** **

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-K/A**

 

**x**** ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended January 28, 2006**

 

**OR**

 

**o**** TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the Transition Periodfrom                        to                        **

 

**Commission file number: 0-8858**

 

**THEPENN TRAFFIC COMPANY**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                              |       | **25-0716800**                     |
|-----------------------------------------------------------|------------|------------------------------------|
| (State of incorporation)                                  |       | (IRS Employer  Identification No.) |
|                                                      |       |                               |
| **1200 State Fair Blvd., Syracuse, New York  13221-4737** | ** ** | **(315) 453-7284**                 |
| (Address of principal executive offices)                  |       | (Telephone Number)                 |

 

Securitiesregistered pursuant to Section 12(b) of the Act:  **None**

 
| Securities  registered pursuant to Section 12(g) of the Act: |   | **Common  Stock, $.01 par value** |
|------------------------------------------------------------------------|--------|-----------------------------------|

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

YESo           NO x

 

Indicateby check mark if the registrant is not required to file reports pursuant to, Section 13or 15 (d) of the Act. YES o           NO x

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days. YES o           NO x

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (Section 229.405 of this chapter) is not contained herein,and will not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K.   o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer, or a smaller reportingcompany.  See definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):
| Large  accelerated filer  o               |   | Accelerated  filer  o         |
|------------------------------------------------|--------|------------------------------------|
| Non-accelerated  filer  x                 |   | Smaller  reporting company  o |
| (Do  not check if a smaller reporting company) |   |                               |

 

Indicatedby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). YES o        NO x

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Section 12, 13 or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a planconfirmed by a court. YES o            NO x

 

Theaggregate market value of the registrant’s voting stock held by nonaffiliatesof the registrant was approximately $0 as of July 30, 2005, the lastbusiness day of the registrant’s most recently completed second fiscal quarter.

 

CommonStock, par value $.01 per share: 8,297,697 shares outstanding as of August 9,2007

 

 

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**FORM 10-K/A INDEX**

 
| **PART II.** | ** ** | ** ** | ** **                                                                                  | ** ** |
|-------------------|------------|------------|---------------------------------------------------------------------------------------------|------------|
|              |       |       |                                                                                        |       |
| Item              | 6.         |       | Selected Financial Data                                                                     | 4          |
|              |       |       |                                                                                        |       |
| Item              | 7.         |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations | 8          |
|              |       |       |                                                                                        |       |
| Item              | 8.         |       | Financial  Statements and Supplementary Data                                                | 18         |
|              |       |       |                                                                                        |       |
| **PART IV.** | ** ** | ** ** | ** **                                                                                  | ** ** |
| ** **        | ** ** | ** ** | ** **                                                                                  | ** ** |
| Item              | 15.        |       | Exhibits and Financial Statement Schedules                                                  | 45         |
|              |       |       |                                                                                        |       |
| Signatures        |       |       |                                                                                        | 48         |

 

2

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**SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Certainstatements included in this Form 10-K, including, without limitation,statements included in Item 7 - “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” which are not statements ofhistorical fact, are intended to be, and are hereby identified as, “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, as amended, reflecting management’s current analysis and expectations,based on what management believes to be reasonable assumptions.  These forward-looking statements includestatements relating to our anticipated financial performance and businessprospects.  Statements preceded by,followed by or that include words such as “believe,” “anticipate,” “estimate,” “expect,”“could,” and other similar expressions are to be considered suchforward-looking statements. Forward-looking statements may involve known and unknown risks,uncertainties and other factors, which may cause the actual results to differmaterially from those projected, stated or implied, depending on such factorsas: our ability to improve operating performance and effectuate business plans;our ability to operate pursuant to the terms of our credit facilities and tocomply with the terms of our lending agreements or to amend or modify the termsof such agreements as may be needed from time to time; our ability to generatecash; our ability to attract and maintain adequate capital; our ability torefinance our indebtedness; increases in prevailing interest rates; our abilityto obtain trade credit, and shipments and terms with vendors and serviceproviders for current orders; our ability to maintain contracts that arecritical to our operations; potential adverse developments with respect to ourliquidity or results of operations; general economic and business conditions;competition, including increased capital investment and promotional activity byour competitors; availability, location and terms of sites for storedevelopment; the successful implementation of our capital expenditure program;labor relations; labor and employee benefit costs including increases in healthcare and pension costs and the level of contributions to our sponsored pensionplans; the result of our pursuit of strategic alternatives; economic andcompetitive uncertainties; our ability to pursue strategic alternatives;economic and competitive uncertainties; changes in strategies; changes ingenerally accepted accounting principles; adverse changes in economic andpolitical climates around the world, including terrorist activities andinternational hostilities; and the outcome of pending, or the commencement ofany new, legal proceedings against, or governmental investigations of us,including the previously announced SEC and U.S. Attorney’s Officeinvestigations.  We caution that theforegoing list of important factors is not exhaustive.  Accordingly, there can be no assurance thatwe will meet future results, performance or achievements expressed or impliedby such forward-looking statements, which are generally required to be publiclyrevised as circumstances change, and which we do not intend to update.

 

**Explanation**

 

The Penn Traffic Company (the “Company”) is filingthis amendment to Form 10-K for the fiscal year ended January 28,2006, filed with the Securities and Exchange Commission on August 17, 2007to reflect the results of a restatement and to report in Note 16 selectedquarterly financial data as supplementary information to the basic financialstatements.  As a result of cancellation of debt in theChapter 11 proceedings, the Company previously entirely eliminated all netoperating loss carryforwards and reduced the tax basis of its long-lived assetseffective January 29, 2006. During the year ended February 2, 2008, the Company corrected theamount of debt forgiveness in the Chapter 11 proceedings that reduced taxattributes which results in an increase aggregating $66 million in the taxbasis of its long-lived assets and net operating loss carryforwards. Thecorrection resulted in an increase in deferred tax assets attributable to thenet operating loss carryforwards, the recording of a related valuationallowance and a reduction in the deferred tax liability attributable to theincrease in the tax basis of long-lived assets. The net effect of the above was a $3.5 million reduction in the netdeferred tax liability and a corresponding reduction in the carrying value ofcertain long-lived assets upon adoption of fresh-start reporting on April 16,2005 and corresponding adjustments to income tax provision and depreciationexpense for the period ended January 28, 2006 (see Note 4 to theconsolidate financial statements).

 

Weare amending the following to reflect the above.

 
| PART II |
|--------------|
|         |
| Item  6.     |   | Selected  Financial Data |
|         |   |   |
| Item  7.     |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|         |   |   |
| Item  8.     |   | Financial  Statements and Supplementary Data |
|         |   |   |
| PART  IV     |
|         |   |   |
| Item  15.    |   | Exhibits  and Financial Statement Schedules |

 

Exceptas described above, no other changes have been made to our Annual Report on Form 10-Kfor the fiscal year ended January 28, 2006, as initially filed with theSecurities and Exchange Commission on August 17, 2007 to reflect theresult of a restatement.

 

3

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**PART II**

 

**ITEM 6.****                            ****SELECTED FINANCIAL DATA**

 

**Consolidated Five-Year Financial Summary**

 

Set forth below is ourselected historical consolidated financial data for the five fiscal years endedJanuary 28, 2006.  As a result ofthe consummation of our plan of reorganization we adopted fresh-start reportingas of April 16, 2005.  Theaccounting periods ended on or prior to April 16, 2005, have beendesignated “Predecessor Company” and the periods subsequent to April 16, 2005,have been designated “Successor Company.”

 

In accordance with theimplementation of fresh-start reporting, our assets, liabilities andstockholders’ equity have been revalued as of April 16, 2005.  In addition, as a result of the consummationof our plan of reorganization, the amount of our indebtedness has beensubstantially reduced.  Accordingly, ourfinancial statements for periods after April 16, 2005 are notcomparable to our financial statements for periods ended on or prior to suchdate.

 

The selected historicalconsolidated financial data for the 41-week period ended January 28, 2006,are derived from our restated consolidated financial statements, which havebeen audited by Eisner LLP, independent accountants.  The Predecessor Company’s selected historicalconsolidated financial data for the 11-week period ended April 16, 2005,  52-week periods ended January 29,2005,  January 31, 2004, February 1,2003 and February 2, 2002 are derived from our unaudited consolidatedfinancial statements.  In addition, theselected historical consolidated financial data for the Successor Companyshould be read in conjunction with our consolidated financial statements andrelated notes included elsewhere herein.

 

4

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| ** **                                                                                     | ** ** | **(Audited and  Restated)  Successor  Company** | ** ** | **(Unaudited) Predecessor Company** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                     | ** ** | **41 Weeks**                                    | ** ** | **11 Weeks**                             | ** ** | **52 Weeks** | ** ** | **52 Weeks** | ** ** | **52 Weeks** | ** ** | **52 Weeks** | ** ** |
| ** **                                                                                     | ** ** | **Ended**                                            | ** ** | **Ended**                                     | ** ** | **Ended** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| **(In thousands of dollars,  except per share data)**            | ** ** | **January 28,  2006 (1)**                       | ** ** | **April 16,  2005**                      | ** ** | **January 29,  2005** | ** ** | **January 31,  2004** | ** ** | **February 1,  2003** | ** ** | **February 2,  2002 (12)** | ** ** |
|                                                                                           |       |                                                 |       |                                          |       |   |   |   |   |   |   |   |   |
| **Revenues**                                                                                   |       | $                                                    | 1,015,893  |                                          | $          | 265,260 |   | $ | 1,285,148 |   | $ | 1,307,977 |   | $ | 1,348,437 |   | $ | 1,364,980 |   |
|                                                                                           |       |                                                 |       |                                          |       |   |   |   |   |   |   |   |   |
| **Costs and Operating Expenses:**                                                              |       |                                                 |       |                                          |       |   |   |   |   |   |   |   |   |
| ** **                                                                                     |       |                                                 |       |                                          |       |   |   |   |   |   |   |   |   |
| Cost of sales (2)                                                                              |       | 754,995                                              |       | 195,533                                       |       | 955,609 |   | 973,393 |   | 999,880 |   | 1,018,605 |   |
| Selling and administrative expenses (3)                                                        |       | 256,023                                              |       | 71,414                                        |       | 312,826 |   | 325,388 |   | 319,118 |   | 305,987 |   |
| Amortization of goodwill (5)                                                                   |       | —                                               |       | —                                        |       | — |   | — |   | — |   | 109,809 |   |
| Asset impairment charge (4)                                                                    |       | —                                               |       | —                                        |       | — |   | 1,002 |   | 17,858 |   | — |   |
| Goodwill impairment charge (5)                                                                 |       | —                                               |       | —                                        |       | — |   | 22,832 |   | 28,397 |   | — |   |
|                                                                                           |       |                                                 |       |                                          |       |   |   |   |   |   |   |   |   |
| **Operating Income (Loss)**                                                                    |       | 4,875                                                |       | (1,687                                        | )          | 16,713 |   | (14,638 | ) | (16,816 | ) | (69,421 | ) |
| Interest expense (6)                                                                           |       | 8,289                                                |       | 1,755                                         |       | 12,365 |   | 32,018 |   | 35,479 |   | 34,820 |   |
| Gain on extinguishment of debt (7)                                                             |       |                                                 |       | (182,831                                      | )          |   |   |   |   |   |   |   |   |
| Reorganization expense (8)                                                                     |       | 1,023                                                |       | 71,117                                        |       | 19,060 |   | 30,818 |   | — |   | — |   |
|                                                                                           |       |                                                 |       |                                          |       |   |   |   |   |   |   |   |   |
| **(Loss) Income from Continuing Operations,  Before Income Taxes and Discontinued Operations** |       | (4,437                                               | )          | 108,272                                       |       | (14,712 | ) | (77,474 | ) | (52,295 | ) | (104,241 | ) |
| Provision (benefit) for income taxes (9)                                                       |       | 261                                                  |       | (23,945                                       | )          | 251 |   | 755 |   | (8,565 | ) | 2,429 |   |
|                                                                                           |       |                                                 |       |                                          |       |   |   |   |   |   |   |   |   |
| **(Loss) Income from Continuing Operations  before Discontinued Operations**                   |       | (4,698                                               | )          | 132,217                                       |       | (14,963 | ) | (78,229 | ) | (43,730 | ) | (106,670 | ) |
| Loss (Income) from discontinued operations,  net of tax (10)                                   |       | —                                               |       | 3,133                                         |       | 8,994 |   | 84,163 |   | 4,337 |   | (11,719 | ) |
|                                                                                           |       |                                                 |       |                                          |       |   |   |   |   |   |   |   |   |
| **Net (Loss) Income**                                                                          |       | $                                                    | (4,698     | )                                             | $          | 129,084 |   | $ | (23,957 | ) | $ | (162,392 | ) | $ | (48,067 | ) | $ | (94,951 | ) |
|                                                                                           |       |                                                 |       |                                          |       |   |   |   |   |   |   |   |   |
| **Net Loss Per Share (Basic and Diluted)**                                                     |       | $                                                    | (0.55      | )                                             |       |   |   |   |   |   |   |   |   |   |

 

No dividends oncommon stock have been paid during the past five fiscal years.  Per share data is not presented for theperiods ended on or prior to April 16, 2005 due to a general lack ofcomparability as a result of the revised capital structure of the company.

 
| **Balance Sheet Data:**               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Total assets                          |       | $          | 325,391    |       | $          | 414,579    |       | $          | 394,225    |       | $          | 454,417    |       | $ | 739,974 |   | $ | 809,032 |   |
| Total debt (including capital leases) |       | 51,252     |       | 67,473     |       | 156,201    |       | 164,555    |       | 356,925    |       | 328,116    |       |
| Stockholders’ equity (deficit)   |       | 118,799    |       | 0          |       | (133,606   | )          | (99,021    | )          | 61,739     |       | 136,858    |       |
|                                       |            |            |            |            |            |            |            |            |            |            |            |            |            |  |  |  |  |  |  |

 
| **Other Data:**               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| EBITDA (11)                   |       | $          | 25,130     |       | $          | 3,100      |       | $          | 39,511     |       | $          | 31,596     |       | $ | 53,506 |   | $ | 66,404 |   |
| Depreciation and amortization |       | 18,798     |       | 4,712      |       | 21,985     |       | 21,697     |       | 26,173     |       | 25,368     |       |
| LIFO (benefit) provision      |       | 1,457      |       | 75         |       | 813        |       | 703        |       | (2,106     | )          | 648        |       |
| Capital expenditures          |       | 20,533     |       | 4,148      |       | 21,244     |       | 6,377      |       | 56,439     |       | 48,008     |       |
| Cash interest expense         |       | 7,222      |       | 1,753      |       | 10,520     |       | 27,542     |       | 32,858     |       | 33,944     |       |
|                               |            |            |            |            |            |            |            |            |            |            |            |            |            |  |  |  |  |  |  |

 

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| **Notes** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 1)        | As a result  of cancellation of debt in the Chapter 11 proceedings (see Note 2), the  Company previously entirely eliminated all net operating loss carryforwards  and reduced the tax basis of its long-lived assets effective January 29,  2006. During the year ended February 2, 2008, the Company corrected the  amount of debt forgiveness in the Chapter 11 proceedings that reduced tax  attributes which results in an increase aggregating $66 million in the tax  basis of its long-lived assets and net operating loss carryforwards.

