estate leases, respectively, including leases for shopping center tenants as well as leases for subleased locations. In connection with the assumption of the leases, the related liability balances previously classified as "Liabilities subject to compromise" were reclassified to the respective balance sheet captions in our Consolidated Balance Sheets. In addition, all undisputed cure amounts related to these leases in the amount of $8.4 million have been paid to the landlords.

Corporate Owned Life Insurance Policies

On September 9, 2011, our Company, together with the Security Life of Denver Life Insurance Company (the "Insurer"), filed a Stipulation and Order permitting the Insurer relief from the automatic stay to enforce certain rights and remedies ("Stipulation") against our Company's pre-petition Corporate Owned Life Insurance Policies ("COLI"). The Stipulation was approved by the Bankruptcy Court on September 29, 2011, which permitted the Insurer to enforce their rights and remedies to COLI under the "Paid-Up Insurance" non-forfeiture option. This option resulted in no cash outlay by our Company. In connection with the cancellation of COLI, we wrote-off the related loans on COLI of $61.9 million, accrued interest of $4.8 million, with an offsetting write-off of other assets of $65.8 million, resulting in a net gain of $0.9 million, which was recorded in "Store operating, general and administrative expense" in our Consolidated Statements of Operations during the 12 and 40 weeks ended December 3, 2011.

Significant Accounting Policies

A summary of our significant accounting policies may be found in our Annual Report on Form 10-K for the year ended February 26, 2011. Except for as described below, there have been no changes in these policies during the 40 weeks ended December 3, 2011.

Change in Accounting Policy

Effective June 19, 2011, our Company changed its method of valuing inventories held at our Pathmark stores from the last-in first-out ("LIFO") method to the first-in first-out ("FIFO") method. As previously noted, our Company entered into a definitive supply agreement with C&S effective May 29, 2011 to provide Services in support of a substantial portion of our Company's supply chain. As a result of the agreement with C&S, our Company began transitioning our inventory to different warehouses such that, beginning in our second fiscal quarter of 2011, the Pathmark inventory is no longer separately segregated and managed. Our Company believes that the FIFO method of inventory valuation is preferable under GAAP and improves financial reporting because it conforms all of our Company's inventories to a consistent inventory method and the use of FIFO better aligns costing with our Company's forecasting and procurement decisions. As described in the accounting guidance for accounting changes and error corrections, the comparative Consolidated Financial Statements of prior periods presented have been adjusted to apply the new accounting method retrospectively.

The following line items within the Consolidated Statements of Operations were affected by the change in accounting policy:


		For the 12 Weeks Ended
				December 4, 2010
								Change:
		As Originally						(Decrease) /
		Reported		As Adjusted				Increase
Cost of merchandise sold	$	(1,259,568	)	$	(1,258,926	)	$	(642	)
Gross margin		534,237			534,879			642

Loss from continuing operations before benefit from
income taxes		(183,636	)		(182,994	)		642
Benefit from income taxes		2,953			2,953			-
Loss from continuing operations		(180,683	)		(180,041	)		642
Loss from discontinued operations		(18,687	)		(18,687	)		-
Net loss		(199,370	)		(198,728	)		642

Net loss per share – basic:
Continuing operations	$	(3.44	)	$	(3.42	)	$	0.02
Discontinued operations		(0.34	)		(0.34	)		-
Net loss per share - basic	$	(3.78	)	$	(3.76	)	$	0.02

Net loss per share – diluted:
Continuing operations	$	(3.44	)	$	(3.42	)	$	0.02
Discontinued operations		(0.34	)		(0.34	)		-
Net loss per share - diluted	$	(3.78	)	$	(3.76	)	$	0.02


		For the 40 Weeks Ended										For the 40 Weeks Ended
		December 3, 2011										December 4, 2010
		As							Change:			As						Change:
		Computed			As Reported			(Decrease) /				Originally				As		(Decrease) /
		under LIFO under FIFO							Increase			Reported			Adjusted			Increase
Cost of merchandise sold	$	(3,918,613	)	$	(3,916,650		)	$	(1,963	)	$	(4,416,258	)	$	(4,414,119		)	$	(2,139	)
Gross margin		1,522,069				1,524,032			1,963			1,860,756			1,862,895				2,139
Loss from continuing operations
before benefit from income taxes		(413,964	)			(412,001	)		1,963			(441,819	)		(439,680		)		2,139
Benefit from income taxes		14,270				14,270			-			2,708				2,708			-
Loss from continuing operations		(399,694	)			(397,731	)		1,963			(439,111	)		(436,972		)		2,139
Income (loss) from discontinued
operations		18,281				18,281			-			(36,576	)			(36,576	)		-
Net loss		(381,413	)			(379,450	)		1,963			(475,687	)		(473,548		)		2,139

Net (loss) income per share –
basic:
Continuing operations	$	(7.51	)		$	(7.45	)	$	0.06		$	(8.45	)		$	(8.41	)	$	0.04
Discontinued operations		0.34				0.34			-			(0.68	)			(0.68	)		-
Net loss per share - basic	$	(7.17	)		$	(7.11	)	$	0.06		$	(9.13	)		$	(9.09	)	$	0.04

Net (loss) income per share –
diluted:
Continuing operations	$	(7.51	)		$	(7.45	)	$	0.06		$	(32.09	)		$	(31.94	)	$	0.15
Discontinued operations		0.34				0.34			-			(2.53	)			(2.53	)		-
Net loss per share - diluted	$	(7.17	)		$	(7.11	)	$	0.06		$	(34.62	)		$	(34.47	)	$	0.15

The following line items within the Consolidated Balance Sheets were affected by the change in accounting policy:


		As of February 26, 2011
		As Originally		As
		Reported		Adjusted		Change
Inventories, net	$	440,960	$	452,289	$	11,329
Accumulated deficit		(1,630,664	)	(1,619,335	)	11,329

There was no impact on net cash provided by operating activities as a result of this change in accounting policy.