 

The  correction resulted in an increase in deferred tax assets attributable to the  net operating loss carryforwards and the recording of a related valuation  allowance and a reduction in the deferred tax liability attributable to the  increase in the tax basis of long-lived assets. The net effect of the above  was a $3.5 million reduction in the net deferred tax liability and a  corresponding reduction in the carrying value of certain long-lived assets  upon adoption of fresh-start reporting on April 16, 2005. See Note 4 on the  consolidated financial statements related to restatement.                                                                           |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 2)        | During  the fourth quarter of fiscal year 2003 we adopted Emerging Issues Task  Force Issue No. 02-16 “Accounting by a Reseller for Cash Consideration  Received from a Vendor”, or “EITF 02-16”. EITF 02-16 requires that vendor  allowances, including slotting allowances, be categorized as a reduction of  cost of sales unless they are a reimbursement of costs incurred to sell the  vendor’s products, in which case, the cash consideration should be  characterized as a reduction of that cost. EITF 02-16 also requires that  rebates or refunds payable, only if the customer completes a specified  cumulative level of purchases from the vendor, be recognized as a reduction  of cost of sales based on a systematic and rational allocation over the  purchase period. Adoption of this standard did not materially affect our net  loss for fiscal year 2003.                                                                                                                                                                                                                                                                                                                                   |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 3)        | During  the fourth quarter of fiscal year 2003, we recorded a $3.6 million  reduction of selling and administrative expenses associated with an  adjustment to reserves for group health and general liability insurance. The  reserve balance for our sponsored group health insurance was reduced due to  improved claims processing that decreased the claims incurred but not  reported. Additionally, through fiscal year 2002, we have estimated the  general liability insurance reserve for future claims based on our actual  claim history, supplemented by industry benchmarks for comparable companies.  During the period when we had insufficient actual claim history to provide  the appropriate assurance in the result, we maintained the liability balance  at the upper end of a reasonable range. Based on actual claim history, we  recorded a reduction in the general liability insurance reserve.                                                                                                                                                                                                                                                                                                                   |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4)        | We  adopted Statement of Financial Accounting Standard No. 144 “Accounting  for the Impairment or Disposal of Long-Lived Assets”, or “SFAS 144”  during fiscal year 2003, which required us to perform a review of the  recorded value of our long-lived assets whenever changes in circumstances  indicate the carrying value of the asset may not be recoverable. During the  fourth quarter of fiscal year 2003, we recorded a non-cash charge of  $17.9 million related to the write-down of 16 of our operating  retail stores and three closed stores to estimated fair market value. In  fiscal year 2004, we recorded a non-cash charge of $1.0 million for 4  retail stores. The impairment charges under SFAS 144 resulted from lower  estimated future cash flows that were due to a combination of factors,  including the difficult economic environment and a more challenging  competitive environment during fiscal year 2003 and fiscal year 2004.  These factors reduced the profitability of our stores and caused us to  conclude that the profitability of certain of our stores would not increase  to a level that would enable the carrying value to be recovered. |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 5)        | We  adopted Statement of Financial Accounting Standard No. 142 “Goodwill and  Other Intangible Assets” or SFAS 142 in fiscal year 2003 and performed a  transitional goodwill assessment, which resulted in no impairment.  SFAS 142 provides that intangible assets with finite useful lives be  amortized, and that goodwill and intangible assets with indefinite useful lives  not to be amortized but tested at least annually for impairment. As of the  adoption of SFAS 142, we no longer record amortization of goodwill in our  Consolidated Statement of Operations. During the fourth quarter of fiscal  years 2003 and 2004, we completed an annual impairment review, which was  further necessitated by the change in the economic and competitive  environment, and we recorded a $28.4 million and a $22.8 million,  non-cash charge for the impairment of goodwill in these periods, respectively.                                                                                                                                                                                                                                                                                           |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 6)        | As a result of our  Chapter 11 filing on May 30, 2003, no principal or interest payments  were made on or after such date on our formerly outstanding senior and senior  subordinated notes. Accordingly, no interest expense for these obligations  has been accrued on or after such date. Had such interest been accrued,  interest expense would have increased by $7.4 million, $11.0 million and $2.3  million for fiscal years 2004, 2005 and the 11-week period ended  April 16, 2005, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 7)        | The gain on extinguishment  of debt for the 11-week period ended April 16, 2005, consists of our  extinguishment of the allowed claims of our unsecured creditors including  trade claims, Cash Balance Pension Plan assumed by Pension Benefit Guaranty  Corporation and the former senior notes in exchange primarily for shares of  our common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 8)        | During the 41-week  period ended January 28, 2006 reorganization expense consisted of  $1.0 million for professional fees and during the 11-week period ended  April 16, 2005 reorganization expense primarily consisted of  $10.4 million of professional fees and $60.0 million of losses  included in other comprehensive loss related to the Cash Balance Pension  Plan, which was recognized in income on termination of the plan, upon  assumption by the PBGC. For fiscal year ended January 29, 2005 the  reorganization expenses consisted of $17.9 million for professional fees  related to the bankruptcy filing, $0.2 million loss on asset disposals and  $0.9 million related to severances paid in connection with the  reorganization. For fiscal year 2004 the reorganization expenses were  primarily for professional fees related to our plan of reorganization.                                                                                                                                                                                                                                                                                                                          |

 

6

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| 9)     | The tax benefit from  continuing operations for the 11-week period ended April 16, 2005 is not  recorded at statutory rates principally due to the gain on the extinguishment  of debt not being included in taxable income and a $24.0 million tax benefit  related to losses from the Cash Balance Pension Plan, which benefit had  previously been credited to other comprehensive loss.  The tax provision for fiscal years 2004 and  2005 was not recorded at statutory rates due to the recording of a valuation  allowance for all of the income tax benefits generated.  A valuation allowance is required when it  is more likely than not that the recorded value of a deferred tax asset will  not be realized.  The tax provision  (benefit) for fiscal years 2002 and 2003 is not recorded at statutory  rates due to differences between income calculations for financial reporting  and tax reporting purposes that result primarily from nondeductible  amortization of goodwill. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10)    | The (income) loss from  discontinued operations reflects operating results and (gains) losses on  disposals of Big Bear Stores and other stores, which were closed or sold  during the fiscal years of 2004 and 2005 and the 11-week period ended  April 16, 2005.  The losses  (gains) for these periods are $33.6 million, ($1.9) million and ($0.3)  million, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 11)    | “EBITDA” is earnings from  continuing operations before interest, taxes, depreciation, amortization,  amortization of goodwill, asset impairment charge, goodwill impairment  charge, and LIFO provision.  EBITDA  should not be interpreted as a measure of operating results, cash flow  provided by operating activities or liquidity, or as an alternative to any  generally accepted accounting principle measure of performance.  We report EBITDA as it is an important  measure utilized by management to monitor the operating performance of our  business.  We also believe that EBITDA  assists investors and other interested parties in evaluating our capacity to  service its debt.  Our reported EBITDA  may not be comparable to similarly titled measures used by other  companies.  Below is a table that sets  forth the reconciliation of operating income (loss) to EBITDA.                                                                                       |

 
| ** **                                   | ** ** | **(Audited)**        | ** ** | ** **                                    | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** |
|----------------------------------------------|------------|----------------------|------------|-----------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                   | ** ** | **Successor**        | ** ** | ** **                                    | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** |
| ** **                                   | ** ** | **Company**          | ** ** | ** **                                    | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** |
| ** **                                   | ** ** | **Restated**         | ** ** | **(Unaudited) Predecessor Company** | ** ** |
| ** **                                   | ** ** | **41 Weeks**    | ** ** | **11 Weeks**                             | ** ** | **52 Weeks**    | ** ** | **52 Weeks**    | ** ** | **52 Weeks**    | ** ** | **52 Weeks**    | ** ** |
| ** **                                   | ** ** | **Ended**            | ** ** | **Ended**                                     | ** ** | **Ended**            | ** ** | **Ended**            | ** ** | **Ended**            | ** ** | **Ended**            | ** ** |
| ** **                                   | ** ** | **January 28,** | ** ** | **April 16,**                            | ** ** | **January 29,** | ** ** | **January 31,** | ** ** | **February 1,** | ** ** | **February 2,** | ** ** |
| **(In thousands of dollars)** | ** ** | **2006**             | ** ** | **2005**                                      | ** ** | **2005**             | ** ** | **2004**             | ** ** | **2003**             | ** ** | **2002**             | ** ** |
|                                         |       |                 |       |                                          |       |                 |       |                 |       |                 |       |                 |       |
| **Operating Income (Loss)**                  |       | $                    | 4,875      |                                          | $          | (1,687               | )          | $                    | 16,713     |                 | $          | (14,638              | )          | $ | (16,816 | ) | $ | (69,421 | ) |
|                                         |       |                 |       |                                          |       |                 |       |                 |       |                 |       |                 |       |
| Depreciation and amortization                |       | 18,798               |       | 4,712                                         |       | 21,985               |       | 21,697               |       | 26,173               |       | 25,368               |       |
| Amortization of goodwill                     |       | —               |       | —                                        |       | —               |       | —               |       | —               |       | 109,809              |       |
| Asset impairment charge                      |       | —               |       | —                                        |       | —               |       | 1,002                |       | 17,858               |       | —               |       |
| Goodwill impairment charge                   |       | —               |       | —                                        |       | —               |       | 22,832               |       | 28,397               |       | —               |       |
| LIFO provision (benefit)                     |       | 1,457                |       | 75                                            |       | 813                  |       | 703                  |       | (2,106               | )          | 648                  |       |
|                                         |       |                 |       |                                          |       |                 |       |                 |       |                 |       |                 |       |
| **EBITDA**                                   |       | $                    | 25,130     |                                          | $          | 3,100                |       | $                    | 39,511     |                 | $          | 31,596               |       | $ | 53,506 |   | $ | 66,404 |   |

 
| (12) | Restated  from amounts previously reported to reflect discontinued operations and a  reduction of cost of sales to reflect a correction for the recording of  certain promotional allowances. |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

7

----

 

**ITEM 7.****                       ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

 

**Overview**

 

As discussed in Note 2 tothe accompanying Consolidated Financial Statements, we emerged from our Chapter11 proceedings on April 13, 2005. For financial reporting purposes, we accounted for the consummation ofour plan of reorganization as of the close of business on April 16, 2005.  In accordance with the American Institute ofCertified Public Accountant’s Statement of Position 90-7, “Financial Reportingby Entities in Reorganization under the Bankruptcy Code” we have appliedfresh-start reporting as of the close of business on April 16, 2005,which has resulted in significant changes to the valuation of certain of ourassets and liabilities, and to its stockholders’ equity.  In connection with the adoption offresh-start reporting, a new entity has been deemed to be created for financialreporting purposes.  The periods ended onor prior to April 16, 2005 have been designated “Predecessor Company”and the periods subsequent to April 16, 2005 have been designated “SuccessorCompany”.  For purposes of the discussionof the unaudited Results of Operations the 11-week period ended April 16, 2005and the audited and restated 41-week period ended January 28, 2006have been deemed noncomparible to prior years and no comparison was done forthese periods and prior years.

 

**Resultsof Operations**

 

The following table setsforth certain Consolidated Statement of Operations components expressed aspercentages of revenues for the 41-week period ended January 28, 2006 andthe 11-week period ended April 16, 2005.

 
| ** **                          | ** ** | **Audited and**                 | ** ** | **Unaudited**            | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|--------------------------|------------|
| ** **                          | ** ** | **Restated  Successor Company** | ** ** | **Predecessor  Company** | ** ** |
| ** **                          | ** ** | **41-Weeks**                         | ** ** | **11-Weeks**             | ** ** |
| ** **                          | ** ** | **Ended**                            | ** ** | **Ended**                | ** ** |
| ** **                          | ** ** | **January 28,**                 | ** ** | **April 16,**       | ** ** |
| ** **                          | ** ** | **2006**                             | ** ** | **2005**                 | ** ** |
| ** **                          | ** ** | ** **                           | ** ** | ** **               | ** ** |
| Revenues                            |       | 100.0                                | %          | 100.0                    | %          |
| ** **                          | ** ** | ** **                           | ** ** | ** **               | ** ** |
| Gross profit (1)                    |       | 25.7                                 |       | 26.3                     |       |
|                                |       |                                 |       |                     |       |
| Selling and administrative expenses |       | 25.2                                 |       | 26.9                     |       |
|                                |       |                                 |       |                     |       |
| Operating income                    |       | 0.5                                  |       | (0.6                     | )          |
|                                |       |                                 |       |                     |       |
| Interest expense                    |       | 0.8                                  |       | 0.7                      |       |
|                                |       |                                 |       |                     |       |
| Extinguishment of debt              |       | 0.0                                  |       | (68.9                    | )          |
|                                |       |                                 |       |                     |       |
| Reorganization item                 |       | 0.1                                  |       | 26.8                     |       |
|                                |       |                                 |       |                     |       |
| Income tax provision (benefit)      |       | 0.0                                  |       | (9.0                     | )          |
|                                |       |                                 |       |                     |       |
| Discontinued  operations            |       | 0.0                                  |       | 1.2                      |       |
|                                |       |                                 |       |                     |       |
| Net (loss) income                   |       | (0.5                                 | )          | 48.7                     |       |

 

----

(1)                                  Revenues less cost of sales.

 

8

----

 

**Fiscal 2006(the audited 41-week period ended January 28, 2006 and the unaudited11-week period ended April 15, 2005)**

 

**Revenues**

 

Revenues for the 41-weekperiod ended January 28, 2006 and the 11-week period ended April 16,2005 were $1.0 billion and $265.3 million, respectively.

 

Same store sales for the41-week period ended January 28, 2006 was a decrease of 1.59% compared tothe 41-week period ended January 29, 2005 and the same store sales for the11-week period ended April 16, 2005 was a decrease of 0.53% compared tothe 11-week period ended April 17, 2004.

 

Wholesale food distributionrevenues were $171.9 million for the 41-week period ended January 28, 2006and $28.7 million for the 11-week period ended April 16, 2005.

 

**GrossProfit**

 

Grossprofit was $260.9 million, or 25.7% of revenues for the 41-week period ended January 28, 2006and $69.7 million or 26.3% of revenues for the 11-week period ended April 16, 2005.

 

**Sellingand Administrative Expenses**

 

Sellingand administrative expenses for the 41-week period ended January 28, 2006were $256.0 million, or 25.2% of revenues and the selling andadministrative expenses for the 11-week period ended April 16, 2005 were$71.4 million, or 26.9% of revenues.

 

**Depreciationand Amortization**

 

Depreciation andamortization expense was $18.8 million, or 1.9% of revenues for the41-week period ended January 28, 2006 and $4.7 million, or 1.8% ofrevenues for the 11-week period ended April 16, 2005.  Depreciation and amortization expenseincreased in Fiscal 2006 primarily due to the shortening of asset life for ourproperty, equipment and machinery, an increase in carrying value of favorableleases, the addition of two new intangible assets (Pharmacy Scripts andSoftware) with the implementation of fresh-start reporting.  The increase in depreciation and amortizationexpense was partially offset by the recording of unfavorable leases associatedwith the implementation of fresh-start reporting.

 

**Operating Income (Loss)**

 

Operating income for the41-week period ended January 28, 2006 was $4.9 million, or 0.5% ofrevenues, and for the 11-week period ended April 16, 2005 operating losswas $1.7 million, or 0.6% of revenues.

 

**InterestExpense**

 

Interest expense for the41-week period ended January 28, 2006 was $8.3 million, or 0.8% ofrevenues, and for the 11-week period ended April 16, 2005 interest expensewas $1.8 million, or 0.7% of revenues. At fresh-start we eliminated the interest rate swap.  We obtained a more favorable interest rateunder our credit facility and cancellation of our debtor-in-possessionfacility.

 

9

----

 

**Reorganization Item**

 

Duringthe 41-week period ended January 28, 2006 we recorded reorganization itemexpense of $1.0 million, or 0.1% of revenues, and for the 11-week periodended April 16, 2005 we recorded reorganization item expense of$71.1 million, or 26.8% of revenues. These expenses were primarily due toPBGC assumption of our Cash Balance Plan and consulting fees paid to variousbankruptcy professionals.

 

**IncomeTax Provision**

 

Incometax provision for the 41-week period ended January 28, 2006 was$0.3 million, or less than 0.1% of revenues, and the income tax benefitfor the 11-week period ended April 16, 2005 was $23.9 million, or9.0% of revenues.

 

DuringFiscal 2006 we provided for only minimal state taxes and capital/franchise taxand reset our deferred tax liability due to our emergence from bankruptcy.

 

**Discontinued Operations**

 

Lossfrom discontinued operations for the 11-week period ended April 16, 2005was $3.1 million.  This loss wasprimarily attributable to our closure of unprofitable stores during thisperiod.

 

**Net (Loss) Income**

 

Net loss for the 41-weekperiod ended January 28, 2006 was $4.7 million, or 0.5% of revenues,and net income for the 11-week period ended April 16, 2005 was$129.1 million, or 48.7% of revenues. The change in the net income (loss) was primarily attributable torecognition of a gain from the extinguishment of debt of $182.8 million in the11-week period ended April 16, 2005.

 

10

----

 

The following table setsforth certain Consolidated Statement of Operations components expressed aspercentages of revenues for the fiscal year ended January 29, 2005,or “Fiscal 2005”, and the fiscal year ended January 31, 2004, or“Fiscal 2004”:

 
| ** **                           | ** ** | **Unaudited**                    | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **Predecessor**** Company** | ** ** |
| ** **                           | ** ** | **Fiscal**                       | ** ** | **Fiscal** | ** ** |
| ** **                           | ** ** | **2005**                         | ** ** | **2004** | ** ** |
|                                 |       |                             |       |   |   |
| Revenues                             |       | 100.0                            | %          | 100.0 | % |
|                                 |       |                             |       |   |   |
| Gross profit (1)                     |       | 25.6                             |       | 25.6 |   |
|                                 |       |                             |       |   |   |
| Selling and administrative expenses  |       | 24.3                             |       | 24.9 |   |
|                                 |       |                             |       |   |   |
| Asset impairment charge              |       | 0.0                              |       | 0.1 |   |
|                                 |       |                             |       |   |   |
| Goodwill impairment charge           |       | 0.0                              |       | 1.7 |   |
|                                 |       |                             |       |   |   |
| Operating income (loss)              |       | 1.3                              |       | (1.1 | ) |
|                                 |       |                             |       |   |   |
| Interest expense                     |       | 1.0                              |       | 2.4 |   |
|                                 |       |                             |       |   |   |
| Reorganization item                  |       | 1.5                              |       | 2.4 |   |
|                                 |       |                             |       |   |   |
| Income tax provision                 |       | 0.0                              |       | 0.1 |   |
|                                 |       |                             |       |   |   |
| Discontinued  operations, net of tax |       | 0.7                              |       | 6.4 |   |
|                                 |       |                             |       |   |   |
| Net loss                             |       | (1.9                             | )          | (12.4 | ) |

 

----

(1)         Revenues less cost of sales.

 

11

----

 

**Fiscal 2005 Compared toFiscal 2004 (based on unaudited results)**

 

**Revenues**

 

Revenues forFiscal 2005 were $1.29 billion, a 1.7% decrease from$1.31 billion in Fiscal 2004. The decrease in revenues forFiscal 2005 is primarily attributable to a decrease in same store sales.

 

Same store sales forFiscal 2005 decreased 1.64% from Fiscal 2004.

 

Wholesale food distributionrevenues were $213.2 million for Fiscal 2005, a decrease of 2.3% from$218.3 million for Fiscal 2004. The decrease in wholesale food distribution revenues in Fiscal 2005was primarily attributable to a reduction in the number of customers of ourwholesale food distribution business.

 

**GrossProfit**

 

Grossprofit was $329.5 million, or 25.6% of revenues, for Fiscal 2005,compared to $334.6 million, or 25.6% of revenues, forFiscal 2004.  The decrease in grossprofit is primarily due to a decrease in revenues.

 

**Sellingand Administrative Expenses**

 

Sellingand administrative expenses for Fiscal 2005 were $312.8 million, or24.3% of revenues, compared to $325.4 million, or 24.9% of revenues, forFiscal 2004.  The decrease inselling and administrative expenses were primarily due to a reduction in theadministrative labor force stemming from the sale and closure of 99 stores inFiscal 2004 and 7 stores in Fiscal 2005.

 

**Depreciationand Amortization**

 

Depreciation andamortization expense was $22.0 million, or 1.7% of revenues, inFiscal 2005 compared to $21.7 million, or 1.7% of revenues, inFiscal 2004.

 

**OperatingIncome (Loss)**

 

Operating income forFiscal 2005 was $16.7 million, or 1.3% of revenues, compared to anoperating loss for Fiscal 2004 of $14.6 million, or 1.1% of revenues forFiscal 2004.  The change from anoperating loss for Fiscal 2004 to operating income for Fiscal 2005 wasprimarily due to a reduction in selling and administrative expenses and assetimpairment and goodwill impairment charges recorded in Fiscal 2004.

 

**Interest Expense**

 

Interest expense forFiscal 2005 decreased to $12.4 million, or 1.0% of revenues, from$32.0 million, or 2.4% of revenues, in Fiscal 2004.  Interest expense for Fiscal 2005 decreasedprimarily due to the elimination of principal and interest payments on oursenior notes, the cancellation of our hedging activities and reduced averagebalances outstanding on our debtor-in-possession facility in accordance withour cost reduction initiatives.

 

**ReorganizationItems**

 

DuringFiscal 2005 we recorded reorganization expenses of $19.0 million comparedto $30.8 million recorded in Fiscal 2004. These expenses were attributable to various lawyers and consultantsretained to proceed with the bankruptcy filing and to manage our operationsduring this process.

 

**DiscontinuedOperations**

 

Lossesfrom discontinued operations were $9.0 million for Fiscal 2005, comparedto $84.2 million in Fiscal 2004. The decrease is primarily attributable to the results of operations ofthe 99 stores sold or closed in Fiscal 2004 compared with the 7 stores closedor sold in Fiscal 2005 and a $33.6 million loss on sales or closure ofunprofitable stores during Fiscal 2004 compared to $1.9 million gain ondisposals of unprofitable stores during Fiscal 2005.

 

12

----

 

**Income Tax Provision**

 

Incometax provision was $0.3 million, or 0.0% of revenues, for Fiscal 2005compared to an income tax provision of $0.8 million, or 0.1% of revenuesfor continuing operations, for Fiscal 2004.

 

Theeffective tax rate for Fiscal 2005 is not recorded at expected statutoryrates primarily due to the recording of a valuation allowance of$7.7 million principally related to tax benefit attributable to netoperating loss generated during Fiscal 2005.  A valuation allowance is required when it ismore likely than not that the recorded value of a deferred tax asset will notbe realized.  The effective tax rate forFiscal 2004 varies from the expected statutory rates due to the recordingof a valuation allowance of $20.6 million.

 

**NetLoss**

 

Net loss forFiscal 2005 was $24.0 million, or 1.9% of revenues, compared to a netloss of $162.4 million, or 12.4% of revenues, for Fiscal 2004.  The net loss decreased duringFiscal 2005 primarily due to the reduction of reorganization expenses,interest expense and impairment charges and reduced losses from discontinuedoperations.

 

**Liquidity and Capital Resources**

 

OnApril 16, 2005, upon emergence from Chapter 11 proceedings, we enteredinto a revolving credit and term loan facility with a group of financialinstitutions providing for a $130.0 million revolving credit facility anda $6.0 million term loan.  Also on April 16,2005, we entered into a supplemental real estate credit facility with anothergroup of lenders, providing for term loan borrowings of up to$28.0 million.  Availability underboth credit facilities is dependent on levels of accounts receivable, inventoryand certain other assets.  Interest rateson borrowings under the revolving credit facility vary depending upon theamount of availability.  At January 28,2006, outstanding borrowings under both facilities aggregated$33.0 million and outstanding letters of credit under the revolving creditfacility amounted to approximately $53.0 million.  At such date, availability in excess ofoutstanding borrowings and letters of credit was approximately$54.0 million.  Borrowings under therevolving credit and term loan facility are secured by substantially all of ourassets, subject to first liens on certain properties by other lenders.  Borrowings under the real estate facility aresecured by a first lien on substantially all of our leasehold interests and asecond lien on substantially all of our remaining assets.  During fiscal year 2006, we had stand-byletters of credit of approximately $53.5 million.  Many of these stand-by letters of credit wererequired upon emergence from bankruptcy and as a result of our inability tofile financial statements.

 

Provisionsof both credit facilities, among other things, require the maintenance ofcertain financial covenants (when availability under the credit facilities isless than $35.0 million for four consecutive days or less than$30.0 million for any one day), and limit the amount of capital expenditures,our assumption of additional debt and our payment of dividends.  At no time through January 28, 2006 havewe been subject to compliance with these financial covenants.  However, had such an event occurred, we wouldnot have been in compliance with the financial covenants and would have been indefault under the terms of the loan agreement at January 28, 2006.  Pursuant to our plan of reorganization, weentered into a collateral trust agreement with the collateral trustee inconnection with the secured trade lien program. The secured trade lien program is with certain of our vendors and allowsus to maintain trade terms.  This programhas been extended until April 13, 2008.

 

OnDecember 26, 2006 and on August 1, 2007, both the revolving creditand term loan facility and the supplemental real estate credit facility wereamended to permit the disposal of assets in connection with the closing ofcertain stores.

 

Wealso have borrowings under mortgages secured by the related properties.

 

**Off-Balance Sheet Arrangements**

 

We do not have any material off-balance sheetarrangements.

 

13

----

 

**Contractual Obligations and Commitments**

 

Thetable below presents our significant contractual obligations at January 28,2006 (in thousands of dollars):

 
| ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **          | ** ** | ** **               | ** ** | **Total**       | ** ** |
|----------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------|------------|--------------------------|------------|-----------------|------------|
| **Commitment expires**      | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **          | ** ** | **Other**                | ** ** | **Contractual** | ** ** |
| **during the**              | ** ** | **Long-term**     | ** ** | **Capital Lease**      | ** ** | **Operating**       | ** ** | **Long-term**            | ** ** | **Cash**        | ** ** |
| **Fiscal Year Ending** | ** ** | **Debt (1)** | ** ** | **Obligations (2)(3)** | ** ** | **Leases (3)** | ** ** | **Liabilities (4)** | ** ** | **Obligations** | ** ** |
|                             |       |              |       |                        |       |                |       |                     |       |            |       |
| February 3,  2007           |       | $                 | 278        |                        | $          | 2,855               |       | $                        | 22,766     |            | $          | 7,440 |   | $ | 33,339 |   |
| February 2,  2008           |       | 33,314            |       | 2,855                       |       | 20,873              |       | 4,053                    |       | 61,095          |       |
| January 31,  2009           |       | 280               |       | 2,855                       |       | 19,759              |       | 2,443                    |       | 25,337          |       |
| January 29,  2010           |       | 298               |       | 2,781                       |       | 15,778              |       | 1,868                    |       | 20,725          |       |
| January 28,  2011           |       | 324               |       | 1,944                       |       | 13,761              |       | 1,451                    |       | 17,480          |       |
| Thereafter                       |       | 3,019             |       | 12,766                      |       | 70,935              |       | 4,294                    |       | 91,014          |       |
|                                  |            |                   |            |                             |            |                     |            |                          |            |                 |            |  |  |  |  |  |

 

----

| (1)    | Balance  for fiscal year ending February 2, 2008 includes repayment of  $33.0 million under the Revolving Credit Facility at January 28,  2006. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                           |
| (2)    | Includes  amounts classified as imputed interest.                                                                                                              |
|   |                                                                                                                                                           |
| (3)    | See  Note 5 to the Consolidated Financial Statements.                                                                                                          |
|   |                                                                                                                                                           |
| (4)    | Other  liabilities include workers compensation, general liability, asset retirement  obligations, store closing costs and the PBGC settlement.                |

 

Wehave also made certain contractual commitments that extend beyond January 28,2006 as shown below (in thousands of dollars):

 

| ** **              | ** ** | **Stand-by**        | ** ** | ** **         | ** ** |
|-------------------------|------------|---------------------|------------|--------------------|------------|
| ** **              | ** ** | **Letters of** | ** ** | **Surety**         | ** ** |
| ** **              | ** ** | **Credit (1)** | ** ** | **Bonds (2)** | ** ** |
| ** **              | ** ** | ** **          | ** ** | ** **         | ** ** |
| Total amounts committed |       | $                   | 53,483     |               | $          | 7,495 |   |
|                         |            |                     |            |                    |            |  |  |

 

----

| (1)    | Letters  of credit are primarily associated with supporting workers’ compensation  obligations and are renewable annually. |
|--------|---------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                            |
| (2)    | We  are required to maintain surety bonds for varying periods of up to three  years from the date of issuance.                  |

 

14

----

 

**Impactof N****ew Accounting Pronouncements**

 

During December 2004, the Financial Accounting Standards Boardissued FASB Statement No. 123 (revised 2004), “Share-Based Payment,” or “SFAS123R”, which is a revision of FASB Statement No. 123, “Accounting forStock-Based Compensation”.  SFAS 123Rsupersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,”and requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the income statement based on theirfair values.  Pro forma disclosure is nolonger an alternative.  SFAS 123R isrequired to be adopted in the first annual reporting period beginning after June 15, 2005.  Accordingly, we adopted SFAS 123R effective January 29,2006.

 

In June 2006, the FASB issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”,or “FIN 48”, effective for fiscal years beginning after December 15,2006.  FIN 48 clarifies the accountingfor uncertainty in tax positions.  FIN 48requires financial statement recognition of the impact of a tax position whenit is more likely than not, based on its technical merits, that the positionwill be sustained upon examination.  Weare currently evaluating the effect of adopting FIN 48.

 

In June 2006, the FASB ratified Emerging Issues Task Force Issue No. 06-3,“How Sales Taxes Collected From Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement (that is, Gross VersusNet Presentation)”, or “EITF 06-3”, effective for periods beginning after December 15,2006.  EITF 06-3 allows taxes assessed byvarious governmental authorities that are directly imposed on revenue-producingtransactions between a seller and a customer, such as sales and some excisetaxes, to be presented on either a gross or net basis.  If such taxes are significant, the accountingpolicy should be disclosed as well as the amount of taxes included in revenueif presented on a gross basis.  We recordsales net of applicable sales taxes. Therefore, the adoption of EITF 06-3 will have no effect on thepresentation of our financial statements.

 

In September 2006, the FASB issued Statement of Financial AccountingStandard No. 157, “Fair Value Measurement”, or “SFAS 157”, effective forfiscal years beginning after November 15, 2007.  SFAS 157 defines fair value, establishes aframework for measuring fair value according to generally accepted accountingprinciples and expands disclosures about fair value measurements.  SFAS 157 does not require any new fair valuemeasurements.  We are currentlyevaluating the effect of adopting SFAS 157.

 

In September 2006, the FASB issued Statement of FinancialAccounting Standard No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans – an amendment of FASB Statements No. 87,88, 106 and 132R”, or “SFAS 158”, effective for fiscal years ending after December 15,2006 with early application encouraged. SFAS 158 requires financial statement recognition of the overfunded orunderfunded status of a defined benefit postretirement plan or otherpostretirement plan as an asset or liability and recognition of changes in thefunded status in comprehensive earnings in the year in which the changesoccur.  We elected early application andadopted SFAS 158 effective as of January 28, 2006.  The adoption of the recognition provision ofSFAS 158 increased stockholders equity by $4.9 million reduced the definedbenefit pension plan liability by $8.3 million and reduced the deferredtax liability by $3.4 million at January 28, 2006 (see Note 11 to theConsolidated Financial Statements).

 

**CriticalAccounting Policies**

 

Critical accountingpolicies are those accounting policies that are very important to the portrayalof our financial condition which require management’s most difficult,subjective or complex judgments, often as a result of the need to makeestimates about the effect of matters that are inherently uncertain.  Our significant accounting policies aresummarized in Note 3 to the consolidated financial statements.

 

We believe the followingaccounting policies to be critical and could result in materially differentamounts being reported under different conditions or using differentassumptions:

 

15

----

 

**Reservefor Store Closures**

 

Reserves for closedstores are recorded in accordance with Statement of Financial AccountingStandard No. 146, “Accounting for Costs Associated with Exit and DisposalActivities,” or “SFAS 146”.  Werecord a liability for the estimated future cash flows (including future leasecommitments, net of estimated cost recoveries) and miscellaneous closingcosts.  Future cash flows are estimatedbased on our knowledge of the market in which the closed stores arelocated.  The estimates of future cashflows are then discounted to the present based on our interest rate of our realestate facility term loan.  Theseestimates of discounted future cash flows could be affected by changes in realestate markets, other economic conditions and the interest rate used in suchcalculations.

 

**Impairmentof Long-lived Assets**

 

Annually or wheneverchanges in circumstance indicate that the carrying value of an asset may not berecoverable, we review our long-lived assets for impairment at the individualstore level based on estimated future undiscounted cash flows attributable tosuch assets.  This review is inaccordance with Statement of Financial Accounting Standards No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets”, or “SFAS 144”.

 

In the event such cashflows are not expected to be sufficient to recover the recorded value of theassets, such assets are written down to their fair value.  In estimating future cash flows, managementconsiders historical performance and assesses the effect of projected changesin competition, maturation of new stores and store remodels, merchandising andmarketing strategies and general market conditions.  Fair values were determined either bymanagement, based on management’s knowledge of local real estate markets andthe value of equipment utilized in the supermarket industry, or by anindependent third party valuation firm. No assurance can be given that the actual future cash flows will besufficient to recover the carrying value of long-lived assets.  Any reductions in the carrying valueresulting from the application of this policy are reflected in the ConsolidatedStatement of Operations as “Asset impairment charge”.

 

**Inventories**

 

Ourinventories are stated at the lower of cost or market.  We follow the link-chain, dollar-value LIFOmethod when calculating our LIFO charge or credit.  Vendor allowances, including early paymentdiscounts, volume rebates, and funds for product placement and advertising, aregenerally recorded as a reduction of inventory cost based on average inventoryturnover rates by product category.

 

Wetake physical counts of inventories throughout the year and record inventoryshortages based on our physical counts. Where physical counts are not available we record an allowance forinventory shortages based on historical shrinkage percentages.

 

**Intangible Assets**

 

Wehave recorded intangible assets for favorable leases, pharmacy prescriptionfiles and computer software.  We amortizeour favorable leases over the remaining life of the lease including allfavorable options.  We amortize thepharmacy prescription files over five years and we amortize the computersoftware over five years.  We considerthese assets annually during our impairment testing.

 

**Allowance for Doubtful Accounts**

 

Weevaluate the collectability of our accounts and notes receivable based on ouranalysis of past due accounts and historical loss trends.  We record an allowance for doubtful accountsagainst the receivable based on the amount that we believe is reasonablycollectable.  It is possible that ourestimation process could differ materially from the actual amounts collected.

 

16

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**Income Taxes**

 

Incometaxes are provided based on the liability method of accounting.  Deferred income taxes are recorded to reflectthe tax consequences in future years of net operating loss carryovers andtemporary differences between the tax basis of assets and liabilities and theircorresponding financial reporting amounts at year-end.

 

**Self-Insurance Liability**

 

We are primarilyself-insured for workers’ compensation and general liability.  Self-insurance liabilities are primarilycalculated based on claims filed and an estimate of claims incurred but not yetreported.  Workers’ compensation andgeneral liability reserves are determined based on historical loss history,industry development factors and trends related to actual payments.  We have limited our total exposure related toself-insured liability claims incurred by maintaining stop-loss coverage withthird party insurers, as defined in the applicable insurance policies, forclaims incurred in excess of established stop-loss levels and policydeductibles.  Projection of lossesconcerning these liabilities is subject to a high degree of variability due tofactors such as claim settlement patterns, litigation trends, legalinterpretations and future levels of health care.  Should a greater amount of claims occurcompared to what was estimated or costs of health care increase beyond what wasanticipated, reserves recorded may not be adequate and additional expense couldbe required in the consolidated financial statements.

 

**Pension Accounting**

 

We currently are solesponsors of four tax-qualified defined benefit pension plans (the “PensionPlans”).  In accordance with theprovisions of SOP 90-1, upon emergence from bankruptcy, the Company recordedthe underfunded status of each of the defined benefit plans as a liability onthe balance sheet.  As of January 28,2006, the Company adopted the provisions of Financial Accounting Standard No. 158,“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans” and in accordance therewith reflected the underfunded status of theplans in its balance sheet at such date. Prospectively, the Company will adjust the liability to reflect thecurrent funded status of the plan.  Anygains or losses that arise during the period but are not recognized ascomponents of net periodic benefit cost will be recognized as a component ofother comprehensive income.  The adoptionof SFAS 158 resulted in the recognition of $8.3 million of unrecognizedactuarial gains which arose during the period ended January 28, 2006and a corresponding reduction in the defined benefit pension plan liability at January 28, 2006.  Such unrecognized gains, net of deferredtaxes of $3.4 million were credited to accumulated other comprehensiveincome in the amount of $4.9 million. The adoption of SFAS 158 had no effect on the Company’s consolidatedstatement of operations for the period ended January 28, 2006.  See Note 11 to the Consolidated FinancialStatements for further discussion on pensions.

 

Pension expense is calculatedbased upon a number of actuarial assumptions, including an expected long-termrate of return on the Pension Plans assets, a discount rate, and an assumedrate of compensation increase.  Afterconsultation with our actuaries, we determined these actuarial assumptions onour fiscal year end of each year to calculate liability information as of thatdate and pension expense for the following year.  The discount rate assumption is determinedbased on the internal rate of return for Citigroup Pension Liability Index withmaturities that are consistent with projected future plan cash flows.  The assumed discount rate used to determinepension expense for the period ended January 28, 2006 was 5.48%.  The assumed discount rate at January 28,2006 of 5.68% will be used to determine pension expense for Fiscal 2007.

 

The assets of the plansconsist of approximately 54% equity securities, 44% fixed income securities and2% cash at January 28, 2006.  Theexpected long-term rates of return on plan assets is based on historical andprojected average rates of return for current and planned asset classes in theplan investment portfolio.  At January 28,2006 the expected long-term rate of return on plan assets to be used in thedetermination of pension expense for Fiscal 2007 was 7.5%.  Based on an estimate of 50% bonds and 50%stock, the rate of return at January 28, 2006 was 10% and 5%,respectively.

 

Significantdifferences between our actual experience or significant changes in ourassumptions, may materially affect the pension obligations and futureexpense.  Additionally, changes in thefair value of plan assets at year end may materially affect our future pensionexpense.  The fair value of plan assetscan vary significantly from year to year.

 

17

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**ITEM 8.****                       ****FINANCIAL STATEMENTS ANDSUPPLEMENTAL DATA**

 
| ** **                                  | ** ** | **Page** |
|---------------------------------------------|------------|----------|
|                                        |       |     |
| Index  to Consolidated Financial Statements |       |     |
|                                        |       |     |
| Reports of  Independent Accountants         |       | 19       |
|                                        |       |     |
| Consolidated Financial Statements:          |       |     |
|                                        |       |     |
| Balance  Sheets                             |       | 20       |
|                                        |       |     |
| Statement of Operations                     |       | 22       |
|                                        |       |     |
| Statement of Cash Flows                     |       | 23       |
|                                        |       |     |
| Statement of Stockholders’ Equity      |       | 24       |
|                                        |       |     |
| Notes to  Consolidated Financial Statements |       | 25       |

 

18

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Boardof Directors

ThePenn Traffic Company

Syracuse,New York

 

Wehave audited the accompanying consolidated balance sheets of The Penn TrafficCompany (the “Company”) as of January 28, 2006 and April 16, 2005(effective date of plan of reorganization for accounting purposes), and therelated consolidated statements of operations, cash flows and stockholders’equity for the period from April 17, 2005 to January 28, 2006.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audit.

 

Weconducted our audit in accordance with auditing standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of The Penn TrafficCompany as of January 28, 2006 and April 16, 2005, and theconsolidated results of its operations and its cash flows for the period from April 17,2005 to January 28, 2006, in conformity with accounting principlesgenerally accepted in the United States of America.

 

Asdiscussed in Note 2 to the consolidated financial statements, on May 30,2003, the Company filed for voluntary bankruptcy protection and reorganizationunder Chapter 11 of the United States Bankruptcy Code.  On April 13, 2005, the Company’s amendedplan of reorganization became effective and the Company emerged from bankruptcyand, effective April 16, 2005, adopted fresh-start reporting which resultsin a new reporting entity and a new basis of accounting.

 

As discussed inNote 4 to the consolidated financial statements, the 2006 and 2005 financialstatements have been restated to correct a misstatement.

 

The selectedquarterly financial data required by item 302(a) of Regulation S-K, whichhad previously been omitted, is included in Note 16 to the consolidatedfinancial statements.

 

/s/ Eisner LLP

 

New York, New York

June 29,2007, except as to the effects of the restatement discussed in Note 4, as towhich the date is April 11, 2008

 

19

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The Penn Traffic Company

ConsolidatedBalance Sheets

Asof January 28, 2006 and April 16, 2005

(Inthousands, except share and per share data)

 
| ** **                                                                                              | ** ** | **January 28,**                   | ** ** | **April 16,**                     | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                              | ** ** | **2006**                               | ** ** | **2005**                               | ** ** |
| ** **                                                                                              | ** ** | **(Restated - Note 4)** | ** ** | **(Restated - Note 4)** | ** ** |
| ** **                                                                                              | ** ** | ** **                             | ** ** | **(Note 3)**                      | ** ** |
| ** **                                                                                              | ** ** | ** **                             | ** ** | ** **                             | ** ** |
| **ASSETS**                                                                                              |       |                                   |       |                                   |       |
|                                                                                                    |       |                                   |       |                                   |       |
| **Current Assets:**                                                                                     |       |                                   |       |                                   |       |
| Cash                                                                                                    |       | $                                      | 12,432     |                                   | $          | 29,304 |   |
| Accounts and notes receivable (less  allowance fordoubtful accounts of $3,174 and $3,243, respectively) |       | 36,970                                 |       | 40,416                                 |       |
| Inventories (Note 3)                                                                                    |       | 113,467                                |       | 116,518                                |       |
| Prepaid expenses and other current assets                                                               |       | 6,157                                  |       | 11,433                                 |       |
|                                                                                                    |       | 169,026                                |       | 197,671                                |       |
|                                                                                                    |       |                                   |       |                                   |       |
| **Capital Leases:**                                                                                     |       |                                   |       |                                   |       |
| Capital leases                                                                                          |       | 12,023                                 |       | 12,023                                 |       |
| Less: Accumulated amortization                                                                          |       | (1,026                                 | )          | —                                 |       |
|                                                                                                    |       | 10,997                                 |       | 12,023                                 |       |
|                                                                                                    |       |                                   |       |                                   |       |
| **Fixed Assets:**                                                                                       |       |                                   |       |                                   |       |
| Land                                                                                                    |       | 11,588                                 |       | 11,584                                 |       |
| Buildings                                                                                               |       | 13,621                                 |       | 13,238                                 |       |
| Equipment and furniture                                                                                 |       | 83,378                                 |       | 68,937                                 |       |
| Vehicles                                                                                                |       | 6,749                                  |       | 5,419                                  |       |
| Leasehold improvements                                                                                  |       | 5,062                                  |       | 721                                    |       |
|                                                                                                    |       | 120,398                                |       | 99,899                                 |       |
| Less: Accumulated depreciation                                                                          |       | (15,999                                | )          | —                                 |       |
|                                                                                                    |       | 104,399                                |       | 99,899                                 |       |
|                                                                                                    |       |                                   |       |                                   |       |
| **Other Assets:**                                                                                       |       |                                   |       |                                   |       |
| Intangible assets (Note 6)                                                                              |       | 33,025                                 |       | 39,612                                 |       |
| Deferred tax asset                                                                                      |       | 2,609                                  |       | 3,524                                  |       |
| Other assets                                                                                            |       | 5,335                                  |       | 6,845                                  |       |
|                                                                                                    |       | 40,969                                 |       | 49,981                                 |       |
|                                                                                                    |       |                                   |       |                                   |       |
| **Total Assets**                                                                                        |       | $                                      | 325,391    |                                   | $          | 359,574 |   |

 

The accompanying notes are an integral part of these statements.

 

20

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| ** **                                                                                                            | ** ** | **January 28,**                   | ** ** | **April 16,**                     | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                            | ** ** | **2006**                               | ** ** | **2005**                               | ** ** |
| ** **                                                                                                            | ** ** | **(Restated - Note 4)** | ** ** | **(Restated - Note 4)** | ** ** |
| ** **                                                                                                            | ** ** | ** **                             | ** ** | **(Note 3)**                      | ** ** |
|                                                                                                                  |       |                                   |       | ** **                             |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                        |       |                                   |       |                                   |       |
|                                                                                                                  |       |                                   |       |                                   |       |
| **Current Liabilities:**                                                                                              |       |                                   |       |                                   |       |
| Current portion of obligations under  capital leases (Note 5)                                                         |       | $                                      | 1,310      |                                   | $          | 1,200 |   |
| Current maturities of long-term debt (Note  7)                                                                        |       | 278                                    |       | 254                                    |       |
| Accounts payable                                                                                                      |       | 36,695                                 |       | 35,075                                 |       |
| Other current liabilities (Note 8)                                                                                    |       | 46,294                                 |       | 58,576                                 |       |
| Accrued interest expense                                                                                              |       | 557                                    |       | 554                                    |       |
| Deferred income taxes (Note 10)                                                                                       |       | 13,302                                 |       | 14,016                                 |       |
| Liabilities subject to compromise (Note 9)                                                                            |       | 2,871                                  |       | 8,497                                  |       |
|                                                                                                                  |       | 101,307                                |       | 118,172                                |       |
|                                                                                                                  |       |                                   |       |                                   |       |
| **Non-current Liabilities:**                                                                                          |       |                                   |       |                                   |       |
| Obligations under capital leases (Note 5)                                                                             |       | 12,429                                 |       | 13,425                                 |       |
| Long-term debt (Note 7)                                                                                               |       | 37,235                                 |       | 37,967                                 |       |
| Defined benefit pension  plan liability (Note 11)                                                                     |       | 27,600                                 |       | 39,959                                 |       |
| Other non-current  liabilities (Note 8)                                                                               |       | 28,021                                 |       | 31,473                                 |       |
|                                                                                                                  |       | 105,285                                |       | 122,824                                |       |
|                                                                                                                  |       |                                   |       |                                   |       |
| **Total Liabilities**                                                                                                 |       | 206,592                                |       | 240,996                                |       |
|                                                                                                                  |       |                                   |       |                                   |       |
| **Commitments and Contingencies (Notes 5, 7  and 12)**                                                                |       |                                   |       |                                   |       |
|                                                                                                                  |       |                                   |       |                                   |       |
| **Stockholders’ Equity:**                                                                                        |       |                                   |       |                                   |       |
| Preferred stock - authorized 1,000,000  shares,$.01 par value; none issued                                            |       | —                                 |       | —                                 |       |
| Common stock - authorized 15,000,000  shares, $.01 par value; issued and to be issued 8,498,752 shares at both  dates |       | 85                                     |       | 85                                     |       |
| Capital in excess of par value                                                                                        |       | 118,493                                |       | 118,493                                |       |
| Deficit                                                                                                               |       | (4,698                                 | )          | —                                 |       |
| Accumulated other comprehensive income                                                                                |       | 4,919                                  |       | —                                 |       |
| **Total stockholders’ equity**                                                                                   |       | 118,799                                |       | 118,578                                |       |
|                                                                                                                  |       |                                   |       |                                   |       |
| **Total Liabilities and Stockholders’ Equity**                                                                   |       | $                                      | 325,391    |                                   | $          | 359,574 |   |

 

The accompanying notes are an integral part of these statements.

 

21

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ThePenn Traffic Company

ConsolidatedStatement of Operations

Forthe Period from April 17, 2005 to January 28, 2006

(Inthousands, except share and per share data)

 
| ** **                                           | ** ** | **Restated**      | ** ** |
|------------------------------------------------------|------------|-------------------|------------|
| ** **                                           | ** ** | **(Note 4)** | ** ** |
|                                                 |       |              |       |
| **Revenues**                                         |       | $                 | 1,015,893  |   |
|                                                 |       |              |       |
| **Cost and Operating Expenses:**                     |       |              |       |
| Cost of sales                                        |       | 754,995           |       |
| Selling and administrative expenses                  |       | 256,023           |       |
|                                                 |       |              |       |
| **Operating Income**                                 |       | 4,875             |       |
| Interest expense                                     |       | 8,289             |       |
| Reorganization expenses                              |       | 1,023             |       |
|                                                 |       |              |       |
| **Loss Before Income Taxes**                         |       | (4,437            | )          |
| Income tax expense (Notes 3 and 10)                  |       | 261               |       |
|                                                 |       |              |       |
| **Net Loss**                                         |       | $                 | (4,698     | ) |
|                                                 |       |              |       |
| Shares  outstanding and to be issued                 |       | 8,498,752         |       |
|                                                 |       |              |       |
| **Net Loss Per Share (Basic and Diluted)  (Note 3)** |       | $                 | (0.55      | ) |

 

22

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ThePenn Traffic Company

ConsolidatedStatement of Cash Flows

Forthe Period from April 17, 2005 to January 28, 2006

(Inthousands)

 
| ** **                                                                       | ** ** | **Restated**      | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                       | ** ** | **(Note 4)** | ** ** |
| ** **                                                                       | ** ** | ** **        | ** ** |
| **Operating Activities:**                                                        |       |              |       |
| Net (loss)                                                                       |       | $                 | (4,698     | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |              |       |
| Depreciation and amortization                                                    |       | 18,798            |       |
| Amortization of deferred financing cost                                          |       | 1,066             |       |
| (Gain) on sale of fixed assets                                                   |       | (605              | )          |
|                                                                             |       |              |       |
| **Net change in operating assets and  liabilities:**                             |       |              |       |
| Accounts and notes receivable, net                                               |       | 3,446             |       |
| Prepaid expenses and other current assets                                        |       | 5,276             |       |
| Inventories                                                                      |       | 3,051             |       |
| Liabilities subject to compromise                                                |       | (5,626            | )          |
| Accounts payable and other current  liabilities                                  |       | (10,659           | )          |
| Other assets                                                                     |       | 444               |       |
| Defined benefit pension plan                                                     |       | (4,044            | )          |
| Other non-current liabilities                                                    |       | (1,799            | )          |
|                                                                             |       |              |       |
| **Net Cash Provided by Operating Activities**                                    |       | 4,650             |       |
|                                                                             |       |              |       |
| **Investing Activities:**                                                        |       |              |       |
| Capital expenditures                                                             |       | (20,533           | )          |
| Proceeds from sale of fixed assets                                               |       | 605               |       |
|                                                                             |       |              |       |
| **Net Cash Used in Investing Activities**                                        |       | (19,928           | )          |
|                                                                             |       |              |       |
| **Financing Activities:**                                                        |       |              |       |
| Payments of mortgages                                                            |       | (208              | )          |
| Net repayments  under revolving credit facility                                  |       | (500              | )          |
| Reduction in  capital lease obligations                                          |       | (886              | )          |
|                                                                             |       |              |       |
| **Net Cash Used In Financing Activities**                                        |       | (1,594            | )          |
|                                                                             |       |              |       |
| **Net decrease in cash**                                                         |       | (16,872           | )          |
|                                                                             |       |              |       |
| **Cash at the beginning of period**                                              |       | 29,304            |       |
|                                                                             |       |              |       |
| **Cash at end of period**                                                        |       | $                 | 12,432     |   |

 

23

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ThePenn Traffic Company

ConsolidatedStatement of Stockholders’ Equity

Forthe Period from April 17, 2005 to January 28, 2006

(Inthousands)

 
| ** **                                                                                                            | ** ** | **Common  Stock** | ** ** | **Capital in  Excess of  Par Value** | ** ** | **Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------------------------------------|------------|-------------|------------|-----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                            | ** ** | ** **        | ** ** | ** **                                          | ** ** | ** **  | ** ** | ** **                                    | ** ** | ** **                            | ** ** |
| Common stock to be issued in connection with plan of reorganization |       | $                 | 85         |                                                | $          | 118,493     |       | $                                             | —     |                                  | —     |   | $ | 118,578 |   |
| ** **                                                                                                            | ** ** | ** **        | ** ** | ** **                                          | ** ** | ** **  | ** ** | ** **                                    | ** ** | ** **                            | ** ** |
| Net loss for the 41-week period ended January 28,  2006                                                          |       | —            |       | —                                              |       | (4,698      | )          | —                                        |       | (4,698                                | )          |
| Unrecognized actuarial gain of pension plans,  net of deferred taxes of $3,396                                        |       | —            |       | —                                              |       | —      |       | 4,919                                         |       | 4,919                                 |       |
|                                                                                                                  |       |              |       |                                                |       |        |       |                                          |       |                                  |       |
| Balance at January 28, 2006                                                                                      |       | $                 | 85         |                                                | $          | 118,493     |       | $                                             | (4,698     | )                                     | $          | 4,919 |   | $ | 118,799 |   |
| Restated (Note 4)                                                                                                     |       |              |       |                                                |       |        |       |                                          |       |                                  |       |
|                                                                                                                       |            |                   |            |                                                     |            |             |            |                                               |            |                                       |            |  |  |  |  |  |

 

24

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The Penn Traffic Company

Notesto Consolidated Financial Statements

 

**Note 1 – Description of Business**

 

ThePenn Traffic Company and its subsidiaries (the “Company”) are engaged in theretail food business and the wholesale food distribution business.  As of January 28, 2006, the Companyoperated 110 supermarkets under the “P&C”, “Quality” and “Bi-Lo”banners in upstate New York, Pennsylvania, Vermont and New Hampshire, andsupplied 79 independent supermarkets and 41 other independent wholesaleaccounts.  The Company services theseowned and independent supermarkets and independent wholesale accounts throughfive distribution centers and a bakery.

 

**Note 2 – Voluntary Bankruptcy Filing and Reorganization**

 

OnMay 30, 2003, The Penn Traffic Company and all of its subsidiaries filedvoluntary petitions under Chapter 11 of the United States Bankruptcy Codein the United States Bankruptcy Court for the Southern District of NewYork.  The filing was made in response topending defaults under the Company’s then-existing loan agreements and a lackof liquidity to continue operations. Under Chapter 11, the Company continued to operate its businesses asdebtor-in-possession under court protection from its creditors and claimants, whileusing the Chapter 11 process to substantially reduce its debt obligations andimplement a plan of reorganization.

 

OnFebruary 2, 2005, the Company filed the First Amended Joint Plan ofReorganization (the “Plan”) with the bankruptcy court.  The Plan was confirmed on March 17, 2005and became effective on April 13, 2005 (the “Effective Date”).

 

Pursuantto the terms of the Plan, the following transactions occurred on or around theEffective Date:

 

1.         The Company entered into new credit agreements providing for borrowingsof up to $164 million (see Note 7). Proceeds from these new credit agreements provided funds sufficient torepay a debtor-in-possession credit facility and all administrative andpriority claims to the extent provided for in the Plan.

 

2.         The Company sold and leased back its five owned distribution facilitiesfor a sales price of approximately $37 million.

 

3.         All shares of common stock and all stock options and warrantsoutstanding prior to the confirmation of the Plan were cancelled and theholders of such equity securities received no distributions under the Plan.

 

4.         The reorganized Company was authorized to issue new shares of commonstock to unsecured creditors, which included holders of $100 million ofsenior notes, a claim by the Pension Benefit Guaranty Corporation or the “PBGC”of $60 million (see Note 11) and trade claims, all of whom were eligibleto receive pro rata distributions of new shares of common stock and the rightto share in potential proceeds from certain causes of action.

 

**Note 3 –Summary of Significant Accounting Policies**

 

**Principlesof Consolidation**

 

Theaccompanying financial statements include the accounts of The Penn TrafficCompany and its wholly-owned subsidiaries. All significant intercompany balances and transactions have beeneliminated in consolidation.

 

**FiscalYear**

 

TheCompany’s fiscal year ends on the Saturday closest to January 31.  Fiscal year 2006 is the 41-week period from April 17,2005, the commencement of Fresh-Start Reporting (see below), to January 28,2006.

 

25

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**Basisof Presentation**

 

Theaccompanying consolidated financial statements as of April 16, 2005 and January 28,2006, and for the fiscal period from April 17, 2005 to January 28,2006, have been prepared in accordance with the provisions of Statement ofPosition 90-7 “Financial Reporting by Entities in Reorganization Under theBankruptcy Code” (“SOP 90-7”) issued by the American Institute of CertifiedPublic Accountants.  Pursuant to theprovisions of SOP 90-7, upon emergence from Chapter 11 proceedings, the Companyadopted fresh-start reporting which resulted in a new reporting entity and anew basis of accounting.

 

AlthoughApril 13, 2005 was the effective date of the Plan, the Company chose April 16, 2005as the effective date for accounting purposes to adopt fresh-start reportingbecause of the proximity of that date to the end of an accounting period.  Applying fresh-start reporting as of April 16, 2005rather than the actual effective date of April 13, 2005 did not have amaterial effect on the financial condition or results of operations of theCompany.

 

Thereorganization value of the Company upon emergence from the Chapter 11proceedings was approximately $195 million.  The reorganization value represents the debtand equity value of the Company as of the effective date.  Such value, which was determined with theassistance of the Company’s financial advisors, was based upon variousvaluation methods, including discounted cash flow methodologies and analysis ofcomparable companies.  The equity valueof the Company upon reorganization amounting to approximately$118 million, was determined after taking into account approximately$77 million of debt, consisting of long-term debt, obligations undercapital leases and defined benefit pension plan liabilities, net of relateddeferred taxes.  In accordance withfresh-start reporting, all assets and liabilities were recorded at theirrespective fair values.  The fair valuesof the Company’s long-lived assets were determined, in part, using informationprovided by third-party appraisers.  Theexcess of the aggregate fair value of the Company’s tangible and identifiableintangible assets less non-interest bearing liabilities over the totalreorganization value of approximately $28.2 million has been recorded as apro rata reduction of non-current assets.

 

**Use ofEstimates**

 

Thepreparation of the financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualamounts could differ from those estimates.

 

**RevenueRecognition**

 

Revenuefrom the sale of products to retail customers is recognized at the time ofsale.  Discounts provided to customersthrough company sponsored loyalty programs are recognized as a reduction insales as products are sold.  Discountsprovided through vendor coupons are not recognized as a reduction in sales tothe extent the Company is reimbursed by the vendor. Pharmacy sales are recordedwhen prescriptions are picked up by the customer.  Sales taxes are not recorded as a component ofsales.  Revenue from gift certificates isrecognized upon redemption of the gift certificates for products.

 

Revenuefrom the sale of products to wholesale customers is recognized at the time ofshipment.

 

**Cost ofSales**

 

Costof sales includes the cost of product and related warehousing and freightcosts.  Vendor allowances are recorded asa reduction of cost of sales when the related product is sold in accordancewith the provisions of Emerging Issues Task Force Issue 02-16.  “Accounting by a Customer (Including aReseller) for Certain Consideration Received from a Vendor”.  Vendor allowances, including early paymentdiscounts, volume rebates, and funds for product placement and advertising, aregenerally recorded as a reduction of inventory cost based on average inventoryturnover rates by product category.

 

Vendorallowances recognized as a reduction of cost of sales for the period ended January 28, 2006aggregated $43.8 million.

 

26

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**Advertising**

 

Advertisingcosts are expensed as incurred and included in selling and administrativeexpenses. Advertising expense for the period ended January 28, 2006aggregated $11.1 million.

 

**Accountsand Notes Receivable**

 

Accountsand notes receivable consist primarily of amounts due from wholesale customers,debit and credit card sales, third party insurance pharmacy sales and vendorallowances.  The Company establishes anallowance for doubtful accounts based on an analysis of past due accounts andhistorical loss trends.

 

**FairValue of Financial Instruments**

 

Thecarrying value of cash, accounts receivable, trade accounts payable and accruedexpenses approximate their fair values due to the relatively short maturitiesof the instruments.  For other debt,carrying value approximates fair value because their interest rates approximatemarket rates.

 

**Inventories**

 

Inventories,consisting primarily of grocery and pharmacy products, are stated at the lowerof cost or market.  Cost is determinedusing the last-in, first-out method (“LIFO”) using the estimated fair value ofinventory on April 16, 2005 upon adoption of fresh-start reporting todetermine LIFO cost for financial reporting purposes.  If cost had been determined using the first-in,first-out method (“FIFO”), inventories would have been $1.5 million higherthan reported at January 28, 2006.

 

TheCompany takes physical counts of inventories throughout the year and recordsinventory shortage adjustments based on the physical counts.  Throughout the year the Company is accruingfor inventory shortages based on historical trends and averages in the properperiods.  Where physical counts are nottaken at the year end, the Company establishes an allowance for inventoryshortages based on historical shrinkage percentages.

 

**FixedAssets and Capital Leases**

 

Majorrenewals and betterments are capitalized, while maintenance and repairs arecharged to expense as incurred. Depreciation and amortization are provided on a straight-line basis overthe estimated useful lives of the assets or, for leasehold improvements, theshorter of the estimated useful lives of the assets or the lease term (whichincludes renewal periods that are reasonably assured).

 

Estimateduseful lives are as follows:

 
| Buildings                |   | 39  years       |
|--------------------------|--------|-----------------|
| Capitalized  leases      |   | 5  to 32 years  |
| Equipment  and furniture |   | 3  to 10 years  |
| Leasehold  improvements  |   | 10  to 32 years |
| Vehicles                 |   | 3  to 8 years   |

 

Fixed assets are reviewed for impairment when events or changes incircumstances indicate that the carrying amount may not be recoverable.  An impairment loss would be recognized whenfuture undiscounted cash flows expected to result from the use of the asset andits eventual disposal are less than the carrying amount.

 

27

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**IntangibleAssets**

 

Identifiableintangible assets consist primarily of favorable leases and pharmacyprescription files (both established upon adoption of fresh-startreporting).  Favorable operating leasesrepresent the present value of the difference by which market value rentexceeds contract rent and are amortized on a straight-line basis over theremaining lease term, including renewal options ranging from 2 to 32years.  Pharmacy prescription files areamortized on a straight-line basis over 5 years.  Computer software is amortized over 5 years.

 

Identifiableintangibles are reviewed for impairment when events or changes in circumstancesindicate that the carrying amount may not be recoverable.  An impairment loss would be recognized whenfuture undiscounted cash flows expected to result from the use of the asset andits eventual disposal are less than the carrying amount.

 

**UnfavorableLeases**

 

Unfavorableoperating leases (established upon adoption of fresh-start reporting) arereported in other non-current liabilities and represent the present value ofthe difference by which contract rent exceeds market value rent and areamortized on a straight-line basis over the remaining lease term, excludingrenewal options, ranging from 2 to 13 years.

 

**IncomeTaxes**

 

Incometaxes are provided based on the liability method of accounting.  Deferred income taxes are recorded to reflectthe tax consequences in future years of net operating loss carryovers andtemporary differences between the tax basis of assets and liabilities and theircorresponding financial reporting amounts at each year-end.

 

**Self-InsuranceLiability**

 

TheCompany self-insures certain insurable risks related to workers’ compensationand general product liability claims. The Company accrues estimated losses forunpaid claims, including incurred but not reported losses, with the assistanceof an external actuary and by factoring in pending claims and historical lossexperience. The Company also maintains self-insured health benefits plans,which provide medical and dental benefits to employees electing coverage underthe plans. The Company accrues estimated losses for unpaid claims, includingincurred but not reported claims, based on historical experience and otherassumptions. Commercial policies are obtained to provide for coverage ofcertain risk exposure above the self-insured retention limits. The estimatedliability associated with settling unpaid claims is included in other currentliabilities if expected to be settled within one year, or otherwise is includedin other non-current liabilities.

 

**StorePre-Opening Costs**

 

Storepre-opening costs are expensed as incurred.

 

**Store Closing Costs**

 

For operating leases related to closed stores, the Company records thefair value of the liability at the cease-use date, determined based on thediscounted value of the remaining lease rentals, reduced by estimated subleaserentals that could be reasonably obtained for the property.  Any one-time termination benefits arerecognized at the time the benefits are communicated to the employees.  Other related costs are recognized in theperiod when the liability is incurred.

 

28

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**Per Share Data**

 

Basic and diluted net loss per share is based on the number of commonshares issued and estimated to be issued pursuant to the Plan.  Common shares issued and estimated to beissued in settlement of claims filed in the Company’s Chapter 11 proceeding aretreated as outstanding as of the effective date of the Plan.  At January 28, 2006, 201,055 commonshares are estimated to be issued in connection with the settlement ofremaining claims (see Note 9.

 

**Recently Issued Accounting Standards**

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued FASB Statement No. 123 (revised 2004), “Share-Based Payment,” (“SFAS123R”) which is a revision of FASB Statement No. 123, “Accounting forStock-Based Compensation.”  SFAS 123Rsupersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,”and requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the income statement based on theirfair values.  Pro forma disclosure is nolonger an alternative. SFAS 123R is required to be adopted in the first annualreporting period beginning after June 15, 2005.  Accordingly, the Company will adopt SFAS 123Reffective January 29, 2006.

 

In June 2006, the FASB issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”(“FIN 48”) effective for fiscal years beginning after December 15,2006.  FIN 48 clarifies the accountingfor uncertainty in tax positions.  FIN 48requires financial statement recognition of the impact of a tax position whenit is more likely than not, based on its technical merits, that the positionwill be sustained upon examination.  TheCompany is currently evaluating the effect of adopting FIN 48.

 

In June 2006, the FASB ratified Emerging Issues Task Force Issue No. 06-3,“How Sales Taxes Collected From Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement (that is, Gross VersusNet Presentation)” (“EITF 06-3”) effective for periods beginning after December 15,2006.  EITF 06-3 allows taxes assessed byvarious governmental authorities that are directly imposed on revenue-producingtransactions between a seller and a customer, such as sales and some excisetaxes, to be presented on either a gross or net basis.  If such taxes are significant, the accountingpolicy should be disclosed as well as the amount of taxes included in revenueif presented on a gross basis.  TheCompany records sales net of applicable sales taxes.  Therefore, the adoption of EITF 06-3 willhave no effect on the presentation of the Company’s financial statements.

 

In September 2006, the FASB issued Statement of FinancialAccounting Standard No. 157, “Fair Value Measurement” (“SFAS 157”)effective for fiscal years beginning after November 15, 2007.  SFAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements.  SFAS 157 does not require any new fair valuemeasurements.  The Company is currentlyevaluating the effect of adopting SFAS 157.

 

In September 2006, the FASB issued Statement of FinancialAccounting Standard No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans – an amendment of FASB Statements No. 87,88, 106 and 132R” (“SFAS 158”) effective for fiscal years ending after December 15,2006 with early application encouraged. SFAS 158 requires financial statement recognition of the overfunded orunderfunded status of a defined benefit postretirement plan or other postretirementplan as an asset or liability and recognition of changes in the funded statusin comprehensive earnings in the year in which the changes occur. The Companyelected early application and adopted SFAS 158 effective as of January 28, 2006.  The adoption of the recognition provision ofSFAS 158 increased stockholders equity by $4.9 million, reduced thedefined benefit pension plan liability by $8.3 million and reduced thedeferred tax liability by $3.4 million at January 28, 2006 (see Note11).

 

29

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**Note 4 –Restatement**

 

Asa result of cancellation of debt in the Chapter 11 proceedings (see Note 2),the Company previously entirely eliminated all net operating loss carryforwardsand reduced the tax basis of its long-lived assets effective January 29, 2006.  The Company has corrected the amount of debtforgiveness in the Chapter 11 proceedings that reduced tax attributes whichresults in an increase aggregating $66 million in the tax basis of its long-livedassets and net operating loss carryforwards.

 

Thecorrection resulted in an increase in deferred tax assets attributable to thenet operating loss carryforwards, the recording of a related valuationallowance and a reduction in the deferred tax liability attributable to theincrease in the tax basis of long-lived assets. The net effect of the above was a $3.5 million reduction in the netdeferred tax liability and a corresponding reduction in the carrying value ofcertain long-lived assets upon adoption of fresh-start reporting on April 16,2005.  As a result, net loss for theperiod from April 17, 2005 to January 28, 2006 and for the year endedFebruary 3, 2007 was restated as follows:

 
| ** **                                      | ** ** | **Period Ended** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **January 28,**  | ** ** |
| ** **                                      | ** ** | **2006**              | ** ** |
| ** **                                      | ** ** | ** **            | ** ** |
| Net loss as previously reported                 |       | $                     | (3,811     | ) |
|                                            |       |                  |       |
| Reduction in depreciation of long-lived  assets |       | 277                   |       |
| Reduction in income tax benefit                 |       | (1,164                | )          |
|                                            |       |                  |       |
| Net loss as restated                            |       | $                     | (4,698     | ) |
|                                            |       |                  |       |
| Net loss per share (basic and diluted):         |       |                  |       |
| As previously reported                          |       | $                     | (0.45      | ) |
| Restated                                        |       | (0.10                 | )          |
| As restated                                     |       | $                     | (0.55      | ) |

 

Thebalance sheet at January 28, 2006 has been restated as follows:

 
| ** **                | ** ** | ** **             | ** ** | ** **           | ** ** | **Change**          | ** ** |
|---------------------------|------------|------------------------|------------|----------------------|------------|---------------------|------------|
| ** **                | ** ** | **As previously** | ** ** | ** **           | ** ** | **Increase /** | ** ** |
| ** **                | ** ** | **reported**           | ** ** | **As restated** | ** ** | **(decrease)**      | ** ** |
|                      |       |                   |       |                 |       |                |       |
| Intangible assets, net    |       | $                      | 36,220     |                 | $          | 33,025              |       | $ | (3,195 | ) |
| Fixed assets, net         |       | 107,629                |       | 104,399              |       | (3,230              | )          |
|                      |       |                   |       |                 |       |                |       |
| Deferred income taxes:    |       |                   |       |                 |       |                |       |
| Other assets              |       | —                 |       | 2,609                |       | 2,609               |       |
| Current liabilities       |       | 7,900                  |       | 13,302               |       | 5,402               |       |
| Non-current liabilities   |       | 8,331                  |       | —               |       | (8,331              | )          |
|                      |       | 16,231                 |       | 10,693               |       | 5,538               |       |
|                      |       |                   |       |                 |       |                |       |
| Stockholders’ equity |       | $                      | 119,686    |                 | $          | 118,799             |       | $ | (887 | ) |

 

30

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Thebalance sheet at April 16, 2005 has been restated as follows:

 
| ** **              | ** ** | ** **             | ** ** | ** **           | ** ** | **Change**          | ** ** |
|-------------------------|------------|------------------------|------------|----------------------|------------|---------------------|------------|
| ** **              | ** ** | **As previously** | ** ** | ** **           | ** ** | **Increase /** | ** ** |
| ** **              | ** ** | **reported**           | ** ** | **As restated** | ** ** | **(decrease)**      | ** ** |
|                    |       |                   |       |                 |       |                |       |
| Fixed assets, net       |       | $                      | 103,406    |                 | $          | 99,899              |       | $ | (3,507 | ) |
|                    |       |                   |       |                 |       |                |       |
| Deferred income taxes:  |       |                   |       |                 |       |                |       |
| Other assets            |       | —                 |       | 3,524                |       | 3,524               |       |
| Current liabilities     |       | 344                    |       | 14,016               |       | 13,672              |       |
| Non-current liabilities |       | 13,655                 |       | —               |       | (13,655             | )          |
|                    |       | $                      | 13,999     |                 | $          | 10,492              |       | $ | 3,507 |   |

 

31

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**Note 5 –Leases**

 

TheCompany leases store facilities for the operation of its retail food businessand distribution facilities for its wholesale food distribution business.  In accordance with the provision of FASBStatement No. 13, “Accounting for Leases,” certain of the leases meet thecriteria to be recorded as capital leases. The remaining leases are recorded as operating leases.  Most of the lease agreements provide forrenewal options and require that the Company pay real estate taxes and otherrelated expenses.  Certain of the leaseagreements also provide for contingent rent payments based on a percentage ofsales.

 

Thefollowing is a summary of future minimum rent payments for operating leases andfor capital leases as of January 28, 2006 (in thousands):

 
| **Fiscal Year Ending**            | ** ** | **Operating Leases** | ** ** | **Capital Leases** | ** ** |
|---------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
|                                        |       |                      |       |                    |       |
| February 3, 2007                       |       | $                         | 22,766     |                    | $          | 2,855 |   |
| February 2, 2008                       |       | 20,873                    |       | 2,855                   |       |
| January 31, 2009                       |       | 19,759                    |       | 2,855                   |       |
| January 30, 2010                       |       | 15,778                    |       | 2,781                   |       |
| January 29, 2011                       |       | 13,761                    |       | 1,944                   |       |
| Thereafter                                  |       | 70,935                    |       | 12,766                  |       |
|                                        |       |                      |       |                    |       |
| Total minimum lease payments                |       | $                         | 163,872    |                    | 26,056     |   |
|                                        |       |                      |       |                    |       |
| Less: Amount representing interest          |       |                      |       | 12,317                  |       |
|                                        |       |                      |       |                    |       |
| Present value of net minimum lease payments |       |                      |       | 13,739                  |       |
|                                        |       |                      |       |                    |       |
| Less: Current portion                       |       |                      |       | 1,310                   |       |
|                                        |       |                      |       |                    |       |
| Long-term obligations under capital leases  |       |                      |       | $                       | 12,429     |   |

 

Futureminimum rent payments have not been reduced by minimum sublease rent income of$8.3 million due in the future under non-cancelable subleases.

 

Rentexpense under operating leases for the period ended January 28, 2006 was$10.7 million as follows (in thousands):

 
| Minimum rent        |   | $      | 13,115 |   |
|---------------------|--------|--------|--------|--------|
| Contingent rent     |   | 201    |   |
| Less: sublease rent |   | (2,625 | )      |
| Net rent expense    |   | $      | 10,691 |   |

 

32

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**Note 6 – Intangible Assets**

 

Intangible assets as of January 28, 2006 and April 16, 2005consist of the following (in thousands):

 
| ** **                       | ** ** | **January 28, 2006** | ** ** | **April 16, 2005** | ** ** |
|----------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                       | ** ** | **Gross Carrying**        | ** ** | **Accumulated**              | ** ** | ** ** | ** ** | **Gross Carrying** | ** ** |
| ** **                       | ** ** | **Amount**                     | ** ** | **Amortization**             | ** ** | **Net** | ** ** | **Amount** | ** ** |
| Amortized intangible assets (1): |       |                           |       |                         |       |   |   |   |   |
| Favorable leases                 |       | $                              | 24,584     |                         | $          | (1,365 | ) | 23,219 |   | $ | 26,739 |   |
| Pharmacy prescription files      |       | 9,527                          |       | (1,657                       | )          | 7,870 |   | 10,362 |   |
| Computer software                |       | 2,337                          |       | (401                         | )          | 1,936 |   | 2,511 |   |
|                             |       |                           |       |                         |       |   |   |   |   |
| Total                            |       | $                              | 36,448     |                         | $          | (3,423 | ) | $ | 33,025 |   | $ | 39,612 |   |
|                                  |            |                                |            |                              |            |  |  |  |  |  |  |  |  |

 

----

| (1) |   | Reduced by  approximately $3.0 million at January 28, 2006 by reduction in  pre-reorganization deferred tax valuation allowance (see Note 10). |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

 
| Aggregate amortization expense:            |   |   |   |   |   |
|--------------------------------------------|--------|--------|--------|--------|--------|
|                                       |   |   |   |   |   |
| For the period ended January 28, 2006 |   |   |   | $      | 3,423  |   |
|                                       |   |   |   |   |   |
| Future Amortization:                       |   |   |   |   |   |
|                                       |   |   |   |   |   |
| Fiscal Year Ending:                        |   |   |   |   |   |
| February 3, 2007                      |   | $      | 3,677  |   |   |   |
| February 2, 2008                      |   | 3,526  |   |   |   |
| January 31, 2009                      |   | 3,877  |   |   |   |
| January 30, 2010                      |   | 3,984  |   |   |   |
| January 29, 2011                      |   | 1,885  |   |   |   |
| Thereafter                                 |   | 16,076 |   |   |   |
|                                       |   |   |   |   |   |
|                                       |   | $      | 33,025 |   |   |   |
|                                            |        |        |        |        |        |  |  |

 

33

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**Note 7 – Debt**

 

Debt consists of the following at January 28, 2006 and April 16,2005 (in thousands):

 
| ** **                                                                                                                                                    | ** ** | **January 28,** | ** ** | **April 16,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                    | ** ** | **2006**             | ** ** | **2005**           | ** ** |
|                                                                                                                                                          |       |                 |       |               |       |
| Revolving credit  facility, interest (6.60% at January 28, 2006) at prime plus .50% to  1.25% or LIBOR plus 2.00% to 2.75%, maturing April 13, 2008 |       | $                    | 17,000     |               | $          | 17,500 |   |
|                                                                                                                                                          |       |                 |       |               |       |
| Term loan  facility, interest (12.25% at January 28, 2006) at prime plus 5.00%,  maturing April 13, 2008                                            |       | 6,000                |       | 6,000              |       |
|                                                                                                                                                          |       |                 |       |               |       |
| Supplemental real  estate credit facility, interest (12.75% at January 28, 2006) at prime  plus 5.50%, maturing April 13, 2008                      |       | 10,000               |       | 10,000             |       |
|                                                                                                                                                          |       |                 |       |               |       |
| Mortgages payable, interest at 6.125% to 12%,  maturing at various dates through May 1, 2021                                                             |       | 4,513                |       | 4,721              |       |
|                                                                                                                                                          |       |                 |       |               |       |
| Total debt                                                                                                                                                    |       | 37,513               |       | 38,221             |       |
|                                                                                                                                                          |       |                 |       |               |       |
| Less: Current portion of long-term debt                                                                                                                       |       | 278                  |       | 254                |       |
|                                                                                                                                                          |       |                 |       |               |       |
| Total long-term  debt                                                                                                                                         |       | $                    | 37,235     |               | $          | 37,967 |   |

 

Maturitiesof debt over the next five years are as follows (in thousands):

 
| Fiscal Year Ending:   |   |   |   |
|-----------------------|--------|--------|--------|
| February 3, 2007 |   | $      | 278    |   |
| February 2, 2008 |   | 33,314 |   |
| January 31, 2009 |   | 280    |   |
| January 30, 2010 |   | 298    |   |
| January 29, 2011 |   | 324    |   |
| Thereafter            |   | 3,019  |   |
|                  |   |   |   |
|                  |   | $      | 37,513 |   |

 

34

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OnApril 16, 2005, upon emergence from Chapter 11 proceedings, the Companyentered into a revolving credit and term loan facility with a group offinancial institutions providing for a $130 million revolving creditfacility and a $6 million term loan. Also on April 16, 2005, the Company entered into a supplementalreal estate credit facility with another group of lenders, providing for borrowingsof up to $28 million. Availability under both credit facilities isdependent on levels of accounts receivable, inventory and certain otherassets.  Interest rates on borrowingsunder the revolving credit facility vary depending upon the amount ofavailability.  At January 28, 2006,outstanding borrowings under both facilities aggregated $33 million andoutstanding letters of credit under the revolving credit facility amounted toapproximately $53 million. At such date, availability in excess of outstandingborrowings and letters of credit was approximately $54 million. Borrowingsunder the revolving credit and term loan facility are secured by substantiallyall the assets of the Company, subject to first liens on certain property byother lenders. Borrowings under the real estate facility are secured by a firstlien on substantially all leasehold interests of the Company, and a second lienon realty owned by the Company.

 

Provisionsof both credit facilities, among other things, require the maintenance ofcertain financial covenants (when availability under the credit facilities isless than $35 million for four consecutive days or less than$30 million for any one day), and limit the amount of capitalexpenditures, the assumption of additional debt and the payment ofdividends.  At no time through January 28,2006 has we have been subject to compliance with these financial covenantsbecause the amount available for borrowing has not dropped to those levels.However, had such an event occurred, we would not have been in compliance withthe financial covenants and would have been in default under the terms of theloan agreement at January 28, 2006.

 

OnDecember 26, 2006, both the revolving credit and term loan facility andthe supplemental real estate credit facility were amended to permit thedisposal of assets in connection with the closing of five stores.

 

TheCompany also has borrowings under mortgages secured by the related properties.

 

35

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**Note 8 – Other Current and Other Non–Current Liabilities**

 

Other current and non-current liabilities as of January 28, 2006and April 16, 2005 consist of the following (in thousands):

 
| ** **                              | ** ** | **January 28,** | ** ** | **April 16,** | ** ** |
|-----------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                              | ** ** | **2006**             | ** ** | **2005**           | ** ** |
| ** **                              | ** ** | ** **           | ** ** | ** **         | ** ** |
| **Other Current Liabilities:**          |       |                 |       |               |       |
|                                    |       |                 |       |               |       |
| Payroll and related payroll taxes       |       | $                    | 5,565      |               | $          | 9,130 |   |
| Workers compensation                    |       | 9,980                |       | 8,828              |       |
| Vacation and other compensated absences |       | 12,329               |       | 12,765             |       |
| Reorganization costs                    |       | 250                  |       | 7,527              |       |
| Employee benefits                       |       | 5,310                |       | 5,467              |       |
| State lottery                           |       | 2,345                |       | 2,109              |       |
| Utilities                               |       | 2,195                |       | 1,636              |       |
| Professional fees                       |       | 1,680                |       | 2,532              |       |
| Other accrued liabilities               |       | 6,640                |       | 8,582              |       |
|                                    |       |                 |       |               |       |
| Total                                   |       | $                    | 46,294     |               | $          | 58,576 |   |
|                                    |       |                 |       |               |       |
| **Other Non-Current Liabilities:**      |       |                 |       |               |       |
|                                    |       |                 |       |               |       |
| Workers compensation                    |       | $                    | 16,172     |               | $          | 17,444 |   |
| Unfavorable leases                      |       | 5,767                |       | 7,420              |       |
| General liability insurance             |       | 1,294                |       | 1,657              |       |
| Asset retirement obligations            |       | 928                  |       | 862                |       |
| Step rent liability                     |       | 705                  |       | —             |       |
| PBGC settlement                         |       | 2,500                |       | 3,214              |       |
| Store closing costs                     |       | 655                  |       | 876                |       |
|                                    |       |                 |       |               |       |
| Total                                   |       | $                    | 28,021     |               | $          | 31,473 |   |

 

36

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**Note 9 – Liabilities Subject to Compromise**

 

In connection with the Chapter 11 proceeding, there are two pendingmatters involving claims for the payment of money or the transfer ofproperty.  In one matter, the Ohio Bureauof Workers’ Compensation (“OBWC”) has filed priority and administrative claimsaggregating $13.4 million for pre-petition unpaid workers’ compensationpremiums and for reserves to pay future claims arising from existinginjuries.  The OBWC has also filed claimsaggregating $1.8 million for alleged non-payment of post-petition premiumsand for reserves to pay future claims arising from existing injuries.  The Company disputes the amounts of theclaims, and is attempting to negotiate a settlement.

 

In another matter, a claimant has filed a priority claim allegedlyarising under an agreement for a sale-leaseback transaction seeking eitherdamages of $2.2 million or specific performance of the agreement.  The Company disputes the merits of the claimand is defending against it.

 

During the period ended January 28, 2006, the Company paid$5.6 million in settlement of disputed claims.  The Company has established liabilities forthe estimated cash payments required to settle the remaining claims outstandingin the Chapter 11 proceedings.  Estimatedshares of common stock to be issued in settlement of claims have been accountedfor as stockholders’ equity.

 

**Note 10 – Income Taxes**

 

The components of income tax expense for the period ended January 28,2006 are as follows (in thousands):

 
| ** **                | ** ** | **Restated**                   | ** ** |
|---------------------------|------------|--------------------------------|------------|
| ** **                | ** ** | **Period Ended**          | ** ** |
| ** **                | ** ** | **January 28, 2006** | ** ** |
| ** **                | ** ** | **(see Note 4)**     | ** ** |
|                      |       |                           |       |
| Current tax  provision    |       |                           |       |
| Federal                   |       | $                              | —     |   |
| State                     |       | 261                            |       |
|                      |       |                           |       |
| Total income  tax expense |       | $                              | 261        |   |

 

The following is reconciliation between the federal income tax benefitcomputed at the statutory federal income tax rate and actual income tax expense(in thousands):

 
| Federal income tax benefit at statutory  rate (35%)   |   | $     | (1,553 | )      |
|-------------------------------------------------------|--------|-------|--------|--------|
| State income taxes, net of federal income  tax effect |   | 170   |   |
| Non-deductible expenses                               |   | 602   |   |
| Valuation allowance                                   |   | 1,042 |   |
| Total income tax expense                              |   | $     | 261    |   |

 

37

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The significant components of deferred income tax assets andliabilities at January 28, 2006 and April 16, 2005 are asfollows (in thousands):

 
| ** **                                              | ** ** | **Restated**         | ** ** | **Restated**       | ** ** |
|---------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                              | ** ** | **January 28,** | ** ** | **April 16,** | ** ** |
| ** **                                              | ** ** | **2006**             | ** ** | **2005**           | ** ** |
|                                                    |       |                 |       |               |       |
| Current  deferred income tax assets / (liabilities)     |       |                 |       |               |       |
|                                                    |       |                 |       |               |       |
| Reserves and  accruals                                  |       | $                    | 11,295     |               | $          | 10,914 |   |
| Valuation  allowance                                    |       | (5,402               | )          | (5,159             | )          |
|                                                    |       |                 |       |               |       |
| Current  deferred tax assets                            |       | 5,893                |       | 5,755              |       |
|                                                    |       |                 |       |               |       |
| Inventories                                             |       | (19,195              | )          | (19,771            | )          |
|                                                    |       |                 |       |               |       |
| Net deferred  income tax assets (liabilities)           |       | (13,302              | )          | (14,016            | )          |
|                                                    |       |                 |       |               |       |
| Non-current  deferred income tax assets / (liabilities) |       |                 |       |               |       |
|                                                    |       |                 |       |               |       |
| Reserves and  accruals                                  |       | 7,781                |       | 8,513              |       |
| Pensions                                                |       | 11,274               |       | 16,323             |       |
| Goodwill (1)                                            |       | 5,695                |       | 6,896              |       |
| Capital  lease obligations                              |       | 5,612                |       | 5,974              |       |
| Net  operating loss carryforward                        |       | 17,760               |       | 11,905             |       |
| Valuation  allowance                                    |       | (24,320              | )          | (20,363            | )          |
|                                                    |       |                 |       |               |       |
| Non-current  deferred tax assets                        |       | 23,802               |       | 29,248             |       |
|                                                    |       |                 |       |               |       |
| Beneficial  leases and other intangible assets          |       | (11,122              | )          | (13,150            | )          |
| Fixed assets                                            |       | (5,579               | )          | (7,663             | )          |
| Capital  leases                                         |       | (4,492               | )          | (4,911             | )          |
|                                                    |       |                 |       |               |       |
| Non-current  deferred tax liabilities                   |       | (21,193              | )          | (25,724            | )          |
|                                                    |       |                 |       |               |       |
| Net  non-current deferred tax assets                    |       | 2,609                |       | 3,524              |       |
|                                                    |       |                 |       |               |       |
| Net deferred  income tax (liabilities)                  |       | $                    | (10,693    | )                  | $          | (10,492 | ) |

 

----

(1)                       Represents tax basis of deductible goodwillarising from acquisitions consummated in prior years.

 

At January 28, 2006, the Company had a net operating loss carryforwardfor federal and state income tax purposes of approximately $43.4 millionavailable to offset future taxable income from 2009 through 2026.

 

A valuation allowance of $29.7 million was established at January 28,2006 to offset the net operating loss carryforward and other deferred taxassets to the extent it is more likely than not, based upon available evidence,that the recorded value will not be realized. Realization is dependent on the existence of sufficient taxable incomewithin the carryforward period, including future reversals of certain taxabletemporary difference.  In providing thevaluation allowance, no reversal of the taxable temporary difference arisingfrom a portion of LIFO inventory was considered to occur during such period as theperiod in which such reversal may occur is not presently determinable.  During the period ended January 28,2006, the valuation allowance increased by $4.2 million.

 

To the extent net operating loss carryforwards or deductible temporarydifference arising prior to the Company’s emergence from Chapter 11 proceedingsfor which a valuation allowance has been provided are realized, the resultingbenefits will be allocated first to reduce intangible assets until they aretotally eliminated and thereafter reported as an increase to additional paid-incapital.  As of January 28, 2006,approximately $23.0 million of the valuation allowance relates topre-reorganization net operating loss carryforwards and deductible temporarydifferences after reduction of $3.0 million which has reduced intangibleassets.

 

38

----

 

**Note 11 – Retirement Plans**

 

The Company has four noncontributory defined benefit pension planscovering certain union personnel.  TheCompany’s policy is to fund pension benefits to the extent contributions aredeductible for tax purposes and in compliance with federal laws andregulations.  For the Company’s plans,normal retirement age is either 62 or 65, but provisions are made for earlierretirement.  Benefits are determinedeither on average annual compensation and years of service, or as apre-determined amount for each year of service. Full vesting occurs upon completion of five years of service.  Assets of the Company’s pension plansprimarily consist of investments in publicly traded equity and debt securities.

 

In accordance with the provisions of SOP 90-1, upon emergence frombankruptcy, the Company recorded the underfunded status of each of the definedbenefit plans as a liability on the balance sheet.  As of January 28, 2006, the Companyadopted the provisions of Financial Accounting Standard No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans” and inaccordance therewith reflected the underfunded status of the plans in itsbalance sheet at such date. Prospectively, the Company will adjust the liability to reflect thecurrent funded status of the plan.  Anygains or losses that arise during the period but are not recognized ascomponents of net periodic benefit cost will be recognized as a component ofother comprehensive income.  The adoptionof SFAS 158 resulted in the recognition of $8.3 million of unrecognizedactuarial gains which arose during the period ended January 28, 2006and a corresponding reduction in the defined benefit pension plan liability at January 28, 2006.  Such unrecognized gains, net of deferredtaxes of $3.4 million were credited to accumulated other comprehensiveincome in the amount of $4.9 million. The adoption of SFAS 158 had no effect on the Company’s consolidatedstatement of operations for the period ended January 28, 2006.

 

At April 16, 2005, the aggregate projected benefit obligation ofthe four defined benefit plans was $108.8 million and the aggregate fairvalue of plan assets was $68.8 million. The unfunded obligation of $39.9 million was recorded as aliability on the balance sheet.  Thefollowing weighted- average assumptions were used to determine the projectedbenefit obligation as of April 16, 2005 – discount rate 5.48% and salaryincreases 3.00%.

 

39

----

 

Information as to the Company’s four defined benefit pension plans asof January 28, 2006, which is the measurement date of the plans, and forthe period then ended is as follows (in thousands):

 
| ** **                                        | ** ** | **January 28, 2006** | ** ** |
|---------------------------------------------------|------------|--------------------------------|------------|
|                                              |       |                           |       |
| Change in  benefit obligation                     |       |                           |       |
| Benefit  obligation at beginning of period        |       | $                              | (108,766   | ) |
| Service cost                                      |       | (1,468                         | )          |
| Interest  cost                                    |       | (4,356                         | )          |
| Actuarial  gain                                   |       | 2,836                          |       |
| Benefits  paid                                    |       | 4,154                          |       |
|                                              |       |                           |       |
| Benefit  obligation at end of period              |       | (107,600                       | )          |
|                                              |       |                           |       |
| Change in  plan assets                            |       |                           |       |
| Fair value  of plan assets at beginning of period |       | 68,824                         |       |
| Actual  return on plan assets                     |       | 9,459                          |       |
| Employer  contributions                           |       | 5,872                          |       |
| Benefits  paid                                    |       | (4,155                         | )          |
|                                              |       |                           |       |
| Fair value  of plan assets at end of period       |       | 80,000                         |       |
|                                              |       |                           |       |
| Underfunded  status                               |       | $                              | (27,600    | ) |

 
| ** **                                                                                                                           | ** ** | **Period Ended**          | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                           | ** ** | **January 28, 2006** | ** ** |
| Components  of net periodic pension cost                                                                                             |       |                           |       |
|                                                                                                                                 |       |                           |       |
| Service cost                                                                                                                         |       | $                              | 1,468      |   |
| Interest  cost                                                                                                                       |       | 4,356                          |       |
| Expected  return on plan assets                                                                                                      |       | (3,979                         | )          |
| Amount of  recognized gains and losses                                                                                               |       | —                         |       |
|                                                                                                                                 |       |                           |       |
| Net periodic  pension cost                                                                                                           |       | $                              | 1,845      |   |
|                                                                                                                                 |       |                           |       |
| The  weighted-average assumptions used to determine the benefit obligation as of  January 28, 2006 are as follows:         |       |                           |       |
|                                                                                                                                 |       |                           |       |
| Discount  rate                                                                                                                       |       | 5.68%                          |       |
| Rate of  compensation increase                                                                                                       |       | 3.00%                          |       |
|                                                                                                                                 |       |                           |       |
| The  weighted-average assumptions used to determine the net benefit cost for the  period ended January 28, 2006 are as follows: |       |                           |       |
|                                                                                                                                 |       |                           |       |
| Discount  rate                                                                                                                       |       | 5.48%                          |       |
| Expected  return on plan assets                                                                                                      |       | 7.50%                          |       |
| Rate of  compensation increase                                                                                                       |       | 3.00%                          |       |
|                                                                                                                                 |       |                           |       |

 

Plan assets by major category as of January 28, 2006 are asfollows:

 
| ** **        | ** ** | **Target Range** | ** ** | **Actual Allocation** | ** ** |
|-------------------|------------|-----------------------|------------|----------------------------|------------|
|              |       |                  |       |                       |       |
| Equity securities |       | 50% to 60%            |       | 54%                        |       |
| Debt securities   |       | 40% to 50%            |       | 44%                        |       |
| Cash              |       | 0% to 10%             |       | 2%                         |       |

 

40

----

 

The Company considers the actual asset categories of the investedassets and the historical rates of return of those categories as the basis forestablishing the expected long-term rate of return (7.5% at January 28,2006) on plan assets.

 

For the year ended January 28, 2006, the Company contributed$5.9 million to the four defined benefit pension plans and for the yearended February 3, 2007, contributed $4.3 million to these plans.

 

The amount of benefits expected to be paid over each of the next sixyears and in the aggregate for the following five-year period are as follows(in thousands):

 
| **Year**  | ** ** | **Amount** | ** ** |
|-----------|------------|------------|------------|
|      |       |       |       |
| 2007      |       | $          | 5,002      |   |
| 2008      |       | 5,092      |       |
| 2009      |       | 5,080      |       |
| 2010      |       | 5,205      |       |
| 2011      |       | 5,434      |       |
| 2012      |       | 5,735      |       |
| 2013-2017 |       | 61,124     |       |
|           |            |            |            |  |

 

On May 20, 2004, a distress termination application was filed withthe PBGC to terminate a cash balance pension plan sponsored by theCompany.  The PBGC filed various claimsin bankruptcy court for payment of unfunded benefit liabilities.  On February 4, 2005, the parties enteredinto a global settlement whereby the Company settled the PBGC claims byagreeing to pay the PBGC $0.155 million upon emergence from bankruptcy and$3.5 million over a two year period commencing six months after theemergence from bankruptcy.  Further, thePBGC was permitted to retain a $60 million unsecured claim in thebankruptcy proceeding which was settled through the issuance of common sharespursuant to the Plan.

 

The Company maintains a 401(k) savings plan for eligibleemployees.  The plan provides formatching contributions by the Company for all employees not covered by otherunion pension plans.  The Company’scontributions aggregated $1.4 million for the period ended January 28, 2006.

 

The Company also participates in seventeen multiemployer collectivebargaining agreements that provide for employer contributions to fundunion-sponsored pension and other benefits. The Company’s contributions aggregated $3.9 million for the periodended January 28, 2006.  While theCompany has not indicated an intention to withdraw from any multiemployer plan,such withdrawal could result in an obligation to the plans for a portion ofunfunded benefit obligations of the particular plans.  The Company’s aggregate withdrawal liabilityat January 28, 2006 is approximately $70 million.

 

**Note 12 – Commitments and Contingencies**

 

The United States Attorney for the Northern District of New York andthe Securities and Exchange Commission have been conducting investigationsrelating to the Company’s promotional allowance practices and policies.  Such investigations began prior to theCompany’s emergence from bankruptcy in April 2005.  The Company has been cooperating with theseinvestigations and has produced documents and made Company employees availablefor interviews as requested.  The Companyunderstands that these investigations are ongoing.

 

On June 1, 2006, the Company announced that the Audit Committee ofthe Board of Directors had completed its internal investigation of the Company’spromotional allowance practices.  TheAudit Committee hired independent counsel to perform the investigation.  The Audit Committee found that the Companyhad engaged in certain improper practices principally relating to the prematurerecognition of promotional allowances and that these practices had largelyceased by the time of the Company’s Chapter 11 filing in May 2003.  On February 3, 2006, the Companyannounced that the employment of the Company’s Chief Marketing Officer and theCompany’s Vice President, Non-Perishables Marketing had been terminatedfollowing an interim report to the Audit Committee on the findings of theinvestigation.

 

In connection with these matters, the Company could be subject todamage claims, fines or penalties.  Atpresent, the Company is unable to estimate the likelihood of an unfavorableoutcome or the amount of any damage claims, fines or penalties in the event ofan unfavorable outcome and, accordingly, no liability has been recorded forthis contingency.

 

The Company enters into various purchase commitments in the ordinarycourse of business.  In the opinion ofmanagement, no losses are expected to result from these purchase commitments(see Item 11. - “Executive Compensation – Stock Options”).

 

41

----

 

**Note 13 – Stock Award Plan**

 

On December 15, 2006, the Company established the 2006 OmnibusAward Plan (the “Award Plan”).  Pursuantto the provisions of the Award Plan, the Company can grant stock options,restricted stock, phantom stock and stock appreciation rights.  The amount of shares of common stock that canbe granted are limited to 902,268 in the aggregate.

 

On December 15, 2006, the Company granted an aggregate of 150,000shares of phantom stock to two officers of the Company.  The awards provide for a payment in cash onthe settlement date of May 1, 2009, or earlier in certain circumstances,of the difference between the value of the Company’s common stock on the grantdate and the settlement date.  Inaccordance with FASB Statement No. 123R, “Accounting for Share BasedPayment,” the awards will be accounted for as compensation expense and acorresponding liability over the period to settlement date based on changes inthe value of the Company’s common stock.

 

On May 14, 2007, the Company granted an aggregate of 22,685 sharesof phantom stock to five non-officer directors. The awards provide for a payment in cash on the settlement date, whichis the earlier of when the individual ceases to be a member of the Company’sBoard of Directors or upon the occurrence of a change in control, as defined,of the value of an equivalent number of shares of common stock.  The award was fully vested upon the grantdate, and the Company will record a compensation charge with a correspondingliability for the fair value of the awards at date of grant.  The liability will be adjusted based onchanges in value of the Company’s common stock, with a corresponding adjustmentto compensation expense, at each period to settlement date.

 

42

----

** **

**Note 14 – Segment Information**

 

The Company operates in two segments – the retail food business and thewholesale food distribution business. The retail food business consists of 110 supermarkets which the Companyoperates.  The wholesale fooddistribution business supplies 79 independent supermarkets and 41 otherindependent wholesale accounts with food and related products.  The Company has allocated warehouse andtransportation costs based on each segment’s percentage of total shipments.  In fiscal year 2007, we had a change in ourallocation policy for warehouse and distribution.  The calculation was modified to include ordersize and distance from the warehouse. Although this change will not have an effect on our consolidated resultsof operations, it may have a material effect on our segment reporting.

 

The Company’s senior management utilizes more than one measurement toevaluate segment performance and allocate resources.  However, the dominant measures utilized arerevenues and operating income before depreciation and amortization andunallocated overhead expenses.

 

The accounting policies of the reportable segments are the same asthose described in Note 3 except that the Company accounts for inventory on aFIFO basis at the segment level compared to LIFO basis at the consolidatedlevel.  The table below presentsinformation with respect to operating segments as well as reconciliations toconsolidated information (in thousands).

 

Period Ended January 28, 2006
| ** **                                                       | ** ** | ** **           | ** ** | **Wholesale  Food** | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|----------------------|------------|---------------------|------------|-----------------|------------|------------|------------|
| ** **                                                       | ** ** | **Retail Food** | ** ** | **Distribution**    | ** ** | **Items**       | ** ** | **Total**  | ** ** |
|                                                             |       |                 |       |                |       |            |       |       |       |
| Revenues                                                         |       | $                    | 824,340    |                | $          | 171,907         |       | $          | 19,646     | (1) | $ | 1,015,893 |   |
|                                                             |       |                 |       |                |       |            |       |       |       |
| Cost of  sales                                                   |       | (579,288             | )          | (158,656            | )          | (13,715         | )(2)       | (751,659   | )(4)       |
| Selling and  administrative expense                              |       | (207,260             | )          | (6,438              | )          | (26,863         | )(3)       | (240,561   | )(4)       |
|                                                             |       |                 |       |                |       |            |       |       |       |
| Operating  income before depreciation and amortization           |       | 37,792               |       | 6,813               |       | (20,932         | )          | 23,673     |       |
|                                                             |       |                 |       |                |       |            |       |       |       |
| Depreciation  and amortization                                   |       | (16,291              | )          | (1,337              | )          | (1,170          | )          | (18,798    | )          |
|                                                             |       |                 |       |                |       |            |       |       |       |
| Operating income  (loss)                                         |       | 21,501               |       | 5,476               |       | (22,102         | )          | 4,875      |       |
| Interest  expense                                                |       |                 |       |                |       |            |       | (8,289     | )          |
| Reorganization  costs                                            |       |                 |       |                |       |            |       | (1,023     | )          |
|                                                             |       |                 |       |                |       |            |       |       |       |
| Consolidated  loss before income taxes                           |       |                 |       |                |       |            |       | $          | (4,437     | ) |
|                                                             |       |                 |       |                |       |            |       |       |       |
| Total assets  as of January 28, 2006                        |       | $                    | 286,414    | (5)                 | $          | 23,744          | (5)        | $          | 15,233     | (6) | $ | 325,391 |   |
|                                                             |       |                 |       |                |       |            |       |       |       |
| Capital  expenditures for the period ended January 28, 2006 |       | $                    | 16,649     |                | $          | —          |       | $          | 3,884      |   | $ | 20,533 |   |

 

----

| (1)    |   | Consists principally of  approximately $12.2 million for bakery sales principally to customers  other than those of the retail and wholesale segments and approximately  $5.1 million for trucking revenues.                                                                                                                                                                                                                      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (2)    |   | Consists principally of  approximately $10.8 million for bakery sales and approximately  $1.5 million increase in cost of sales to reconcile segment inventories  on FIFO to consolidated inventories on LIFO.                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (3)    |   | Consists principally of  approximately $22.3 million of payroll, benefits, and payroll taxes  associated with the administrative staff, approximately $2.5 million of  contract hauling costs associated with trucking revenue, and approximately  $2.2 million of legal costs associated with the internal and SEC  investigation relating to the Company’s practices regarding promotional  discounts and allowances. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (4)    |   | Excludes depreciation and  amortization of $3.3 million for cost of sales and $15.5 million  for selling and administrative expenses.                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (5)    |   | The warehouse and  transportation assets have been allocated using the same methodology as that  which was used for the warehouse and transportation costs.                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (6)    |   | Consists principally of  fixed assets and inventory of the bakery operation and general corporate  assets.                                                                                                                                                                                                                                                                                                                                  |

 

43

----

 

**Note 15 – Allowance forDoubtful Accounts**

 

An analysis of the changes to the allowance for doubtful accounts forthe period from April 17, 2005 to January 28, 2006 was asfollows (in thousands):

 
| Balance at  beginning of period          |   | $      | 3,243  |   |
|------------------------------------------|--------|--------|--------|--------|
| Additions  charged to costs and expenses |   | 2,540  |   |
| Accounts  written off, net of recoveries |   | (2,609 | )      |
| Balance at  the end of period            |   | $      | 3,174  |   |

 

**Note 16 – Quarterly Financial Data (Unaudited)**

 

The following table presents our quarterly results of operations:

 
| ** **                                              | ** ** | **For the period from April 17, 2005 through January 28, 2006** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **1st**                                                                                                           | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** |
| ** **                                              | ** ** | **2-Week**                                                                                                        | ** ** | **13-Weeks** | ** ** | **13-Weeks** | ** ** | **13-Weeks** | ** ** |
| ** **                                              | ** ** | **Period**                                                                                                        | ** ** | **Ended** | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **                                              | ** ** | **April 30,**                                                                                                | ** ** | **July 30,** | ** ** | **October 29,** | ** ** | **January 28,** | ** ** |
| **Description**                                         | ** ** | **2005**                                                                                                          | ** ** | **2005** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                              | ** ** | **(In thousands of dollars, except per share data)**                           | ** ** |
|                                                    |       |                                                                                                              |       |   |   |   |   |   |   |
| Revenues                                                |       | $                                                                                                                 | 46,065     |   | $ | 331,329 |   | $ | 315,373 |   | $ | 323,126 |   |
|                                                    |       |                                                                                                              |       |   |   |   |   |   |   |
| Gross profit                                            |       | 10,111                                                                                                            |       | 83,966 |   | 82,551 |   | 84,270 |   |
|                                                    |       |                                                                                                              |       |   |   |   |   |   |   |
| Net (loss)  income                                      |       | (1,119                                                                                                            | )          | (5,193 | ) | (2,635 | ) | 4,249 |   |
|                                                    |       |                                                                                                              |       |   |   |   |   |   |   |
| Per common  share data                                  |       |                                                                                                              |       |   |   |   |   |   |   |
| (Basic and  Diluted):                                   |       |                                                                                                              |       |   |   |   |   |   |   |
| Net (loss)  income                                      |       | $                                                                                                                 | (0.13      | ) | $ | (0.61 | ) | $ | (0.31 | ) | $ | 0.50 |   |
|                                                    |       |                                                                                                              |       |   |   |   |   |   |   |
| Weighted  average common shares issued or to be issued: |       |                                                                                                              |       |   |   |   |   |   |   |
| Basic and  diluted:                                     |       | 8,498,752                                                                                                         |       | 8,498,572 |   | 8,498,752 |   | 8,498,752 |   |

 

44

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**PART IV**

 

## **ITEM 15.**                                         EXHIBITS, FINANCIAL STATEMENT SCHEDULESAND REPORTS ON FORM 8-K

## ** **

Our consolidated financial statements filed as part of this reportappear beginning on page 20.

 

**Exhibits:**

 

The following are filed as Exhibits to this Report:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.1                  |       | First Amended Joint  Plan of Reorganization of The Penn Traffic Company and its Affiliated Debtors  and Debtors-in-Possession, dated February 4, 2005 (incorporated by  reference to Exhibit 2.1 to Form 8-K filed on March 24, 2005).                                                                                                                                                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 2.2                  |       | Notice  of Technical Modifications to the First Amended Joint Plan of Reorganization  of The Penn Traffic Company and its Affiliated Debtors and Debtors in  Possession under Chapter 11 of the Bankruptcy Code dated February 4,  2005 (incorporated by reference to Exhibit 2.3 to the Form 8-K  filed on March 24, 2005).                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.1                  |       | Second Amended and  Restated Certificate of Incorporation (incorporated by reference to  Exhibit 3.1 to Form 8-A12G/A filed on April 13, 2005). (Previously  filed)                                                                                                                                                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.2                  |       | Amended and Restated By-Laws of Penn Traffic (incorporated by  reference to Exhibit 2 to Form 8-A12G/A filed on June 29, 1999).                                                                                                                                                                                                                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.1                 |       | Global  Settlement Agreement and Mutual Release, dated as of  February 4, 2005, by and between The Pension Benefit Guaranty  Corporation, the Official Committee of Unsecured Creditors and The Penn  Traffic Company and its affiliated debtors (incorporated by reference to  Exhibit 10.1 to the Form 8-K filed on February 11, 2005).                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.2                 |       | Form of  Change in Control Protection Agreement (incorporated by reference to  Exhibit 99.1 to the Form 8-K filed on April 18, 2006).                                                                                                                                                                                                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.3                 |       | Credit  Agreement, among The Penn Traffic Company, Penny Curtiss Baking  Company, Inc. and Big M Supermarkets, Inc., as borrowers; the other  credit parties signatory thereto; General Electric Capital Corporation; JP  Morgan Chase Bank, N.A.; The CIT Group/Business Credit; GECC Capital Markets  Group, Inc.; and the other lenders signatory thereto from time to time  (incorporated by reference to Exhibit 99.1 to the Form 8-K filed on  September 12, 2006). |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.4                 |       | Supplemental  Loan Credit Agreement, dated as of April 13, 2005, among The Penn  Traffic Company, Penny Curtiss Baking Company, Inc. and Big M  Supermarkets, Inc., as borrowers; the other credit parties signatory  thereto; Kimco Capital Corp.; and the other lenders signatory thereto from  time to time (incorporated by reference to Exhibit 99.2 to the  Form 8-K filed on September 12, 2006).                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.5                 |       | Amendment,  dated December 28, 2006, to the Credit Agreement, among The Penn Traffic  Company, Penny Curtiss Baking Company, Inc. and Big M  Supermarkets, Inc., as borrowers; the other credit parties signatory  thereto; General Electric Capital Corporation; JP Morgan Chase Bank, N.A.;  The CIT Group/Business Credit; GECC Capital Markets Group, Inc.; and the  other lenders signatory thereto from time to time. (Previously filed)                                      |

 

45

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| **Exhibits No.** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|-----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.6                  |       | Amendment,  dated December 28, 2006, to the Supplemental Loan Credit Agreement,  dated as of April 13, 2005, among The Penn Traffic Company, Penny  Curtiss Baking Company, Inc. and Big M Supermarkets, Inc., as  borrowers; the other credit parties signatory thereto; Kimco Capital Corp.;  and the other lenders signatory thereto from time to time. (Previously filed)                                                                                                                                                              |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7                  |       | Consulting  Agreement, dated as of June 29, 2006, between The Penn Traffic Company  and Robert J. Kelly (incorporated by reference to Exhibit 99.1 to the  Form 8-K filed on June 30, 2006).                                                                                                                                                                                                                                                                                                                                               |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.8                  |       | Offer  Letter, dated as of October 2, 2006, between The Penn Traffic Company  and Robert Panasuk (incorporated by reference to Exhibit 99.1 to the  Form 8-K filed on October 6, 2006).                                                                                                                                                                                                                                                                                                                                                    |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.9                  |       | Offer  Letter, dated as of December 12, 2006, between The Penn Traffic Company  and Robert Panasuk (incorporated by reference to Exhibit 99.1 to the  Form 8-K filed on December 18, 2006).                                                                                                                                                                                                                                                                                                                                                |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.10                 |       | Description  of Material Terms of Compensation of Randy P. Martin (incorporated by  reference to the Form 8-K filed on March 15, 2005).                                                                                                                                                                                                                                                                                                                                                                                                              |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.11                 |       | Severance  Agreement between The Penn Traffic Company and Randy P. Martin  (incorporated by reference to Exhibit 99.1 to the Form 8-K filed on  February 1, 2007).                                                                                                                                                                                                                                                                                                                                                                    |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.12                 |       | Offer  Letter, dated May 2, 2007, between The Penn Traffic Company and  Tod A. Nestor (incorporated by reference to Exhibit 99.1 to the  Form 8-K filed on May 9, 2007).                                                                                                                                                                                                                                                                                                                                                              |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.13                 |       | The  Penn Traffic Company 2006 Omnibus Award Plan (incorporated by reference to  Exhibit 99.4 to the Form 8-K filed on December 18, 2006).                                                                                                                                                                                                                                                                                                                                                                                                      |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.14                 |       | Form of  The Penn Traffic Company Phantom Stock Award Agreement (incorporated by  reference to Exhibit 99.1 to the Form 8-K filed on  May 18, 2007).                                                                                                                                                                                                                                                                                                                                                                                  |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.15                 |       | Second  Amendment, dated as of August 1, 2007, to the Credit Agreement, among  The Penn Traffic Company, Penny Curtiss Baking Company, Inc. and Big M  Supermarkets, Inc., as borrowers; the other credit parties signatory  thereto; General Electric Capital Corporation; JP Morgan Chase Bank, N.A.;  The CIT Group/Business Credit; GECC Capital Markets Group, Inc.; and the  other lenders signatory thereto from time to time (incorporated by reference  to Exhibit 99.1 to the Form 8-K filed on August 13, 2007). |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.16                 |       | Second  Amendment, dated as of August 1, 2007, to the Supplemental Loan Credit  Agreement, dated as of April 13, 2005, among The Penn Traffic Company,  Penny Curtiss Baking Company, Inc. and Big M Supermarkets, Inc., as  borrowers; the other credit parties signatory thereto; Kimco Capital Corp.;  and the other lenders signatory thereto from time to time (incorporated by  reference to Exhibit 99.2 to the Form 8-K filed on August 13,  2007).                                                                 |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 16.1                  |       | Letter  from Deloitte & Touche LLP to the Securities and Exchange Commission  dated September 12, 2006 (incorporated by reference to Exhibit 99.1  to the Form 8-K filed on September 12, 2006).                                                                                                                                                                                                                                                                                                                                  |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 21.1                  |       | Subsidiaries of The Penn Traffic Company. (Previously filed)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

46

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| **Exhibits No.** | ** ** | ** **                                                                                                                                                                                     |
|-----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |       |                                                                                                                                                                                           |
| 31.1                  |       | Certification of CEO  pursuant to Rule 13a-14(a) under the Securities Exchange Act of  1934, as amended.                                                                             |
|                  |       |                                                                                                                                                                                           |
| 31.2                  |       | Certification  of CFO pursuant to Rule 13a-14(a) under the Securities Exchange Act  of 1934, as amended.                                                                             |
|                  |       |                                                                                                                                                                                           |
| 32.1                  |       | Certification  of CEO pursuant to Rule 13a-14(b) under the Securities Exchange Act  of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the  United States Code. |
|                  |       |                                                                                                                                                                                           |
| 32.2                  |       | Certification  of CFO pursuant to Rule 13a-14(b) under the Securities Exchange Act  of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the  United States Code. |

 

47

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Signatures

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized as of the8th day of May 2008.

 

**THE PENN TRAFFIC COMPANY**

 

 
| By:    | /s/ Gregory J. Young                  |
|--------|---------------------------------------|
| Name:  | Gregory J. Young                      |
| Title: | President and Chief Executive Officer |

 

48

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